Consultation: Introducing secondary adjustments | KPMG | UK

Consultation: Introducing secondary adjustments into UK transfer pricing legislation

Consultation: Introducing secondary adjustments

The Government is looking into whether to introduce a secondary adjustment rule into the UK’s domestic transfer pricing legislation.


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As part of the Government’s efforts to make the UK tax system competitive while tackling tax avoidance, as set out in the 2016 Business Tax Roadmap and the OECD’s base erosion and profit shifting (BEPS) project, a consultation has been opened on the proposal to introduce a secondary adjustment rule into the UK’s domestic transfer pricing legislation.

The UK’s transfer pricing legislation currently requires intra-group transactions to be priced on an ‘arm’s length’ basis. Transfer pricing adjustments are made via a primary adjustment to the price used for tax purposes. However, as this price only takes effect for tax purposes, the cash benefit from non-arm’s length pricing can accumulate in another jurisdiction.

To counter this, a secondary adjustment can be made to align the economic situation with the transfer pricing situation, by applying a tax charge to the accumulated cash benefit. Secondary adjustment rules are already in force in many jurisdictions, including the US, Canada and France.

The consultation covers not only whether a secondary adjustment rule should be introduced, but how such a rule should be designed. The deadline for responses is 18 August 2016.

Consideration of secondary adjustment legislation was first mentioned in the consultation process for the transfer pricing legislation that was introduced in 1999. So perhaps this could be preparing taxpayers for a post-BEPS increase in tax audits.

Formalising the position for secondary adjustments also gives the opportunity to clarify the UK tax position where companies wish to voluntarily repatriate funds linked to a transfer pricing adjustment. At the moment there is no legislative basis for removing the adjustment from UK tax if it goes through the profit and loss account in later periods, and the basis of repatriation must be discussed and agreed as part of the Mutual Agreement Procedure (MAP) process.

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