HMRC have published revised guidance preventing any transfer pricing discussions with taxpayers outside APAs or enquiries.
Until recently, whilst HMRC would only agree a transfer pricing issue with a taxpayer within the context of resolving an enquiry or entering into an Advance Pricing Agreement (APA), it was possible for them to give an indication, expressed in terms of the level of risk, of how HMRC might see the tax risk relating to particular transactions, without leaving any inference that any particular price will automatically be considered to be an appropriate transfer price. Revised guidance now states that where a transfer pricing issue is neither suitable for an APA, nor warrants an enquiry, HMRC should not engage in discussions on that issue.
HMRC’s International Tax Manual, at INTM480540, provides operational guidance on real time working of transfer pricing issues (excluding thin capitalisation). This guidance had previously stated that HMRC could engage in discussions with taxpayers on their transfer pricing, and might, in some circumstances, give an indication to the taxpayer of whether they considered a particular transfer pricing arrangement to be low (or indeed high) risk. Whilst only an APA or the resolution of an enquiry would lead to a definitive statement of HMRC accepting a transfer price as being arm’s length, this gave taxpayers at least some comfort in situations where pricing appeared to be reasonable, but an APA would either have not been appropriate for the taxpayer (on a cost-benefit basis) or would not have been accepted by HMRC (due to not meeting the size or complexity threshold).
INTM480540 has now been revised to make clear that Customer Relationship Managers (CRMs) and case teams should not engage in discussions in respect of a taxpayer’s transfer pricing, outside of the APA or enquiry formal processes. It goes on to say that “On no account should a low-risk opinion or any other indication as to the perceived level of risk in the TP arrangements be given outside the APA or TP governance frameworks.”
Combined with the recent revisions to the criteria for HMRC to accept APA applications under the updated Statement of Practice 2 (2010), this change represents a significant tightening of HMRC’s approach to transfer pricing, whilst leaving taxpayers with even greater uncertainty. In an environment where transfer pricing disputes are already likely to increase, as tax authorities around the world interpret the revisions to the OECD Transfer Pricing Guidelines that have emerged from the BEPS initiative, the importance of robust transfer pricing documentation will be greater than ever.
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