Until recently, HMRC would only agree a transfer pricing issue with a taxpayer within the context of resolving an enquiry or entering into an APA. But, it was possible for HMRC to give an indication—expressed in terms of the level of risk—as to how HMRC might see the tax risk relating to particular transactions, without leaving any inference that any particular price would automatically be considered to be an appropriate transfer price.
HMRC’s International Tax Manual, at INTM480540, provided operational guidance on real-time working of transfer pricing issues (excluding thin capitalisation). This guidance previously stated that HMRC could engage in discussions with taxpayers on their transfer pricing issues, and might (under some circumstances) give an indication to the taxpayer of whether HMRC considered a particular transfer pricing arrangement to be low (or high) risk.
While 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 when 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).
HMRC has revised the guidance so that it states that when a transfer pricing issue is neither suitable for an APA, nor warrants an enquiry, HMRC is not to engage in discussions on that issue.
INTM480540 has been revised to make clear that Customer Relationship Managers (CRMs) and case teams are not to engage in discussions in respect of a taxpayer’s transfer pricing, outside of the APA or enquiry formal processes.
“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, while 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.
Read a January 2017 report prepared by the KPMG member firm in the UK
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