Transfer Pricing – What should you be considering?
September 7, 2017
Transfer Pricing regulations are a set of common rules and practices adopted by most leading countries to combat profit shifting from high tax jurisdictions to low tax jurisdictions to minimise tax. There is a misconception that only large global companies like Starbucks and Google are caught by these rules, but as entrepreneurial SMEs grow, more and more companies are being caught by the rules.
Most companies only need to consider Transfer Pricing where they are part of a group that have more than 250 employees, or have turnover of over €50m and total assets of more than €43m. These thresholds apply to the global group, not just the UK companies.
Even if your company/group doesn’t breach these limits you will need to consider the Transfer Pricing rules either if you are in the Patent Box tax regime, or if you have any transactions with entities in tax havens.
Transfer Pricing issues generally only arise when there are transactions with foreign companies, but they can apply to transactions between UK companies where transactions between related entities give rise to a tax advantage, for instance where one company is non-tax paying due to brought forward losses.
What do you need to do?
If your company is within the Transfer Pricing regime then you will need to put in place procedures to ensure that any transactions with related parties are at arm’s length. These need to be kept up to date, and adequate documentation kept in support. If your company is a subsidiary of a foreign group your overseas parent company may have already considered Transfer Pricing and possibly even developed a set of procedures. Unfortunately, while potentially of some use, this isn’t sufficient to meet requirements in the UK. It is important to review transfer pricing from a UK perspective.
Country by Country Reporting
In addition to the standard Transfer Pricing rules, there is also separate ‘Country by Country Reporting’ documentation that is required for groups with a worldwide turnover of over €750m. If you are part of a group with turnover over the threshold then you may need to prepare a report to submit to HMRC, or even if not you will need to provide notification to HMRC regarding this. The deadline for notifying HMRC is 1 September 2017, so if this applies to you contact us now to see what you need to do.
Advantages of Transfer Pricing
It is natural to just see Transfer Pricing as a costly burden, but there can be significant advantages to having a Transfer Pricing review.
- You will be ready for any HMRC enquiry into Transfer Pricing
- You can put in place the arm’s length price in advance rather than having to put through a Transfer Pricing adjustment at a later date. This would avoid the double tax charge that potentially results from a transfer pricing adjustment. It is also possible to put in place an Advance Pricing Agreement with HMRC, whereby HMRC will agree to the basis of arriving at Transfer Prices.
- As a result of the Transfer Pricing review, we may be able to find a suitable price which gives a lower tax charge in the UK and a tax saving at group level.