 |
Businesses operating internationally face so many challenges that the tax implications of setting prices and other conditions for transactions between group companies may not be a high priority. Unfortunately, the tax authorities may have a different idea.
Transfer pricing is the setting of prices and other conditions attached to transactions between connected parties. Groups face increased risk of tax audits into transfer pricing issues as tax authorities come under pressure to maintain tax yields. But there are opportunities as well as risks: transfer pricing techniques can also help optimise and stabilise a group’s effective tax rate.
Why is transfer pricing now a key business issue?
Tax authorities throughout the world are developing and enhancing their abilities to audit and adjust transfer prices. Tax authorities are increasingly sharing information with each other.
In the UK, HM Revenue & Customs (HMRC) has doubled the size of its dedicated transfer pricing team. Moreover, global economic developments are putting pressure on existing business models and this presents the opportunity to change pricing policy and financing structures.
Transfer pricing doesn’t just affect large groups
The UK does have an exemption from the transfer pricing rules for small and medium-sized groups. However, the exemption may not apply to all transactions and medium-sized groups should not assume they will never be asked to justify their pricing policies. Many other countries do not have a corresponding “safe harbour” for smaller businesses.
What are the potential costs of getting it wrong?
If HMRC chooses to enquire into your transfer pricing arrangements, time-consuming and costly tax audits will follow and could culminate in demands for additional tax, interest and penalties. Corresponding adjustments in the other affected countries may be difficult or impossible to achieve so there may be a net loss to the group.
In the past, penalties were hardly ever levied in the UK in respect of transfer pricing adjustments. However, since 1 April 2008, a new penalty structure means that businesses face penalties of between 15% and 30% of any additional tax in cases where inadequate effort has been made to set and document appropriate transfer prices.
Key areas of focus
HMRC investigators have experience of the areas in which groups often overlook transfer pricing issues or make mistakes in their valuations and adjustments. The areas regarded as high risk include:
Group services
- Have all group services been correctly identified?
- Do they genuinely provide a benefit to the recipient?
- Should amounts be recharged at cost, at a mark-up or on some other basis?
Financing
- Is intra-group debt structured in the optimal manner?
- Is the interest rate appropriate?
- What is the impact of the collapse of commercial credit markets?
- Do the covenants in intra-group loans mirror those seen at arm’s length?
- Intangible property
- Are both “hard” intangibles, such as patents, and “soft” intangibles, such as unregistered brands, properly identified and compensated?
Support from PKF
Risk and opportunity assessment
Our specialists review the intra-group dealings and existing transfer pricing documentation in order to prepare a detailed risk assessment statement which identifies and quantifies vulnerable areas and makes recommendations to address them. This process often reveals previously hidden opportunities for increasing supply chain tax efficiency.
Full documentation support
We work with your key personnel to ensure we fully understand business drivers across your group. Armed with a sound understanding, we map functions, assets and risks within your group which then enables us to identify appropriate pricing methodologies and benchmarking strategies against comparable transactions and companies. We can then work with companies’ legal advisers to prepare robust but flexible intra-group agreements that you can use, safe in the knowledge that any HMRC challenge can easily be rebuffed.
Attribution of profits between branch and head office
We employ transfer pricing techniques to optimise the split of profits between branch and head office of a company.
International advantage
PKF (UK) LLP is a member firm of the PKF International Limited network of legally independent member firms. Worldwide, the member firms have around 15,000 people working out of 400 offices in 120 countries. Our UK transfer pricing team work in collaboration with specialists from other member firms of PKF International Limited, to deliver multi-country solutions. We can also call on expert economics and valuation support where required.
Contact us for help with transfer pricing. | |
|