The Basic Transfer Pricing Rule

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This Website is all about Transfer Pricing from a UK taxation perspective. Its aim is to inform and educate.

Over the coming months I’ll cover basic Transfer Pricing principles and take a more detailed look at UK specific Transfer Pricing rules and topical UK Transfer Pricing issues as they arise. Each Note will be around 1500 words, so not too taxing.

Managers in corporate groups with a UK presence may find my Notes useful to help them better understand how Transfer Pricing affects their businesses and how Transfer Pricing documentation and commercial agreements can support their tax position. A carefully documented Transfer Pricing policy will give comfort that Transfer Pricing risks are managed effectively and give assurance to directors, auditors and other stakeholders that the policy can be supported if challenged.

Undergrad students with an academic interest in Transfer Pricing may also find my Notes useful, and anyone else with a Transfer Pricing question (or who wants to check out a potentially ‘daft’ question before asking their Transfer Pricing advisers).

Any feedback or suggestions, whether on content, style or topics to include, will be most welcome and I’ll try to help with any questions through the “Got a Question?” form.

Over the coming months my Notes will introduce the concept of transfer pricing, explain the arm’s length principle and other aspects of UK Transfer Pricing law and provide some topical TP information that groups with a UK presence may need to consider.

So, what is Transfer Pricing?

The transfer price is the price charged in a transaction between two connected parties, e.g. for the supply of goods or services.

The focus is on connected parties, e.g. members of the same group, because here the price charged may not be the same as what would have been charged if the parties had been separate and independent businesses transacting at arm’s length.

(The “arm’s length principle” is the cornerstone of the UK’s approach to Transfer Pricing and something I’ll be dealing with in detail in a later Note.)

It is estimated that about 60 – 70% of international trade is within corporate groups, rather than between separate, independent companies, so Transfer Pricing can provide a multitude of tax planning opportunities.

However, Transfer Pricing can also give rise to costly compliance issues. It is not illegal or inherently abusive but the aggressive Transfer Pricing policies adopted by some groups can be, e.g. when they manipulate their intra-group transfer prices to shift profits from the UK to a low-tax jurisdiction.

Transfer Pricing risks mostly arise in cross border transactions between two companies in the same group.

However, UK Transfer Pricing law also applies to transactions where both parties are within the UK, e.g. where creative Transfer Pricing might be used to shift profits to a group company with stranded losses, effectively negating those profits and reducing the group’s overall tax bill.

And Transfer Pricing risks are not limited to company to company transactions, a transaction between a company and a controlling individual would also be within the scope of UK Transfer Pricing.

So let’s start with the basic rule.

I won’t make a habit of referring to legislation, but, …… you can find the UK Transfer Pricing legislation in Part 4 of the Taxation (International and Other Provisions) Act 2010, normally referred to as “TIOPA10”, which must be interpreted in accordance with OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD = Organisation for Economic Co-operation and Development).

The basic Transfer Pricing rule is in Sections 146 to 148 of TIOPA10.

This tells you that the UK Transfer Pricing rules apply to both corporation tax and income tax and, if they apply to you, your tax calculations should be based on the arm’s length, not the actual, transaction.

There is a basic pre-condition that an actual transaction has taken place between two persons, the persons are connected, the transaction differs from what would have happened at arm’s length and one or both of the persons gets a UK tax advantage as a result.

“Connected” basically means that one controls the other or both are controlled by another person. In most cases this would mean a parent/subsidiary or two subsidiaries of the same parent, but the rules are much wider than this, so beware.

Note also that the two connected persons do not actually need to be direct parties to the transaction, but the transaction or transactions must result in “provision” between them. “Provision” has a wide meaning, more than simply a payment.

The basic rule also brings in the concept of the “arm’s length provision”, being the provision that would have been made between independent parties.

So, does the actual provision between our connected parties reflect what independent parties would have agreed given the same facts and circumstances, with the same underlying transaction or series of transactions?

If it does, fine.

If it doesn’t and one or other (or both) of the parties gains a UK tax advantage as a result, then an adjustment may be required to increase UK profits (or decrease losses) to the arm’s length amount.

What if there’s no tax advantage? What if it goes the other way, i.e. the transaction isn’t at arm’s length but you’re paying too much UK tax as a result?

Well, that’s just too bad, the UK Transfer Pricing rules don’t permit you to reduce your UK profits under any circumstances. It’s a one-way street!

On that high note I think that’ll do for now. You have the basics. The next Note on this theme will take a detailed look at the arm’s length principle.

I think I’ll also do something on the UK’s new Diverted Profits Tax. If you think you have Transfer Pricing issues then DPT might affect you. And cost you!

Bye for now.


I try to make the contents of this website as useful, reliable and factual as possible but any opinions expressed are solely my own. They do not represent the views of my employer or any other person I’m connected with.

The purpose of the site is to inform and educate readers with general guidance and useful tips. It provides only an overview of the regulations and guidance in force at the date of publication and is not a substitute for professional advice. It is not designed to provide professional advice or financial advice and should not be relied on as such.

You should not base any action on the contents of this website without first obtaining specific professional advice from appropriately qualified Transfer Pricing experts. They can establish the full facts and circumstances of your business – I can’t.

Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of this Website can be accepted by the author.


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