Given the need for countries to protect their tax base in the current economic climate, a continuing aggressive stance by tax authorities to Transfer Pricing can be expected.
So, what actions can a Multi-National Enterprise (MNE) take to minimise its Transfer Pricing risk?
Well, it’s essential to have a Transfer Pricing policy, supported by relevant and appropriate documentary evidence to demonstrate that the outcome is arm’s length.
This would normally include:
– A description of the connected party transaction or transactions,
– details of the functions performed by each party, assets employed and risks borne,
– the rationale behind the choice of Transfer Pricing Method to establish an arm’s length price,
– the methodology and results of the Comparability Analysis.
Whilst taxpayers should keep records to support the entries in their tax return, there is no obligation to submit TP documentation to HMRC. However, HMRC can request that contemporaneous documentary evidence of compliance with the arm’s length principle is made available on request to support the annual tax return. In addition to the above, such records would include the primary accounting records, tax adjustment records and connected party transaction records.
Many countries allow MNEs to agree their transfer pricing in advance by the use of Advance Pricing Agreements (APAs) or Advance Thin Capitalisation Agreements (ATCAs).
Provided the MNE adheres to the APA or ATCA, it will have certainty over the treatment of its connected party transactions for Transfer Pricing purposes, avoid controversy, penalties and potential double taxation.
Ideally, an APA should involve the tax authorities of both countries in which a transaction take place, otherwise the other country’s tax authority may dispute the arm’s length price.
ATCAs, which deal with financial Transfer Pricing, i.e. debt, are invariably unilateral, with potential double taxation dealt with through the Mutual Agreement Procedure (MAP) under and for the purposes of the Double Taxation Arrangements between the two countries.
If you think that any of these issues might affect you or your business you should seek advice from a professional Transfer Pricing advisor.