UK Transfer Pricing Consultation – Secondary Adjustments

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This is a consultation on whether a secondary adjustment rule should be introduced into the UK’s transfer pricing legislation and how that rule would be designed.

The UK government’s preference is for a rule which treats the non-arm’s length excess as a deemed loan from the UK company with interest imputed at an above-market rate (for deterrent effect). The rule would be triggered for primary adjustments above a certain threshold, e.g. above £1m.

UK transfer pricing is designed to correctly apportion profits arising from transactions between connected persons, normally companies in the same multi-national group, where at least one of them is in the UK and disadvantaged by the transactions being incorrectly priced.

UK profits must be calculated for tax purposes as if the transactions had been undertaken between unconnected enterprises acting independently. This is known as the “arm’s length principle” and is an internationally agreed standard for apportioning profits arising on connected-party cross-border transactions.

The arm’s length transfer price is realised in the tax computations by adjusting the actual price to what it would have been at arm’s length. This is known as the “primary adjustment”.

Whilst the primary adjustment ensures that the UK company pays the correct amount of tax on its connected party transactions, the non-UK company may still benefit from the arrangements.

For example, if the UK company pays £20m to an overseas connected party for the provision of goods and/or services but the arm’s length price is £15m, the UK’s profit will be increased by £5m as a result of the primary adjustment. However, the non-UK company has still received £20m, i.e. £5m more than it would have received at arm’s length.

The proposed “secondary adjustment” seeks to address this anomaly by applying a tax charge on this excess cash.

The UK government’s preference is for a rule which treats the excess as a deemed loan from the UK company with interest imputed at an above-market rate (for deterrent effect). The rule would be triggered for primary adjustments above a certain threshold, e.g. above £1m.

This consultation closes on 18 August 2016 at 11:45pm

For more details please refer to the consultation document.

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