How would your TP Documentation stand up to HMRC Audit?

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Netherland vs. A BV, October 2017, Lower Court, case no 2017: 5965

In this recent transfer pricing case the Dutch Courts reduced the tax authority’s adjusted assessment of €188.3m down to €32.1m

The basic facts are:

  • A Dutch parent company had provided services to foreign subsidiaries on a cost-plus basis.
  • The parent received compensation when a business restructuring transferred its HQ and strategic functions to Switzerland.
  • The Dutch Tax Authorities concluded that this compensation was not enough and that the parent continued to perform strategic functions for the group.

However, the Court ruled that:

  • the parent had fulfilled its legal obligations by preparing thorough transfer pricing documentation.
  • that the burden of proof was on the Dutch tax authorities and
  • the tax authorities did not provide sufficient arguments to support their adjustment.

This outcome illustrates the importance of ‘preparing thorough transfer pricing documentation’ and, although it’s a Dutch example, the principle holds good across jurisdictions.

If you are interested in finding out how your TP documentation might fare if audited by HMRC then read on……

During my time my as an HMRC Transfer Pricing Specialist I encountered many examples of TP documentation that were far from thorough in their preparation. Failings included: vague descriptions of the group and its policies, superficial or incomplete comparability studies, unsupported assertions, fallacious arguments, inconsistencies and even basic computational errors.

Clearly, HMRC would be criticised if it were to accept at face value the conclusions of a report displaying such shortcomings, and rightly so. Therefore HMRC may decide that a formal TP enquiry is required (or that the offending report gives grounds for continuing an existing enquiry) to address their concerns and establish the facts so that a view can be taken of the MNE’s TP.

However, when the full facts and circumstances become known they often demonstrate that the MNE’s TP is actually consistent with the arm’s length principle and the enquiry is concluded with no adjustment, i.e.the whole thing was a waste of time and money for all concerned.

If the MNE’s TP documentation had been carefully sense-checked by an independent reviewer with relevant experience before release to HMRC, any deficiencies that might otherwise trigger “potential TP risk” alarm bells within HMRC are more likely to have been identified and corrected, clarified or expanded, and therefore all the relevant facts and circumstances are more likely to be clearly and comprehensively presented to HMRC along with cogent arguments supporting the MNE’s TP, potentially avoiding or cutting short a time-consuming enquiry.

Whilst there can be no guarantee that HMRC will not open an enquiry into your TP, the better your policy and practices are prepared, documented and presented the more likely you will be considered “low-risk”.

I have HMRC TP risk-assessing and case-working experience for most business sectors and transaction types, including debt pricing for ATCAs and was a member of HMRC’s TP Governance Panel which has the final say on most TP enquiries, so I can carry out this sense-check and help you prepare your UK TP documents for HMRC eyes.

If you’d like to learn more about how I can help you please use the “contact me” tab above or email me with brief details of your situation.

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