Transfer Pricing Documentation

How clear is your Transfer Pricing documentation?

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Until recently I was a Senior Transfer Pricing Specialist with HM Revenue & Customs. I have HMRC TP risk-assessing and case-working experience for most business sectors and transaction types and was a member of HMRC’s TP Governance Panel, which has the final say on most TP enquiries.

I have now decided to specialise in helping MNEs and their advisers prepare their “final” TP documentation for HMRC eyes.

You may think your TP Documentation is clear and complete; but HMRC may think otherwise. Many TP enquiries are opened or extended by HMRC because the full facts and circumstances of the business and its transfer pricing are absent from or not clearly presented in the documents provided. Ironically, on establishing the facts it often becomes clear to HMRC that the pricing is actually at arm’s length and the enquiry can be closed without adjustment. Unfortunately, considerable time and money will have been expended on the enquiry in the meantime.

Such enquiries can be avoided or cut short.

I can “sense-check” your TP documentation; issues that might otherwise trigger “TP risk” alarm bells within HMRC will be identified and can be corrected, clarified or expanded as required, before submission to HMRC, to better demonstrate your principled and objective approach to achieving the appropriate arm’s length pricing.

To find out how I can help you please use the “contact me” tab above or email me directly.

Gordon McLeman 08 December 2017

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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…… Read the rest of this entry »

“Intra-group reinsurance transfer pricing in a post-BEPS world”

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Originally published by Grant Thornton UK LLP, 9 May 2016

Reinsurance is a common connected-party transaction for groups operating in the insurance sector. This 2016 article from Grant Thornton discusses a key change to the OECD Transfer Pricing Guidelines arising from BEPS and how it impacts the transfer pricing of intra-group reinsurance.

The article concludes that “for many groups there is unlikely to be a sea change in the transfer pricing analysis performed, but there will be a greater level of documentation and evidence required to support the nature of the analysis performed.”

Source article here

The Key Elements of a Transfer Pricing Report

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Action 13 of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) recognises that enhancing transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations is an essential part of tackling the BEPS problem.

Multinationals with a turnover above €750m in their countries of residence will be required to start using the new Country by Country (CbC) reporting template for fiscal years ending on or after 31 December 2016 with a filing deadline of 31 December 2017.

However, groups with consolidated group revenue less than €750m as at 01/01/2015 will be exempted from filing a CbC report

Therefore, existing standards on TP reporting remain valid for the foreseeable future. This note is a reminder of the key elements of those standards.

A transfer pricing report may be commissioned by an enterprise for a number of reasons, e.g. to set the parameters for a TP policy, to support an existing TP policy or to demonstrate the arm’s length nature of a historical position when there was no TP policy in place.

Whatever the reason for its production, in the initial stages of a transfer pricing audit the tax authority will inevitably ask for this documentation, which will then be examined in considerable detail to determine whether the enterprise’s transfer prices are consistent with the arm’s length position.

A well-constructed TP report will provide all the detail and evidence a tax authority could reasonably require to perform its due diligence obligations.

Whilst the enterprise may have chosen the transfer pricing method and tested party etc. it considers appropriate, the tax authority may challenge those choices. Therefore, the enterprise should be prepared to explain how the profitability of each link in the chain of related-party transactions aligns with its functions, risks, and assets.

The key elements of a well-prepared transfer pricing report are discussed below. More detail can be found in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and by following the embedded links below.

Read the rest of this entry »

Minimising Transfer Pricing Risk

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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. Read the rest of this entry »