HMRC transfer pricing guide places emphasis on risk management

The recommendation is contained in new guidance issued by HM Revenue and Customs (HMRC), which is designed to help UK businesses manage compliance risks arising from transfer pricing. It is the seventh edition in the series of ‘guidelines for compliance’ HMRC has issued.

Tax expert Steven Porter of Pinsent Masons described HMRC’s new guidance, first trailed well over a year ago as, “long-awaited”. The guidance is aimed at “UK risk leads” – holders of senior finance, risk and tax roles within UK businesses falling within scope of transfer pricing rules.

Transfer pricing refers to the method companies use to price transactions between entities in the same group. Without tax rules to control the transfer prices, multinational businesses could allocate costs and income between parts of the business located in different countries, which would result in a reduction in tax payable in the UK.

HMRC believes that the UK misses out on significant sums through businesses transferring profit to lower-tax jurisdictions. This has led to transfer pricing becoming a major focus of investigations carried out by the UK tax authority in recent years. HMRC has powers to adjust a UK company’s profits for corporation tax purposes if it pays more or less than the market rate for goods or services provided by or to non-arm’s length enterprises.

Abigail McGregor of Pinsent Masons said the guidance is particularly relevant to large businesses, which are required to notify HMRC where they have adopted an uncertain tax treatment – including where their interpretation of a tax issue runs contrary to HMRC’s ‘known position’ on the matter.

“The contents of ‘guidelines for compliance’ are identified by HMRC as representing their ‘known position’ for the purposes of the uncertain tax treatment obligations, which means that all businesses within the scope of transfer pricing need to review this new guidance in detail and consider whether any of the positions they have adopted could now be classified as uncertain, giving rise to an obligation to notify or pre-notify HMRC,” McGregor said.

The first part of this new guidance is focused on corporates having “a robust compliance risk framework” and provides recommendations to those who are responsible for the overall tax risk and compliance for the companies when they are engaging with transfer pricing specialists who are conducting the work on their behalf.

HMRC said “a robust compliance risk framework should be designed to align with UK transfer pricing rules and consist of processes, checks and controls”. Among other means of managing compliance risks, it said UK risk leads should conduct a “review of documented policies and terms governing transactions with the UK business with commercial or operational colleagues”, including sense checking “whether group transfer pricing policies, contractual terms and other written arrangements make sense commercially and are consistent with the way in which the UK business operates”.

Porter said: “Tax risk management is an increasingly complex and important role within large businesses and the consequences of not setting up appropriate risk management procedures to ensure compliance can be costly.”

“This guidance makes it clear that HMRC considers that the responsibility for transfer pricing compliance lies at the top of the business and that an approach of appointing a transfer pricing specialist and considering your responsibilities have been met won’t wash with HMRC. It expects a much greater and more regular engagement of senior management in the ongoing process,” he said.

The new guidance also outlines a number of common compliance risks for the benefit of transfer pricing specialists who are conducting the operational work for multinationals. HMRC highlighted that it “frequently encounters transfer pricing documentation which is too high level, insufficiently evidenced or for which functional analysis is not two-sided in nature”.