Most countries now have detailed rules governing the pricing of transactions between related parties. These are usually tax rules but stem from the basic legal requirement that companies, for example subsidiaries that form part of a group, account for goods and services bought or sold regardless of whether those transactions are with third parties or other group members. Many countries also have formal or informal rules on compliance (for example the preparation of transfer pricing documentation) and operate penalties for non-compliance.
The OECD has agreed a general principle - the arm's length principle - which should govern transactions of this sort and has published detailed guidelines on its application. The UK has adopted these guidelines in tax law.
In the UK, transfer pricing rules apply to a wide range of transactions including those between two UK companies or between any person (including individuals and charities) and a company or partnership. In principle the rules cover almost everything from sales or purchases of goods and services, to intellectual property, debt or deemed transactions that are not reflected in any accounts. The interaction with other areas of tax law can be complex with several special sets of transfer pricing rules for specific issues in different parts of the Taxes Acts.
PwCs transfer pricing group has been consistently ranked as the leading UK practice by the International Tax Review and the Global Tax Monitor recognises PwC as the leading firm globally for transfer pricing, by reputation, with a very strong lead over the competition1. We have dedicated teams across the world comprising professionals in economics, accounting, and tax law. This combination of experience enables us to develop innovative approaches to transfer pricing issues.
We can help answer the following questions:
Our coordinated transfer pricing planning advice includes health checks to identify and analyse priorities and develop policies. We work regularly with companies, small and large, that do not have dedicated in-house expertise in transfer pricing to provide guidance or detailed advice. Similarly, we have worked with many of the UK's leading companies, which often do have in-house expertise, to resolve particularly complex transfer pricing problems and implement solutions. In many cases these will involve more than one country and if you need to coordinate your worldwide transfer pricing policies we can offer a tailored consultative approach to defining business requirements and developing appropriate tax strategies.
Some issues are so fundamentally uncertain that it makes sense to agree the transfer pricing with the tax authorities in advance. Such arrangements are known as advance pricing agreements (APAs). In the UK such agreements are usually bilateral ie agreement with the two tax authorities involved, and some are multilateral. Inevitably when dealing with two or more governments this process can be lengthy.
In relation to debt, HMRC will enter into advance thin capitalisation agreements. These are unilateral and therefore far less time consuming. We have agreed over 50 of these since they were introduced in 2007.
For all but those qualifying as small or medium sized enterprises, submitting a tax return is effectively a declaration that the results reported reflect arm's length transfer prices. HMRC may then enquire into the underlying transactions and certain record keeping requirements exist. In broad terms these are sometimes referred to as the "transfer pricing documentation requirements". Similar rules exist in many countries overseas. If you need guidance on documentation requirements we can offer an evaluation to help with analysis of what is needed and can assist in preparing transfer pricing documentation that complies with compliance requirements in the UK and abroad. Alternatively our Global Core Documentation service offers a streamlined alternative that helps multinationals deal with the requirements of multiple jurisdictions.
If HMRC is investigating your transfer pricing we can help with advice on your position or your approach to the defence. HMRC has some detailed processes for pursuing transfer pricing enquiries and familiarity with these is often helpful. We have experience both of cases that have been taken to court and those settled privately through negotiation.
If you are facing penalties or legal action around transfer pricing issues we can offer specialist tax litigation support to help you manage and settle disputes. We can also help you prepare for disputes by identifying and managing tax risks from the outset.
Where two countries take a different view of the same transaction(s) the result is likely to be economic double taxation - paying tax twice on the same profits. The established mechanisms for dealing with situations like this are found in double tax treaties (the Mutual Agreement Procedure) or, within the EU, under the EU Arbitration Convention. We have extensive experience of both options and in some cases have been able to resolve the relevant issue with the government of one or other country without invoking a formal (and time consuming) procedure.
We have an extensive global network of specialists with expertise in this area operating as our Global Dispute Resolution service.
1These results are based on the year-ending Q2 2009 figures, with a sample size of 3,246 primary buyers of tax services globally.
Launched in 2000, the Global Tax Monitor (GTM) is a multi-client independent survey conducted by research agency TNS, that examines the competitive position of the top firms in the tax advisory market - globally, regionally, nationally and on an industry basis. It provides a comprehensive measure of firm reputation, client service and brand health, gained currently from just over 3,000 telephone interviews annually with key decision makers (CFOs and Tax Directors) in 31 key markets.