INTM431050 - What is transfer pricing all about?

What is the UK’s transfer pricing rule?

It is doubtful whether the existence of a tax treaty with an Associated Enterprises Article is enough in itself to justify an upward adjustment to profits on transfer pricing principles. A charging provision under a country's domestic law is generally required. The UK's current transfer pricing legislation is to be found at ICTA88/SCH28AA.

ICTA88/SCH28AA applies for accounting periods ending on or after 1 July 1999 (and income tax years of assessment 1999/2000 onwards) and puts the onus on taxpayers to include in their Self Assessment any upwards adjustments to their commercial profits that arise from the application of the arm's length principle. It applies to a very wide range of transactions, including:-

• The purchase and sale of goods
• The provision of management and other services
• Rents and hire charges
• Transfers of intangible property, such as trademarks, patents and know-how
• Sharing of expertise, business contacts, supply systems, etc
• Provision of finance, and other financial arrangements

The purpose of the legislation is to counter tax loss generated by non arm's length pricing; but it takes no account of whether or not the setting of the original transfer prices has been tax motivated. The rule implements the arm's length principle as articulated in the Associated Enterprises Article of the OECD Model Tax Convention on Income and Capital. And it operates by substituting, for the purposes of calculating taxable profits, arm's length terms in place of the actual terms of transactions between connected parties.

The legislation provides for the arm's length principle to be applied to the composite effect of a series of transactions rather than looking at each transaction in isolation.

ICTA88/SCH28AA does not apply to transactions between third parties, but such transactions can be taken into account when looking at a provision made or imposed between two connected persons by means of a series of transactions (for example loans from unconnected lenders where an overseas associate acts as guarantor).

The rule does not apply in connected party cases where the only effect of non-arm's length pricing is to overstate a taxpayer’s profits for UK tax purposes. The rule applies where the effect of connected party pricing is the understatement of a taxpayer’s profits (or overstatement of losses) for UK tax purposes.

Detailed guidance on how ICTA88/SCH28AA works can be found atINTM432000onwards.

For accounting periods ending on or before 30 June 1999 (and income tax years of assessment up to and including 1998/1999) the relevant legislation is at ICTA88 /S770-773. See INTM436000 onwards.