INTM461230 - Transfer pricing: risk assessment and case selection - Risk assessment: review of information from other sources

The review of the file will give a general idea of the business activities of the company, but may not have a detailed picture and there is unlikely to be much information there on group activities. Other sources of information need to be considered. The following sources may be helpful:

• Group website 
• Site visits and meetings with group personnel 
• Commercial databases 
• Press reports, trade magazines and articles 
• Internet searches 
• Other sources of information 

Group website

Most companies are likely to have their own websites. Large groups and in particular multinational enterprises will have very comprehensive sites, providing a wealth of useful information. The site will certainly promote what the group does - services it provides or goods it sells. Major products or brands will very likely be extensively promoted. The section on investor relations will contain the latest and prior year’s accounts, and the latest half-yearly or quarterly figures. If the group is US-based, it will have to make a number of returns each year to the Securities and Exchange Commission and these will usually be available (see Internet searches below).

There may be copies of presentations by senior staff to business analysts, investors and credit rating agencies - these may give useful information on forecast sales and new products.

There will normally be a link to press releases, which might provide information such as new products, products being sold, and factories opened or closed.

The site may provide detailed information on where activities are around the world. Sometimes there will be detailed explanations of research and development efforts. Invariably there will be details about job vacancies, which will provide information on where in the world staff are based, and what they do.

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Site visits and meetings with group personnel

A meeting with the company is usually considered essential during the course of a transfer pricing enquiry but a meeting can also be very helpful at the risk assessment stage, particularly with larger groups. A common complaint from taxpayers is that HMRC Officers do not understand their business and either ask for too much information or ask irrelevant questions. A polite request for a meeting at the risk assessment stage can therefore be productive for all concerned.

If the group agree to a meeting, expectations should be realistic. This is an opportunity to either find out, or confirm exactly what happens in the business. Remember, at this stage the purpose is to gather information and assess the potential for a transfer pricing enquiry; this is not an enquiry.

Questions should be designed to find out:

• What are the business activities? Do the company’s activities generally reflect the group activities as a whole, or are they more limited?
• What are the group’s major products? What involvement does the company have in these?
• What is the management structure in the company and how does this link in with the rest of the group?
• Does the group have any companies that centralise activities such as warehousing, procurement or invoicing of goods?
• What proportion of purchases is from other group companies? Are any of these based in tax havens or tax shelters?
• What proportion of sales is to other group companies? Are any of these based in tax havens or tax shelters?
• Are there any research and development activities in the company? What do they do and who owns the rights to any intellectual property created from these activities?
• Does the company pay any significant royalties or fees to other group companies to use their intellectual property? Are any of these based in tax havens or tax shelters? How are the payments broadly calculated?

Some of this may already be known. The questions need to be tailored to the particular group and its business. Spending a meeting ticking off a standard list of questions one by one is not enough. The questioning needs to be flexible and responsive to what is said. Certain issues will turn out to require more exploration and others may be disposed of more quickly than anticipated. It is advisable that the Transfer Pricing Specialist attend the meeting where possible.

Always bear in mind that a meeting during the risk assessment process will give provide an opportunity to establish that the transfer pricing of some intra group transactions will be low risk. If a business case is made and receives approval from the Transfer Pricing Panel to undertake a transfer pricing enquiry, then the meeting may provide sufficient information to be able to focus the enquiries from the outset. This is of great use to both HMRC and the taxpayer.

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Commercial databases

All Local Compliance Offices, the Large Business Service (LBS) and Specialist Investigations now have access to commercial databases such as FAME. Help in using them is available from the Transfer Pricing Group. It can be useful to try and find similar but independent companies carrying out broadly similar activities, and compare their financial results to those of the company under enquiry. For the purposes of a risk assessment, the search can be fairly general, to establish broadly how the company is doing compared with similar companies.

A database search might show that the company is completely outside of the range of these comparables, which will be an indicator that the case is worth looking at in more detail. In other cases the results may be more inconclusive and it will be necessary to consider other factors to confirm whether the case is still worthwhile. Alternatively, the company may be near the top or even outperforming the comparables, which probably though not necessarily means looking elsewhere for potential transfer pricing cases.

The chapter on 'Establishing the arm’s length price', starting at INTM467000 contains detailed instructions on how to conduct a search using commercial databases at INTM467130. The approach here should not be formulaic. The aim is to build up a full understanding of the company. Any conclusions should be drawn only after a full consideration of all the facts.

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Press reports, trade magazines and articles

Press reports can provide useful information on both particular companies and their trade sectors. Information on business sectors can help decide whether declining results for a company reflect a wider malaise for that particular business sector, or reveal that the sector was in fact rather buoyant during the period in question. Articles on business sectors may also indicate when a competitor has launched a rival product, which might explain a fall in sales for the company being reviewed.

Press reports on individual companies provide information about the launch of new products, factories opening or closing, strategic partnerships or alliances they are entering into and sometimes even concrete information such as royalty rates on licence agreements they have concluded. For example, press reports in 2001 indicated that businesses making and marketing Harry Potter products would be paying a royalty of 12% of their sales to the owner of the Harry Potter suite of intellectual property rights.

There are a number of sources for press and trade articles. Increasingly, articles are now available online. Within HMRC, OneSource can be used to obtain copies of press reports or trade articles that mention a particular company, covering an archive of two years. Requests for such information should be made to the relevant TP Specialist or International Issues Manager if there is no local access. Business International also has a number of publications covering the pharmaceutical and banking industries.

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Internet searches

The Internet is a very powerful search tool and can produce some very useful information on particular groups or industries. In particular returns made to other countries’ government agencies can sometimes be found on the Internet.

A publicly-quoted US corporation has to make a series of returns each year to the Securities and Exchange Commission ('SEC') in the US. The returns are comprehensive, sometimes very repetitive and can be over 600 pages long. On average, annual returns are between 100 and 200 pages. The returns contain information that is meant to be able to help the US public make informed decisions about investments. They will contain a detailed three-year summary of the business activities, acquisitions and disposals, research and development. The returns will also contain information on major licence agreements with third parties. These can sometimes be a useful source for internal comparables.

Unquoted US corporations also have to make returns, but the disclosure rules mean that they may provide more limited information.

The more common returns that a company has to make to the SEC are:

• 10K - annual return for US corporations.
• 20F - annual return for US corporations with a non-US publicly-quoted parent.
• 8Q - quarterly return for all US corporations.

SEC returns can be obtained from the following sites

Canada has a similar system and returns for Canadian publicly quoted corporations can be found at:

Business International tries regularly to review Internet sites which would provide useful information. The sites include information on interest rates, spot exchange rates, idiots’ guides to financial operations, company information news services and sites providing information on and promoting the use of tax havens.

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Other sources of information

Goods may be subject to VAT and other duties, and HMRC staff working in this area may have useful information about pricing. There are various ways a person can be assessed, including a method founded on the arm’s length principle. In large cases, particularly where the strategy is to concentrate on one or two products, it will be worthwhile asking colleagues in the former Customs & Excise operations for information on how duties or VAT have been assessed, where goods are sold to a connected person.