INTM467010 - Establishing the arm's length price: gathering your own evidence
General overview
One essential part of a transfer pricing enquiry is being able
to demonstrate that the price between the two connected persons is
not the price that you would find between two independent parties.
You have to demonstrate that the transfer prices applied to a
transaction, or series of transactions, are not at arm’s
length. The other essential part is to calculate the arm’s
length price which would have existed between the parties had they
been unconnected. The method you adopt must be in accordance with
the OECD Transfer Pricing Guidelines and the criteria you use must
be based on all of the facts and circumstances. The taxpayer is
entitled to apply the same degree of scrutiny to your proposed
solution as you did to the transfer pricing adopted in their
return.
In some situations, it may be possible to demonstrate what
you consider the arm’s length price should be during the
course of testing the transfer price used by the taxpayer. For
example, you might be able to show that certain comparables used by
the company are not appropriate, and by excluding them, the range
of arm’s length prices increases from 2-4% to 4-6%. In other
cases you may need to build up a case from scratch, by using a
different methodology.
You must leave a clear audit trail or explanation as to how
your transfer pricing was calculated. The group may make a claim
for a corresponding adjustment in the other country. This will
involve the competent authority in the UK reviewing your case and
explaining your figures to the competent authority of the other
country - see
INTM470000 onwards on the mutual
agreement procedure and basis for corresponding adjustments.
The UK competent authority must therefore
- Be able to understand how you have calculated your transfer prices and how you used those figures to settle your case.
- Be able to explain how the arm’s length price was calculated.
This chapter looks at how you calculate an arm’s length price. This is not a straightforward exercise. Depending on the transactions involved, you may need to consider the reward for valuable intangibles, probably the hardest area of transfer pricing. In all cases, the more work and care you put into your research the better placed you will be to calculate the arm’s length price.
