INTM468000 - Giving transfer pricing advice to taxpayers

Requests for advice on the operation of the transfer pricing rules

(The text below replaces the original version of this paragraph, which in turn was based on an internal IR memo TS115/99 which appeared in December 1999. This primarily concerned agreements utilising Code of Practice 10 on service provision within a group of companies, where Inspectors were able to accept that a cost-plus arrangement was appropriate.

With the advent of the guidance on Centrally Provided Services which appeared in 2004 ( INTM464055) this guidance became superseded.)

This guidance is not intended to cover:

• Treaty Clearances: claims by non residents to receive royalties or interest at the treaty rate of withholding tax or implementing EU Interest and Royalties Directive.[ INTM400010 onwards]
• Financial Transfer Pricing issues: CT & VAT, International CT continues to offer advice about the tax consequences of proposed financing arrangements [ INTM540000 onwards]

Inspectors are sometimes approached by businesses seeking advice or “comfort” about their arrangements for setting transfer prices. Following the extension of ICTA88/SCH28AA to cover UK-to-UK transactions between affected persons it is perhaps particularly likely that UK based groups of companies which have not hitherto been subject to Sch28AA may seek to raise such issues with their Inspectors.

Where, as will often be the case, the issue is the provision of services by one or more companies within a group, then it is probable that INTM464055 will cover the situation and taxpayers may be referred to that guidance which should help them to self assess. (Inspectors should also refer to INTM461020).

In other circumstances Inspectors should exercise caution about being drawn into discussions about transfer pricing issues which may leave taxpayers with expectations that they may rely on some “understanding” reached with the Inspector when later submitting their Returns.

In particular, it is critical that inspectors distinguish between giving general guidance on the law relating to transfer pricing, which is a necessary customer service measure, and any discussion which may come to be regarded by a taxpayer as amounting to an agreement that a particular price or formula offers a “correct” solution to a transfer pricing problem.

In general, Inspectors should confine themselves to giving advice on methodology only. In this way there can be no reasonable inference that any particular price for a good or service used in calculating profits in a Return will be considered by the HM Revenue & Customs to satisfy the requirements of the transfer pricing rules.

It is the taxpayer’s obligation to make a return in accordance with the arm’s length standard. It is invariably the case that taxpayers will know more about pricing structures and about where value is added in their businesses and industries than do Inspectors, and taxpayers should use such knowledge and their commercial judgement to make arrangements and set prices which conform to the arm’s length standard.

In the most complex transfer pricing situations an Advance Pricing Agreement may be a possibility and taxpayers should be referred to INTM469010 and Statement of Practice 3/99.