INTM467070 - Establishing the arm's length price: gathering your own evidence - Using a test year

A transfer pricing enquiry will normally focus on one year. If the enquiry shows there are problems with the transfer pricing of intra-group transactions, you will need to suggest an alternative solution which provides an arm’s length result.

You will also need to consider the extent to which you need to include other years, both going forwards and backwards. The key point here is establishing whether the company was doing anything materially different in those years, or if a different transfer pricing policy was being used for those years.

While you need to consider the results of these other years, it may not be necessary to repeat your enquiry process for each year. Providing the facts and circumstances are more or less the same then using a test year to establish the facts will be a sensible way forward. If you establish there are problems for this test year, but the company objects to other years being considered, you should invite it to demonstrate what is different about those years.

A test year need not necessarily be the year you originally picked for enquiry. On occasion it may be easier to pick another year where there is more information and the facts are easier to ascertain. However a company should be able to demonstrate that the arm’s length standard was applied when the return is made. For all years it should be no more difficult to provide and test facts and information for one year than it is for any other. Always consider how actual commercial factors would have affected the arm’s length reward in any given year.