2011\/12 \u2013 2016\/17 HMRC secured an additional \u00a35.9 billion<\/a> of tax receipts by challenging the transfer pricing arrangements of multinational trading groups.
\nTherefore, what can international groups do to get the price right? And avoid both the time and expense of a tax enquiry.<\/p>\nExemptions for SMEs not straightforward<\/h2>\n
Firstly, the good news is in the UK, HMRC provides an exemption to most small and medium size enterprises (SMEs). To qualify as medium the business will have no more than 250 employees, annual turnover less than \u20ac50 Million and a balance sheet of less than \u20ac43 million.
\nHowever, this UK exemption may not apply in the following circumstances:
\n\u2022 Transactions with overseas subsidiaries where the UK does not have a double tax treaty including the appropriate non-discrimination article
\n\u2022 Where HMRC has issued a transfer pricing notice to an SME which is party to a transaction relevant to a patent box claim
\n\u2022 Where an SME elects that the exemption from the transfer pricing notice should not apply
\n\u2022 Where HMRC issued a transfer pricing notice to a medium sized enterprise
\nFurthermore, while the UK has an SME exemption, not all territories have one and their thresholds may stipulate different criteria. Therefore, where a group trades globally it is worth considering this issue even if at first glance it seems the SME exemption is available.<\/p>\n
OECD Guidelines<\/h2>\n
The first port of call for determining the right price are the OECD [Organisation for Economic Co-operation and Development] guidelines. These are globally accepted as the bible for providing methodology on calculating an appropriate price and the documentation which needs to be in place. Allowing for review of the pricing policy following its implementation and ongoing monitoring. At their core is the principle that transactions are at arm\u2019s length.<\/p>\n
Advanced Pricing Agreements (APAs)<\/h2>\n
After determining an arm\u2019s length pricing policy, to provide additional comfort that the price is right, a group may wish to obtain an advance pricing agreement (APA) from tax authorities. Thereby agreeing the principles for calculating the price with the tax authority. The degree of certainty obtained can vary from non-binding opinions through to a form of advanced clearance on the transfer pricing policy. HMRC does not offer a simplified process for SMEs for an APA. However, other territories such as France and the USA do provide a streamlined APA process for SMEs. While, APAs do add an initial administrative burden, the clarity they provide on whether the price is right, avoids any nasty tax surprises further down line.<\/p>\n
Overall setting the right price for transactions between group companies is not straightforward and is an issue which tax authorities globally are increasingly taking a keen interest in. Even where groups may be able to take advantage of the UK SME exemption, when trading internationally, groups need to be vigilant that these exemptions apply in other territories. Where groups do need to consider an appropriate transfer price, the best starting point are the OECD guidelines, which at their heart are based on the arm\u2019s length principle. Finally, having determined an appropriate transfer pricing policy, to mitigate against any nasty tax surprises down the road it is worth considering obtaining an advance pricing agreement from the relevant tax authorities.<\/p>\n","protected":false},"excerpt":{"rendered":"
Setting the right price for transactions between group companies is one that many boards ask themselves in order that each group company\u2019s profit and loss fairly reflects the underlying nature of transactions. For many items an external market can act as a reference point, making this task relatively straightforward. However, this becomes more difficult when[…] <\/p>\n
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