Presented by Jay Sanghrajka – Shipleys LLP

 Transfer Pricing – Preliminary  UK Transfer Pricing (TP) Rules – Overview  UK Transfer Pricing filing requirements  HMRC Enquiries  Penalties  HMRC Compliance strategy  Overview of TP Methods  2010 update – Advance Pricing Agreements and Mutual Agreement Procedure

 TP means the value or price at which transactions takes place amongst related parties.  TP are the prices at which an enterprise transfers physical goods and intangible property and provides services to associated enterprises.  TP gain significance because these can be used by the controlling party to their advantage to minimise tax incidence.  Approximately 60% of the total transactions across the world are between related parties.  If the transactions are across different tax jurisdictions, where tax rates are different, shifting is beneficial.

 Transfer Pricing rules apply to transactions between related parties where: ◦ The business or group is large; ◦ The business elects for it to apply (say, SMEs); ◦ HMRC direct it should apply (medium size entities); ◦ The related party is located in a non-qualifying territory (overseas country with no DTT with UK or DTT has no non-discrimination Article).  Not limited to company transactions – can apply to transactions between company and controlling individual.  Where UK transfer pricing rules apply, businesses are required to “self-assess” the prices used.

 Evidence (documentation) needs to be retained how the figures arrived at.  Documentation includes: ◦ Detailed analysis of the transaction; ◦ Commercial relationships between related parties; ◦ Prices and terms applying to transactions.  Documentation must be in place before tax return filed.  Adjustment to reflect arm’s length price must be made on tax return.

 The amount of the adjustment is that required to bring the profits up to what they would have been if the arm’s length provision had applied.  The UK rules are to be construed in a manner consistent with: ◦ The expression of the arm’s length principle in Article 9 of the OECD Model Tax Convention on Income and on Capital (‘Article 9’) and ◦ The guidance in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the ‘OECD Transfer Pricing Guidelines’). ◦ Prices and terms applying to transactions.

 Returns need to be filed in accordance with the basic transfer pricing rule. This refers not to the pricing of transactions between the parties, but the computation for tax purposes. This means that taxpayers will be required to make computational adjustments in cases where transactions, as recorded in the accounts, are not on an arm’s length basis and the taxpayer is potentially advantaged in respect of UK tax by the actual provision.

 Primary accounting records  Tax adjustment records  Records of transactions with related parties  Evidence to demonstrate an arm’s length result (this is a key requirement and is usually met by comparable data/transfer pricing report).  These records need to be available if requested by HMRC and to the extent that they are required to file a return that accords with the arm’s length test.

 Penalty up to100% can be charged if liability understated.  A penalty situation arises if there is an inaccuracy in a document or return or if notification is not made that an assessment is understated. For a penalty to be charged, there must be a loss of tax or an increased claim to a loss or repayment.  The inaccuracy must also be careless, deliberate, or deliberate and concealed.  No penalty arises if the inaccuracy occurs despite taking reasonable care. This contrasts with pre-2008 legislation which provided that a penalty may be due if an incorrect return was fraudulent or negligently submitted.

Type of InaccuracyMaximum Penalty Careless30% of PLR Deliberate not Concealed70% of PLR Deliberate and Concealed100% of PLR PLR = Potential Lost Revenue

 In 2008, HMRC set up their specialist “Transfer Pricing Group” to administer or supervise all UK transfer pricing – includes transfer pricing specialists, economists and sector specialists.  UK currently updating CFC, foreign branch and IP rules, corporate tax rate has been reduced, foreign dividends exempt since  Pressure on HMRC to bring in revenue quickly given state of UK finances.  Adverse publicity for multinationals – Apple, Google, Starbucks, etc.

 Penalty regime is tougher in principle – will it be imposed more stringently than in the past?  Success in the “Dixons” litigation in 2008 – but since then little apparent appetite to go to court on other large enquiries?  Long running Astra Zeneca enquiry settled for £505m January 2010 – consensus is that Astra got a good deal?  Key policy for taxpayers should be to ensure documentation is up to date to avoid penalties.

 Comparable Uncontrolled Price Method  Resale Price Method  Cost Plus Method  Transactional Net Margin Method  Profit split Method  Fundamentally the UK follows the OECD lead  UK legislation is being updated to reflect revised OECD guidelines in 2010

 HMRC is currently consulting on both APA and MAP – an example of them reaching out to businesses to encourage engagement on TP issues.  Draft statements of practice have been issued.  These clarify HMRC’s views and procedural best practice rather than proposing significant changes.  Advance them capitalisation agreements not affected.

Any questions?