HM Revenue & Customs published revised guidance preventing any transfer pricing discussions with taxpayers outside advance pricing agreements (APAs) or enquiries.
Until recently, HMRC would only agree a transfer pricing issue with a taxpayer within the context of resolving an enquiry or entering into an APA. But, it was possible for HMRC to give an indication—expressed in terms of the level of risk—as to how HMRC might see the tax risk relating to particular transactions, without leaving any inference that any particular price would automatically be considered to be an appropriate transfer price.
HMRC’s International Tax Manual, at INTM480540, provided operational guidance on real-time working of transfer pricing issues (excluding thin capitalisation). This guidance previously stated that HMRC could engage in discussions with taxpayers on their transfer pricing issues, and might (under some circumstances) give an indication to the taxpayer of whether HMRC considered a particular transfer pricing arrangement to be low (or high) risk.
While only an APA or the resolution of an enquiry would lead to a definitive statement of HMRC accepting a transfer price as being arm’s length, this gave taxpayers at least some comfort in situations when pricing appeared to be reasonable, but an APA would either have not been appropriate for the taxpayer (on a cost-benefit basis) or would not have been accepted by HMRC (due to not meeting the size or complexity threshold).
HMRC has revised the guidance so that it states that when a transfer pricing issue is neither suitable for an APA, nor warrants an enquiry, HMRC is not to engage in discussions on that issue.
INTM480540 has been revised to make clear that Customer Relationship Managers (CRMs) and case teams are not to engage in discussions in respect of a taxpayer’s transfer pricing, outside of the APA or enquiry formal processes.
“On no account should a low-risk opinion or any other indication as to the perceived level of risk in the TP arrangements be given outside the APA or TP governance frameworks.”
Combined with the recent revisions to the criteria for HMRC to accept APA applications under the updated Statement of Practice 2 (2010), this change represents a significant tightening of HMRC’s approach to transfer pricing, while leaving taxpayers with even greater uncertainty. In an environment where transfer pricing disputes are already likely to increase, as tax authorities around the world interpret the revisions to the OECD Transfer Pricing Guidelines that have emerged from the BEPS initiative, the importance of robust transfer pricing documentation will be greater than ever.
Read a January 2017 report prepared by the KPMG member firm in the UK
© 2019 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.