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HMRC internal manual

International Manual

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HM Revenue & Customs
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Transfer pricing: legislation: rules: Compensating adjustments

Compensating adjustments associated with UK transfer pricing adjustments

Where a transfer pricing adjustment has been made to one party to an actual provision another party, who is not a potentially advantaged party (see INTM412020), may make a claim under TIOPA10/S174 to adjust their taxable profits if the relevant criteria are met.

The criteria are:

  • Only one of the parties to the provision is an advantaged person in respect of that provision; and
  • The other affected person is within the charge to income or corporation tax in respect of the relevant profits; and
  • The advantaged person has made a return on the basis of the arm’s length provision.

If accounting periods differ, it may be necessary for the disadvantaged person to correct their return once a valid claim can be made. The disadvantaged person has two years to make a claim from the date the advantaged person makes their return.

In a case where an enquiry results in a transfer pricing adjustment but the disadvantaged person has already submitted a return for the relevant period then the disadvantaged party will be able to amend their return accordingly.

A claim does not affect the credits brought into account in respect of closing trading stock, or closing work in progress for accounting periods ending on or after the last day of the accounting period of the advantaged person in which the actual provision was mad or imposed.

A claim will not generally affect how exchange gains or losses from loan relationships or derivative contracts are accounted for. See CFM61000 onwards.

Further legislation applies where the provision relates to a security. See INTM413110.

Controlled Foreign Companies

Where a UK company has made a transfer pricing uplift of profit as a potentially advantaged person and the counter party to the transaction is a Controlled Foreign Company (CFC) then a compensating adjustment is given in the computation of profit of the CFC because of the assumptions made in undertaking this calculation.

Where there has been a transfer pricing uplift in calculating the profit of a CFC and a UK company is the other party to the transaction then TIOPA/S179 applies and a compensating adjustment is only available if the whole of the apportionable profits are apportionable to UK resident companies under ICTA88/S747(3) and tax is chargeable under ICTA88/S747(4) on the whole of those apportioned profits.

See INTM255600 for more information on CFC computation of chargeable profits.