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HMRC internal manual

International Manual

Transfer Pricing: methodologies: Mutual Agreement Procedure: SP1/11: first notification

Statement of Practice 1/11: first notification

Clearly the UK cannot leave itself exposed indefinitely to requests to enter MAP. For the purposes of both a UK tax treaty or the Arbitration Convention, HMRC will therefore regard the first notification as being the finalisation of a transfer pricing enquiry which gives rise to double taxation. This stage will be marked by the determination of the quantum of the additional profits arising from a transfer pricing adjustment such as the issue of a closure notice, or the amendment of a return during an enquiry (Paragraphs 30/31 Schedule 18 FA1998). HMRC considers that at this point, the taxpayer must be aware of the possibility that double taxation may arise and should therefore present a case to protect its position.

Because HMRC will admit a case to MAP prior to first notification, it may be that at the time the case is presented it is not certain that a transfer pricing adjustment will be made or that double taxation will arise. In particular, it may not be possible to gauge the quantum of profits that might be subject to double taxation. In such cases, HMRC may well defer MAP negotiations with the competent authority of the treaty partner until it becomes clear that such negotiations are likely to prove meaningful and effective in avoiding double taxation. Nevertheless, in cases of doubt, HMRC will contact the other state or states involved to explain why it does not consider it appropriate to commence MAP negotiations at that point and to seek the agreement of the other state as to the point at which negotiations should commence.

However, it should be noted that even if the UK is prepared to commence MAP negotiations, its treaty partner may not be and the UK has no power to compel it to enter negotiations.

OECD guidance

In determining whether taxation of relevant transactions will satisfy the arm’s length principle and thus result in taxation in accordance with the provisions of a tax treaty, the UK will be guided by the OECD Transfer Pricing Guidelines, the OECD Report on the Attribution of Profits to Permanent Establishments and the Commentary on the OECD Convention. These documents represent the consensus view of OECD Member Countries on the application of the arm’s length principle and are also expected to be influential outside OECD Member Countries.