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HMRC internal manual

International Manual

Transfer Pricing: methodologies: Mutual Agreement Procedure: Other matters

Secondary Adjustments

Secondary adjustments are discussed in Chapter IV of the OECD Transfer Pricing Guidelines. Secondary adjustments may be defined as adjustments that are intended to realign the economics of the underlying transaction to reflect arm’s length terms. Secondary adjustments recognise that while the primary transfer pricing adjustment is to the taxable profits of the associated enterprises, it does not rectify the situation where one enterprise benefits from funds that it would not have held had the transactions in question been conducted on arm’s length terms. A secondary adjustment seeks to rectify this by adjusting the underlying economics of the transaction. For example, a jurisdiction making a primary adjustment to the income of a subsidiary of a foreign parent may treat the excess profits in the hands of the foreign parent as having been transferred as a dividend, in which case it may consider that withholding tax should be levied.


A secondary adjustment, however, may itself give rise to double taxation unless a corresponding credit or some other form of relief is provided by the other tax authority for the additional tax liability resulting from the secondary adjustment. The UK will consider the merits of claims to deduct interest relating to the deeming of a constructive loan by the other tax authority following a transfer pricing adjustment. The issue would, however, be subject to the arm’s length principle and would be considered in the light of any relevant provisions relating to payments of interests. Where the other tax authority applies a secondary adjustment by deeming a distribution to have been made, the UK neither taxes the deemed distribution nor grants relief for tax suffered on the distribution in the other jurisdiction.


Repatriation of Funds

During the course of a transfer pricing enquiry it is not uncommon for an enterprise to raise the subject of repatriation of funds. The purpose of such a repatriation is to restore the cash position of the associated enterprises to that which would have existed had arm’s length terms applied to the transactions giving rise to a transfer pricing adjustment; some jurisdictions encourage repatriation and have specific rules governing the procedure. It is recommended that any repatriation of funds should only be made following agreement of the transfer pricing reallocation as part of the MAP. It should be noted that the manner of repatriation to the UK, that is how an adjustment is accounted for, may lead to potential additional UK taxation.  For example, if the funds are repatriated through the trading account. Any enquiry on the subject of repatriation, whether this be inbound or outbound should be referred to the Business Assets and International, Transfer Pricing Team for advice.


Advance Pricing Agreements

An advance pricing agreement (APA) is a written agreement that determines, for a fixed period, a method for resolving transfer pricing issues in advance of a return being made. In certain circumstances it may be appropriate to apply the transfer pricing methodology used in the APA to earlier years that may be under enquiry or subject to MAP discussion. Further guidance on APA may be found at INTM 422000.