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HMRC internal manual

International Manual

Transfer Pricing: methodologies: Mutual Agreement Procedure: SP1/11: secondary adjustments and further information

Statement of Practice 1/11: secondary adjustments and further information

Secondary adjustments are discussed in Chapter IV of the Guidelines. Complexities sometimes arise where an overseas jurisdiction makes a secondary adjustment following a transfer pricing settlement. Secondary adjustments may be defined as adjustments that are intended to restore the financial situation of the associated enterprises which have entered into the transactions giving rise to the transfer pricing adjustment to that which would have existed had the transactions been conducted on arm’s length terms. Such 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 actually retains 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, most commonly by assuming that a constructive dividend, constructive equity contribution or constructive interest-bearing loan has been made in an amount equal to the transfer pricing adjustment. 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 country 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 a treaty partner 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 a treaty partner 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.

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. Guidance on APAs may be found at SP2/10 - ‘Advance Pricing Agreements’ issued on 17 December 2010. This SP can be downloaded in full from the GOV.UK website.

Further information

Requests for further information should be addressed to:

General cases
Martin O’Rourke
HMRC, Business Assets & International
Portcullis House
21 India Street
G2 4PZ 

Tel: 03000 515912

E-mail: <martin.o’>
For customers outside the UK, telephone +44 3000 515912

Issues regarding individuals

Shaun Thomas
Specialist Personal Tax, Charities Savings & International
St John’s House
Merton Road
L75 1BB

Tel: 03000 536906
For customers outside the UK, telephone +44 3000 536906