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HMRC internal manual

International Manual

Transfer pricing: Types of transactions: setting aside a provision between connected parties

When setting aside a provision may be appropriate

Normally, a transfer pricing examination will involve identifying the actual provision made or imposed between associated persons through the process of accurate delineation of the actual transaction (see INTM485021-485024 ), then comparing that transaction with comparable transactions between independent parties in order to ascertain whether that provision has been priced at an arm’s length price.


Guidance is given in the OECD’s Transfer Pricing Guidelines at paragraphs 1.119 to 1.128 as to the circumstances where, in applying the arm’s length principle, it may be appropriate to disregard the accurately delineated transaction.


The guidance stresses that every effort should be made to price the accurately delineated transaction and that it is not appropriate to disregard that transaction:

  • simply because pricing of the transaction is difficult, or
  • merely because a comparable transaction may not be seen between independent enterprises


Where the same transaction is seen between independent enterprises in comparable circumstances – i.e. in which all the economically relevant characteristics (see INTM485022) are the same - it will not be appropriate to disregard the actual transaction.


However, where the same transaction is not seen between independent parties it will be appropriate to disregard the actual transaction where:

  • the arrangements made in respect of the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances
  • thereby preventing determination of a price that would be acceptable to both parties taking into account:


  1. their respective perspectives, and
  2. the options realistically available to each of them


A relevant, although not determinative, indicator that a transaction is commercially irrational is that it leaves the MNE group as a whole worse off on a pre-tax basis than had it not occurred.


Where the criteria for disregarding the actual transaction are met the structure of the transaction adopted for transfer pricing purposes to replace it should comport as closely as possible with the actual transaction whilst achieving a commercially rational expected result and hence a price acceptable to both parties. This may in some cases result in the conclusion that no transaction would have taken place.


It is important to note that this is a very difficult area and it would be necessary to ascertain all the facts and circumstances of a case, together with any evidence that such arrangements would not have existed between third parties, before concluding that a provision should be set aside. Any evidence of the provision and the price that would have existed would also have to be considered. In all such instances, consult the Transfer Pricing Team at CSTD Business, Assets & International.