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HMRC internal manual

International Manual

Transfer Pricing: Transactions and Structures: business structures: general overview

Inter-company transactions

One of the aims for a company’s head of tax may be to try and reduce the effective tax rate for the group (see INTM482050).

A way in which groups may seek to drive down their effective tax rate is the use of cross-border transactions, where tax can be a motivating factor. Certain business and legal structures under some circumstances may involve non arm’s length pricing. Case teams should always review any of the business structures which feature in this chapter with care to see if this is the case.

It should not automatically be assumed that the adoption of a particular structure is evidence of inappropriate pricing. It is legitimate for any company to mitigate any tax to the level that is properly payable. It’s only through obtaining all the facts and considering them that a judgment can be made.

Intra-group payments of royalties, commission, service fees, etc. are now commonplace within MNEs. With large groups increasingly operating on a global basis and as a consequence of improved communications and distribution channels there are now far more inter-affiliate transactions than ever before. And there has been a corresponding increase in the potential incidence of inappropriate pricing.

The UK’s transfer pricing code can challenge transactions where, for example,

  • valuable intangible property is licensed out at under value
  • marketing and distribution companies make non-arm’s length losses
  • manufacturers fail to make an arm’s length profit.

The UK is certainly not alone in this - virtually all developed countries have transfer pricing legislation.