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HMRC internal manual

International Manual

Transfer Pricing: Transactions and Structures: business structures: tax-efficient structures

Structures which may be encountered

Structures should be of concern where a non-arm’s length profit arises. Where many aspects of a business are ultimately under the same ownership, it is possible to organise the trade in such a way that would not happen between independents.

Traditional business models rely on a concept of a vertical or straight-line supply chain. At its very basic the chain may look like this:


The owner has the know-how; the maker uses the know-how to manufacture the goods; the seller markets those goods to the customers. The activities may take place in different companies, or may all be present in just one company.

A business structure which involves transfer pricing risk may look like that in the example below. It will contain a number of structures or terms with which readers may be unfamiliar. This chapter covers the more common elements that tend to be found in a group-wide tax-efficient restructuring.


Everything in the structure flows to or from the entrepreneurial figure in the middle, the principal. The principal may be based somewhere where profits are taxed at a low rate, or where there are specific incentives to reduce the taxable profits. The principal will own key valuable intangibles such as brand names or patents.

Research and development will be carried out on behalf of the principal on a contract basis - any valuable discoveries or intangibles created will be owned by the principal.

If manufacturing is carried out in ‘normal rate’ countries, risks will be minimised by use of contract or toll manufacturing. Raw materials will be bought by the principal, who will retain ownership of the products throughout the manufacturing cycle. In some scenarios, the manufacturing will be sited in a country where specific incentives are available, and may be combined with the base of the principal.

Finished goods may be warehoused in central locations, preferably in a country offering particular incentives. Additional services such as packaging, invoice servicing, etc., might be carried out here.

Sales of goods to customers will either be made by the principal, acting through a number of commissionaires, or by limited risk distributors.

The group may sell goods over the internet. The server and ancillary services may be sited in a low tax country.

A group treasury company will marshal the cash requirements of the group and may undertake functions such as debt factoring for the limited risk distributors. It will probably be sited in a country offering tax incentives for financial operations.

Customer liaison in the form of call centres may deal with customer orders, queries, complaints and after sales services. Again, such activities may be centred in countries where specific tax incentives are available.

The activities in the normal-rate countries will be rewarded with a minimal profit but one which appears to be consistent with the activities carried out and the low risk in those countries. Sizeable profits will be made by the principal, with other profit centres such as the treasury company contributing to a reduction of the group’s effective tax rate.

Case teams should take care to establish why a structure has been set up in a particular way, whether it is a new structure or a change to an existing one, in order to better understand how the business operates. It may be found that a reorganisation has been carried out due to a merger or acquisition, or to react to changes in the market. Each tax-efficient reorganisation of an MNE will be bespoke and teams will see many variations of the structure shown above. Some groups may instigate change over a very short timescale; other groups may introduce a new structure in a series of reorganisations, spread over a number of years.

This chapter looks at the more common tax efficient structures encountered in cases where transactions involve tangible and intangible goods. Cases involving financial flows (group finance companies, thinning out, avoidance and arbitrage) are covered in the chapters from INTM500000 onwards. Advice on risk assessing transfer pricing can be found at INTM482000 onwards.