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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer Pricing: Operational guidance: real time working of transfer pricing issues (excluding thin capitalisation)

HMRC will seek to work transfer pricing issues in real-time with all of its customers. This provides earlier certainty for the business and allows HMRC to examine the issues when information and, where appropriate, relevant business personnel are more easily accessed. Experience has shown that real time working may also reduce the time taken to review an issue. Discussions with a customer will therefore often arise in advance of a return being made at the initiative of the customer or as a result of HMRC’s risk management approach.

It is important at the outset to establish what the customer is seeking from the real-time review. The main question is whether they wish to have legal certainty in relation to the transfer pricing real time working issue or will be content with a general opinion on methodology or risk status, as this will determine the appropriate course of action. The only way that a customer can be given legal certainty about the tax treatment of future transactions is under the formal Advance Pricing Agreement process, so that if a customer is seeking this level of certainty they should be referred to INTM422000 and Statement of Practice 02/10 so that they can consider this option.

It is essential that all discussions of transfer pricing issues in real-time involve the Transfer Pricing Group [“TPG”]. Where potential transfer pricing issues unexpectedly arise during discussions with a customer it is recommended that the discussions are restricted to obtaining information about the business, clarifying the issue(s) that the customer has identified for HMRC review and whether they are seeking a general opinion or legal certainty in relation to the issue(s). An approach should then be made to the TPG for specialist advice.

When material discussions are to take place, and particularly when further information is going to be sought from the customer and a general opinion given, it will be necessary for the discussions to be subject to the TP governance procedures. This means that a business case document needs to be prepared and approved by the appropriate TP Panel.

When legal certainty is not being sought, case teams may, with TPG input, give advice on methodology. They may also give an indication, expressed in terms of the level of risk, of how HMRC might see the transfer pricing risk posed in the corporation tax return, once it is made, without leaving any inference that any particular price for goods or services used in calculating profits in a tax return will automatically be considered by HMRC to satisfy the requirements of the transfer pricing rules in the absence of an APA.

It may be that the customer is unsure whether they wish to seek legal certainty via an APA, although that might be their preferred outcome, because they are unfamiliar with the process or uncertain whether their arrangements might fit the criteria for admission to the programme. Most of the questions about the process can be addressed by Statement of Practice 02/10. However, the TP Competent Authority team dealing with APAs will be happy to discuss any issues that are not resolved by the statement of practice and the relevant contact details can be found at the end of this section.

This flowchart (PDF 22kb) illustrates the options should transfer pricing issues be raised by the customer in real-time:

To recap, although similar transfer pricing issues often recur each year it is important to ensure that businesses know there can be no certainty about their transfer pricing methodology and policies without a formal APA agreement.

Unilateral APA agreements, particularly when agreed at the time of settlement of an enquiry, may be quicker to finalise than a bilateral agreement involving another Tax Administration although they do not normally eliminate the risk of double taxation in relation to the transfer pricing issue.

As set out in SP02/10 HMRC generally recommends that APA applications are bilateral but is willing to consider a unilateral agreement where:

Applicants are able to persuade HMRC that the extension to a bilateral APA would unnecessarily complicate and delay the process; or

The other party to the transaction is resident in a jurisdiction with which HMRC has no treaty or where HMRC is aware that the treaty partner has no APA process; or

There is considered to be little extra to be gained by seeking a bilateral agreement. For example where the UK is at the hub of arrangements with associated enterprises in many different countries and where the trade flows involved with any one particular country are relatively modest in scale.

Any potential interest in applying for an APA, whether unilateral, bilateral or multi-lateral, should be referred to the following contact point who will consider whether it is appropriate for the APA programme. Case teams should get in touch as soon as it appears a realistic possibility that an APA may be sought to informally discuss the suitability of an APA for that customer:

Nick Stevart (APA Lead)
CTIS Business International
11th Floor East, Euston Tower, 286 Euston Road, London NW1 3UH

Telephone: 03000 585659
Fax: 03000 586915

HMRC has limited resources and focuses these on the risks it judges most significant. It may, for example, be the case that, following a risk assessment, HMRC decides that the transfer pricing issues raised by a customer do not warrant detailed enquiries at that time. This does not mean that the transfer pricing policies have, in any way, been agreed and there is nothing to prevent a transfer pricing intervention being made in the future.

INTM480550 explains the separate approach which is needed for thin capitalisation work.