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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: risk assessment: issues to consider before starting a transfer pricing enquiry: tax at risk

Scope for risk

Case teams should always first consider the scope for significant transfer pricing risks in the business before any transactions are examined in detail.

For example, if a UK company is owned by shareholders, none of which has a controlling interest, and does not have any subsidiaries, then there is unlikely to be major transfer pricing risk. In all likelihood, transactions undertaken by the company will be with independent persons.

At the other extreme, a UK-headed multinational group, with over 500 subsidiaries, with markets in 70 different countries and owning well-known brands would present significant scope for transfer pricing risk.

Another factor to consider is the tax position of a related business. Where the marginal tax rate borne by that other business is similar to the rate borne by the business in question, then the scope for significant transfer pricing risks to be present will usually be lower than when the marginal tax rate of the related business differs to a material extent. See INTM482040 for a selection of more specific issues which teams may need to consider as part of a risk assessment.

Amount of tax at risk

Regardless of the size of the transaction, the transfer pricing legislation at TIOPA10/Part4 requires customers to make their returns on the basis that their transfer pricing is in accordance with the arm’s length principle (see INTM412020 onwards).

Case teams should always consider the amount of tax at risk. It is far more cost effective to target resources on transfer pricing cases where there is likely to be significant tax at stake.

Estimating how much tax may be at risk is a crucial part of the enquiry selection procedure because case teams must consider the potential tax which could be raised against the resources required. For that reason, an estimate of the tax at stake must be included in the Business Case made at the selection stage of the transfer pricing governance (see INTM481040) and kept under review throughout any ensuing enquiry.