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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: risk assessment: transfer pricing risk indicators: general

Some issues to consider

As an accompaniment to the concept of transfer pricing risk, we’ve provided below a summary of possible international issues which case teams may encounter. It’s not an exhaustive list, and the presence of any of these points should not automatically be assumed to mean that a business bears a high degree of transfer pricing risk. Case teams should read the detailed guidance in this manual before considering any of these issues in detail.

  • UK company’s profits or losses appear inconsistent either with its business activities or with worldwide group results over a cycle of, say, 5 years (see INTM482080)
  • UK company provides intangibles but it receives no or low royalties and does not seem to be generating an entrepreneurial reward for its R & D. The other party to the transaction has a high net margin given what is known about its business activities (INTM482100)
  • Borrowing appears disproportionately high in relation to shareholders’ funds, bearing in mind the type of business involved (INTM413070)
  • Interest appears high in relation to the business’s ability to service the debt from its operating profits before tax and interest payable. What constitutes “high” is a complex issue, but does the debt burden appear sustainable, alongside the company’s other requirements and obligations? (INTM413200)
  • Transactions do not appear to make commercial sense e.g. insertion, for no apparent commercial purpose, of a new UK group holding company with substantial debt, particularly in comparison to the previous position (see for example INTM440060)
  • Transactions with related parties in low tax territories (see for example INTM440100)
  • Acquisition of a UK group by a private equity firm, which will rely on heavy debt funding (INTM519000)
  • Notes in UK accounts, or other forms of information such as press or internet articles, which mention restructuring, acquisition/merger activity, transfer of UK activities to related parties and/or changes to the way in which the company is rewarded (INTM441000 onwards)
  • Disappearance of/significant decline in stock (INTM440030)

A number of these factors taken together, rather than individually, may be indicators of a transfer pricing issue.

The potential tax risk might not involve just transfer pricing on goods, services, etc. Other issues such as financial transfer pricing (thin capitalisation, outward lending: see INTM501000 onwards) arbitrage (see INTM590000) or controlled foreign companies legislation (see INTM200000) may also need to be considered.

It is important to bear in mind that transfer pricing can be as concerned with identifying ‘missing’ transactions as much as it can be concerned with risk assessing those transactions that are presented in the accounts.