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HMRC internal manual

International Manual

Transfer pricing: risk assessment: transfer pricing risk indicators: transfer pricing rules in other countries

Transfer pricing requirements of other territories

Where a UK company transacts with an affiliate in another country, the strength of the transfer pricing rules in that other territory may be an important factor in the risk assessment. For instance, if the rules of the other territory allow significant penalties for non-compliance with transfer pricing rules, and if such penalties are routinely imposed by the tax authorities in that other state, then the group will have been aware of this when setting the transfer price between the two entities. The risk to HMRC is that the price may have been set in a non-arm’s length way in order to over-comply with the overseas tax regime to the possible detriment of the UK.

The location of the parent company of a multinational enterprise is another important factor. Groups strongly associated with one country may be more concerned about their home revenue administration than about other revenue administrations, or may need to stream income to the home territory to fund investments or pay dividends. Under such conditions, a group might tend towards over-compliance with the rules in one fiscal authority.

Some countries might not recognise all the methods recommended by OECD in setting an arm’s length price. Where there is no procedure to alleviate double taxation by way of a corresponding adjustment under mutual agreement procedures, groups may set transfer prices to conform to that particular country’s rules, at the expense of the UK. For more information on the Mutual Agreement Procedure (‘MAP’), see INTM423000 onwards.

Different tax bases in other countries

Some countries may have headline rates broadly similar to those of other countries but then offer lower taxation for certain activities or in certain circumstances. Others may offer nil or low rates of corporation tax.

Having created a business activity in a country which offers a lower tax base and/or rate, there is a possibility that some multinational enterprises (‘MNEs’) may set prices so that profits arise there, rather than somewhere else. This will help reduce the MNE’s overall effective tax rate.

If the UK part of an MNE is party to cross-border intra-group transactions involving a lower tax state then careful consideration should be given to the possibility that pricing may not be at arm’s length. It would be reasonable to consider carefully any claims about existence and pricing of transactions with affiliates in such territories. There may be commercial reasons for entering into transactions with entities in low tax states that do not involve tax considerations; however, it is sensible when looking at factors for selecting a case for a transfer pricing enquiry to treat any such transactions as having a high potential for non-arm’s length pricing.