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HMRC internal manual

International Manual

Transfer pricing: risk assessment: transfer pricing risk indicators: business reorganisations

Reorganisations and restructuring

Any transfer pricing risk assessment needs to consider the business structures and transaction flows adopted both in any restructuring of an ongoing trade and also in any merger or acquisition.

The types of new business structure and reorganisation which might increase risk are looked at in much more detail at INTM441000 onwards. However, a case review should take into account any of the following factors:

  • Any sale or transfer of intellectual property, especially one followed by the charging of royalties.
  • The acquisition of new businesses in fragmented fashion (see INTM440130 for other issues concerning fragmentation), where intellectual property is acquired by a group company based in a low tax country.
  • Accounts for activities such as distribution and manufacturing show a sudden drop in profit margins, accompanied by other factors such as the disappearance of stock from the balance sheet.
  • A manufacturing company declares that it has changed ‘status’ in the year, for instance moving from independent manufacturing to toll or contract manufacturing (or vice versa).
  • A distribution company declares that it has entered into a commissionaire arrangement (or vice versa) (see INTM441040 onwards).
  • The group restructures its supply chain in some way, particularly where entities in a low-tax territory become involved in the chain.
  • The introduction of cost-sharing arrangements between members of a group (see INTM421090).
  • The business is acquired by new owners and there is a significant drop in profits.
  • New entities in low-tax countries are introduced into the group structure, or existing entities in such territories take on new or increased functions.
  • Opportunities will arise for advancing non-arm’s length debt during refinancing, mergers and acquisitions (see INTM517000 onwards).

The presence of any or all of the above situations does not dictate that an enquiry should be launched. Care should be taken to establish as many facts as is possible at the risk assessment stage.