Transfer pricing: risk assessment: conducting a transfer pricing risk assessment: detailed process
Detailed risk assessment
Given that transfer pricing enquiries are usually very resource intensive for both the business and HMRC, as detailed a risk assessment as feasible should be carried out. The results will provide the information to complete the Business Case required by the selection stage of the TP governance process.
It is good practice to involve the business as far as possible in the risk assessment process (see also INTM482020) so that there is a common understanding about its approach to transfer pricing before resources are invested by all parties in providing and reviewing information. The business may offer a presentation of its views about any potential transfer pricing issues that may exist, for example.
A risk assessment should consist of more than a mere recognition that risks may exist. It should also consider the implications of those risks, making recommendations based on the available evidence.
A transfer pricing risk assessment should ideally include, as appropriate
- An overview of the business, including a review of the group’s internet site, identifying where the head office is located and what is the basic management structure
- A detailed examination of the consolidated accounts and of the accounts of appropriate entities within the group, in order to understand the profitability of the business both in the UK and globally
- A review of the group structure, listing what are likely to be the key intra-group transactions
- A summary of the principal markets in which the business operates, identifying the key profit drivers in the business and as far as possible determining their location
- Details of where research and development is carried out
- A summary of valuable intellectual property the group owns together with details as to which companies own what property
- A summary of the manufacturing process for the goods being sold and where the goods are physically manufactured
- Identification of the goods or services the group offers, and what are its principal products and/or brands
- What the supply route is, covering the whole process from raw materials to the sale of finished goods. This should include any central distribution or warehousing subsidiaries and if possible who has title to the goods at various stages
- How the goods are sold (e.g. retail, wholesale, commission basis, internet, etc.)
- Who the main competitors are
- A review of the trade press and internet for industry trends and details of where the taxpayer is placed within the sector
- A search using a commercial database to examine trends and comparables in the particular business sector
- An analysis of recent developments within the group (such as new acquisitions, new markets, disposals, etc)
- A review of the CFC return to identify potential risk (see INTM200000 onwards for detailed guidance about CFCs)
- Liaison with employer compliance teams for details of highly-paid UK staff
- Liaison (in appropriate cases) with indirect tax colleagues
- Liaison with a Trade Sector Adviser for the relevant sector
- A review of any previous transfer pricing enquiry
- A review of any other relevant information, such as recent arbitrage clearance applications for instance
- A general review of the company or group for other useful information, such as claims made under double taxation treaties, older risk assessments and enquiries, notes of site visits, details of employees, claims for research and development allowances - anything that will add to the picture of the business activities
Case teams must discuss the case with a local Transfer Pricing Specialist who may also advise consulting other specialists, such as economists or International Issues Managers.
Such pre-enquiry work is a worthwhile investment of time even if the decision is not to proceed to enquiry. Risk assessment is as much about preventing the take-up of unsuitable cases as it is about identifying the high risk ones and, where an enquiry does result from the process, effort put in at the risk assessment stage will speed up the working of the case.