Transfer pricing: risk assessment: conducting a transfer pricing risk assessment: review of information from other sources
Risk assessment - review of information from other sources
Depending on circumstances, case teams may have little existing information on the activities of a business. The following other sources of information may be helpful:
Large businesses and in particular multinational enterprises will have very comprehensive websites, providing a wealth of useful information. Major products or brands will very likely be extensively promoted. The investor relations pages will contain the latest and prior year’s accounts, and the latest half-yearly or quarterly figures. If the group is US-based, it will have to make a number of returns each year to the Securities and Exchange Commission and these will usually be available (see internet searches below).
There may be copies of presentations by senior staff to business analysts, investors and credit rating agencies - these may give useful information on forecast sales and new products.
There will normally be a link to press releases, which might provide information such as new products, products being sold, and factories opened or closed.
The site may provide detailed information on where activities are around the world. Sometimes there will be detailed explanations of research and development efforts. Invariably there will be details about job vacancies, which will provide information on where in the world staff are based, and what they do.
Whilst all this information can be very useful, case teams should bear in mind why businesses have a web presence: reasons will include marketing, shareholder relations, staff recruitment and on. The site will project positive messages and any marked sensitive information will be excluded.
Meetings with the business
A meeting with the business is usually considered essential during the course of a transfer pricing enquiry but a meeting can also be very helpful at the risk assessment stage, particularly with larger businesses. See INTM482130 for guidance about the importance of knowing a business and a summary of points which should be included in a risk assessment. A polite request for a meeting at the risk assessment stage can be productive for all concerned. Bear in mind that HMRC’s governance for working transfer pricing issues in real time must be followed - see INTM480040 and INTM480050.
It is advisable that the Transfer Pricing Specialist attend the meeting where possible.
Always bear in mind that a meeting during the risk assessment process will provide an opportunity to establish whether the transfer pricing of some intra group transactions may be low risk. The meeting may provide sufficient information to be able to focus the enquiries from the outset, which will be of great use to both HMRC and the business.
All Local Compliance Offices, the Large Business Service (LBS) and Specialist Investigations now have access to commercial databases. Help in using them is available from the Transfer Pricing Group; case teams should consult their Transfer Pricing Specialist. It can be useful to try and find similar but independent companies carrying out broadly similar activities, and compare their financial results to those of the company under enquiry. For the purposes of a risk assessment, the search can be fairly general, to establish broadly how the company is doing compared with similar companies.
A database search might show that the company is completely outside of the range of these comparables, which will be an indicator that the case is worth looking at in more detail. In other cases the results may be more inconclusive and it will be necessary to consider other factors to confirm whether the case is still worthwhile. Alternatively, the company may be near the top or even outperforming the comparables, which probably though not necessarily means looking elsewhere for potential transfer pricing cases.
INTM485100 contains outline guidance on how to conduct a search using commercial databases.
Press reports, trade magazines and articles
Press reports can provide useful information on both particular companies and their trade sectors. Information on business sectors can help decide whether declining results for a company reflect a wider malaise for that particular business sector, or reveal that the sector was in fact rather buoyant during the period in question. Articles on business sectors may also indicate when a competitor has launched a rival product, which might explain a fall in sales for the company being reviewed.
Press reports on individual companies provide information about the launch of new products, factories opening or closing, strategic partnerships or alliances they are entering into and sometimes even concrete information such as royalty rates on licence agreements they have concluded. Media reports or trade articles that mention a particular company are available from several sources within HMRC. Requests for such information should be made to the relevant TP Specialist or International Issues Manager.
Returns made to other countries’ government agencies can sometimes be found on the Internet. For example, a publicly-quoted US corporation has to make a series of returns each year to the Securities and Exchange Commission (‘SEC’) in the US. The returns are comprehensive and although they can be lengthy and repetitive, they can often contain useful information. The returns contain information aimed at helping the US public make informed decisions about investments. They will contain a detailed three-year summary of the business activities, including acquisitions, disposals and research and development activity. The returns will also contain information on major licence agreements with third parties. These can sometimes be a useful source for internal comparables. The accounts notes can also be very helpful.
Unquoted US corporations also have to make returns, but the disclosure rules mean that they may provide more limited information.
The more common returns that a company has to make to the SEC are:
- 10K - annual return for US corporations.
- 20F - annual return for US corporations with a non-US publicly-quoted parent.
- 8Q - quarterly return for all US corporations.
SEC returns can be obtained from the following sites
http://www.secinfo.com (this site requires registration)
Canada has a similar system and returns for Canadian publicly quoted corporations can be found at:
Business, Assets & International tries regularly to review internet sites which would provide useful information. The sites include information on interest rates, spot exchange rates, guides to financial operations, company information news services and sites providing information on and promoting the use of low tax countries.
Other sources of information
Goods may be subject to VAT and other duties, and HMRC staff working in this area may have useful information about pricing. There are various ways a person can be assessed, including a method founded on the arm’s length principle. In large cases, particularly where the strategy is to concentrate on one or two products, it can be worthwhile asking colleagues in CITEX (Customs & International Trade Units of Expertise) for information on how duties or VAT have been assessed, where goods or services are sold to a connected person.
HMRC also employs a number of Trade Sector Advisers (TSAs) with industry experience that can be useful in gaining an understanding of how the business works. The TSAs should be contacted as part of the risk assessment where it is identified that their commercial expertise will add value to the process.