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HMRC internal manual

International Manual

Transfer pricing: risk assessment: summary and conclusions

Conducting a transfer pricing risk assessment is not a mechanistic process. Although this chapter of the guidance has provided a number of specific risk indicators that case teams should look for, there is no substitute for knowing the business well and gathering detailed information. The most important thing that needs to be understood in a risk assessment is how the business makes its profits or losses - what are the key profit drivers, where are they located and how does the pattern of profits across the business as a whole (not just in the UK) sit with these key drivers? Where a company appears to carry on key functions, hold key assets or bear key risks then it is reasonable to expect these to generate a sizeable part of the business’s profits - a significant mismatch may be an indication of non-arm’s length pricing.

Although transfer pricing enquiries can produce large amounts of tax they can also be resource intensive. Asking some simple questions before inputting significant amounts of resource is therefore a sensible step:

  • Does the case have the scope for transfer pricing risks to be present?
  • Is there sufficient resource available to work any risks that may be identified?
  • Are there indications that the amount of tax at risk could be significant?

If these questions can be answered positively then it makes sense to proceed with a fuller risk assessment. Conducting a thorough risk assessment will allow any resultant enquiries to be clearly focused, thereby minimising disruption to the business and helping HMRC to settle the enquiries by the appropriate target deadline.

A good transfer pricing risk assessment will be a collaborative effort between the case team and the Transfer Pricing Specialist (TPS), and ideally the business as well, with other specialists becoming involved as appropriate. Although the TPS will have a good understanding of transfer pricing principles, the case team will have more detailed knowledge of the business in question. Combining these two elements should lead to a more thorough and well researched risk assessment and, ultimately, a faster and more effective enquiry.