Transfer pricing: operational guidance: working a transfer pricing case: initial information request
There are three broad requirements for an effective information request:
- To know the nature and volume of transactions between the company and its related parties
- To know how the transactions were priced
- To know whether this price was arm’s length
The aim of any initial information request is fully to understand how the business trades; to identify who carries out what functions; to understand the nature, scope and volume of relevant inter-company transactions; and to see what profit accrues where.
Any planned information request must first be discussed and agreed with the relevant transfer pricing specialist.
The information request must be tailored as far as possible to the circumstances of the particular case, based on the gaps in HMRC’s knowledge identified in the risk assessment (see INTM482000 onwards and in particular the issues to consider at INTM482150). Businesses quite legitimately differ in the way they organise themselves and the information request should be adapted accordingly.
See INTM483050 where there is no, or an incomplete, response to an information request.
Discussing the information request with the customer and adviser
It is good practice to discuss any information request with the business and its advisers before finalising it. Case teams will rightly have regard to the potential cost and burden to the customer of complying with an information request. A dialogue with the customer before the issue of a formal information notice means that both parties can understand what is needed, and whether there could be any problems in supplying it. The business should also be asked whether it may need extra time to meet an information request.
Another reason for engaging with the business before the initial information request is that it may be able to provide a transfer pricing report. This may provide much of the factual information which the case team needs and will allow any subsequent information request to be targeted more precisely. INTM484000 onwards gives detailed advice on handling transfer pricing reports. There will of course be other ways that evidence can be presented to HMRC to demonstrate arm’s length pricing.
If a transfer pricing report is available, it is important to see it as early as possible. However, case teams should bear in mind that a business cannot be compelled to commission a transfer pricing report.
General guidance about information requests as part of an HMRC enquiry can be read in the Compliance Handbook atCH220000 onwards.
Initial request to be comprehensive
The initial information request should be as complete as possible. Case teams should aim to avoid having to open up new avenues of enquiry at a later stage, although this will sometimes be necessary as new information comes to light.
Content of information request
The information request must be complete, focussed and tailored to the potential issues in each case as identified in the risk assessment. The following list indicates a range of suggested items from which case owners and transfer pricing specialists might select relevant points for inclusion in an information request, where they believe it is justified to do so. This list is neither exhaustive nor definitive and most cases will not require such a level of detail.
- Identification of relevant connected party transactions, with details of products or services provided
- A group structure globally and for the UK
- An overview of the activities and recent history of the business
- Details of the products and/or services provided
- Documents which the business has prepared for CTSA transfer pricing requirements, including any transfer pricing reports with details of any comparability studies and of any searches for comparables
- Any further evidence the business has of arm’s length pricing
- The business’s own transfer pricing manual or policy document(s)
- Details of the transfer pricing methodologies including clear details of how the prices are calculated and of the impact this has on the parties’ profit levels
- A functional analysis detailing the functions performed by the parties to the transactions, the assets used and risks assumed by each
- An outline of the key transactional flows in the business, both internally and with third parties, together with a discussion of contractual terms
- A volume breakdown of relevant inter company transactions
- Accounts for all parties relevant to the transactions (wherever located) with a segmental split of the relevant figures where appropriate
- Agreements and contracts governing the transactions
- Details of the main profit generating activities and assets in the group together with details of where they are located
- Details of the key intellectual property used in the business, the entities which have developed or acquired it and currently own and use it, and of any payments related to it
- Details of the intra-group funding arrangements
Care and thought should be invested in the creation of an information request. Case teams must bear in mind the advice on this page to engage with the customer, where possible, in order to better understand the business and lessen any compliance burden.
See INTM483030 for a discussion of the transfer pricing documentation which businesses should keep.