INTM483110 - Transfer pricing: operational guidance: working a transfer pricing case: penalties

Overview

NB: All references on this page to transfer pricing cases should be read as applying equally to permanent establishment enquiries.

As with any other case, a penalty may be due where an inaccuracy is found in a transfer pricing enquiry:

  • if an incorrect return is made and a business has been careless or negligent in establishing the arm’s length basis for the return (CH80000 and EM4800).
  • if a business does not maintain the appropriate documentation necessary to demonstrate that it has made its returns on the basis that the terms of connected party transactions were considered to be on arm’s length terms (see CH11000 and INTM483030).

Guidance on penalties is at EM4500, CH81000 and CH400000.

Carelessness

One of the main concerns of business in relation to transfer pricing and penalties is what is meant by ‘carelessness’ (or ‘negligence’, for penalties applying to accounting periods ending on or before 1 April 2009), given that to some extent what is an arm’s length price is a matter of judgement and there is frequently no single ‘right’ answer. Detailed guidance about what is meant by ‘carelessness” can be read in the Compliance Manual at CH81140 onwards.

At INTM483120 we provide a series of examples of possible situations which case teams may encounter when considering whether penalties should apply specifically in transfer pricing enquiries.

Role of CSTD Business, Assets & International Transfer Pricing Team

As with all enquiry cases, when you have an evidence-based reason to believe that a penalty may be due, you must give the customer the Human Rights Act message and factsheet as set out in CH300700. Business, Assets & International (BAI) approval is not needed to issue the Human Rights Act message and factsheet.

However, the case team’s proposed penalty position when settling any transfer pricing or permanent establishment case must be reviewed by the Transfer Pricing Team in BAI before the penalty position is agreed and finalised with the customer.

If a case meets the criteria for consideration by the Penalties Consistency Panel (PCP), this governance process will incorporate the BAI TP Team penalty review and so no separate report to BAI is required.

In all other transfer pricing cases, a report setting out an analysis of the proposed penalty position must be sent to the BAI TP Penalties Lead for agreement before the penalty position in the transfer pricing settlement is agreed with the customer.

Referral to BAI During an Ongoing Enquiry

Any open transfer pricing case should be referred to the Transfer Pricing Team in BAI immediately if it becomes apparent that deliberate and/or concealed penalties may be in point an behaviours must not be discussed with the business or its professional advisers until BAI has agreed the approach to take to behaviour discussions. The business must not be asked to provide more information, or reminded of outstanding information, until advice is received from BAI.

As in any other case, the case team should always consider the Suspected Fraud Identification Process for their business area as soon as deliberate behaviours are thought to be in play. The BAI Transfer Pricing Penalties Lead should be informed immediately of any transfer pricing case which is to be subject to the Suspected Fraud Identification Process.