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HMRC internal manual

International Manual

Transfer pricing: operational guidance: examining transfer pricing reports: overview

Approach to take

As part of the initial request for information, the company will have been asked how it sets its transfer prices and to provide evidence that those prices are arm’s length. That evidence will probably come in the form of a transfer pricing report prepared by a professional adviser, although there is no obligation on the taxpayer to produce information in that particular form. Case teams should always ask for any internal manuals or documentation which the company holds governing the group’s policies for setting its transfer prices. See the Compliance Handbook at CH10100 onwards for information on general record-keeping obligations.

Case teams must examine the report critically to assess whether its conclusions are justified, looking beyond any unsupported assertions that the transfer pricing is arm’s length. They should not be deterred by the apparent sophistication of any report, bearing in mind that the report will typically be designed to demonstrate that prices are at arm’s length.

A further factor to consider is whether the report has been prepared to meet the transfer pricing requirements of a foreign tax authority. If so, there is a risk that the authority in question may have accepted its conclusions because they result in over-compliance by an affiliated company in that territory at the expense of the profits of the UK company under scrutiny. This issue is addressed further at INTM484030.

Remember that the aim when examining a report is to assess whether the company’s prices are in accordance with the arm’s length principle (see INTM412040). A good report will help case teams to do this regardless of its conclusions because a report should contain a wealth of information about the company and how it trades with third parties and group companies. The conclusions of a report which lacks the relevant detail will be less convincing.

Inter-affiliate transactions may be priced with less precision than would be the case between parties at arm’s length, with affiliates instead adopting a balancing adjustment during the year to ensure a particular reward accrues to each party to the transaction. This reward should be in accordance with the group’s transfer pricing policy and may well provide the arm’s length reward for each company. However, the evidence submitted in the report will need to be examined carefully before this conclusion can be accepted.

There is an important difference between a report, which is evidence about transfer prices, and a transfer pricing policy, which describes how transfer prices are set. However, both documents will improve an understanding of the nature of the transfer prices which have been adopted. In practice, a transfer pricing policy may have been set following the conclusions of a report or may have already been in place, with the report serving to support the group’s transfer pricing policy. Or a report may be used to retrospectively demonstrate or support the view that a company’s results are arm’s length even if no transfer pricing policy existed at the time transactions were entered into. Whatever the case, the context within which the report was written should be established and taken into account.

Challenging the conclusions of a report is only an intermediate stage in a transfer pricing enquiry. Even if it has been established that the company’s pricing is capable of different interpretation, case teams will still have to consider how to price it.