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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: operational guidance: examining transfer pricing reports: what transactions are covered?

Transactions considered by the report

The report should make it clear exactly what transactions it is considering, how they are carried out, the other parties involved and how transactions with affiliates are priced. If these issues are not adequately covered, case teams should obtain the necessary information.

It may have already been agreed with the company that some inter-affiliate transactions will not form part of the enquiry. This is a valid approach in some situations and is explained in the chapter on risk assessment starting at INTM482040.

Watch out for transactions which are known to exist or which would exist at arm’s length but which are not mentioned in the report. For example, the company may own a patent which is exploited by affiliates but for which no income is being received by the company as holder of the intangible. If the conclusion is that this intangible would be charged for at arm’s length then a price must be considered.

The initial review should already have produced details of the types of transactions and the volumes involved. This will have helped in deciding which transactions are worth further enquiry.

Reports typically attempt to prove that each series of transactions between connected persons is carried out at arm’s length. Always consider whether this is a valid approach: an independent enterprise might look for a total return on all of its activities, which it may not see as separable. For instance, a report may attempt to show that the sum of all transactions involving a distribution activity is rewarded at arm’s length. Certain R & D services not directly linked to the distribution activity are also carried out however, and the group uses cost plus to price these. The report may well use ‘comparable’ distribution companies to produce an arm’s length range of results using the transactional net margin method (TNMM; see INTM421080) to justify the distribution function and use ‘comparable’ R & D companies to produce a cost plus range of results. These individual approaches are discussed at INTM484060, but the activity as a whole should also be considered. At arm’s length, a business may look for an integrated return for all of its activities. An overall arm’s length return for a range of activities might exceed the sum of the individual returns for those activities viewed in isolation. This will of course be a matter of fact and degree.