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HMRC internal manual

International Manual

Transfer pricing: operational guidance: examining transfer pricing reports: dealing with global transfer pricing

Global transfer pricing

A multinational enterprise (‘MNE’) will have to comply with the transfer pricing regulations of a number of different countries. The reporting requirements and degree of documentation will differ from country to country. The MNE may look to reduce its compliance costs by producing a ‘one size fits all’ transfer pricing policy. This is understandable and provided the work performed satisfies the UK requirements for using the arm’s length standard, it should not cause an issue.

However there can sometimes be problems with a global policy which need to be addressed during the course of a transfer pricing enquiry because the facts and circumstances of the UK business may be materially different from that of affiliates overseas. Case teams should establish from the outset what policy the MNE has adopted for transfer pricing and, where the functional analysis of a transfer pricing risk was drawn up on a regional or global basis, the particular functions, assets and risks of the relevant UK enterprises.

Most countries adopt the arm’s length standard for pricing intra-group transactions, and will be guided by the OECD Transfer Pricing Guidelines but the precise approaches of their transfer pricing legislation can differ. Some countries may use a formulaic approach for setting an arm’s length price, which is not recommended in the Guidelines.

There may also be differing approaches towards valuation methods. For example:

  • while both the UK and US tax authorities believe it is generally acceptable to charge for the costs of providing share options to staff, each might take a different view towards valuing the arm’s length price of providing those options.
  • a UK company may be considered by the group as part of a Europe-wide region. The transfer pricing policy may be based on considering whether the policy produces the correct return for Europe as a whole, as opposed to results made by individual countries.
  • the comparability exercise of a transfer pricing report may use comparable companies from just one country in Europe, or even only those from the home territory of the MNE.
  • the functional analysis of a transfer pricing report may look at Europe as a whole, and fail to address particular functions or risks undertaken or borne by individual countries.
  • the transfer pricing policy of the MNE may be structured so as to over-comply with one country’s transfer pricing regulations.

These possibilities mean that case teams should always understand precisely what the group’s transfer pricing policy is, how it works in practice and how this might influence the way in which transfer prices have been set. Claims that a company has exercised its best endeavours to set transfer prices and therefore no adjustment is due should be carefully examined.

Often comparables from outside the UK are used, for example a pan-European set. Depending on the extent to which they satisfy the comparability factors they may or may not be reliable so their use must be considered on a case-by-case basis. They should not be automatically rejected just because they are not domestic. See INTM485100 for more guidance on the use of non-domestic comparables.