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HMRC internal manual

International Manual

Transfer pricing operational guidance: Evidence gathering: Overview


An essential part of a transfer pricing enquiry is to identify and then test the price between the two connected persons to establish whether it is the price that would be found between two independent parties. See INTM412020 for an explanation of the basic transfer pricing rule, INTM412040 for a summary of the arm’s length principle and INTM483010 on the purpose of a transfer pricing enquiry.

If case teams conclude that the pricing is not arm’s length, then they will have to find, and preferably agree, the arm’s length price which would have existed between the parties had they been unconnected; see INTM483070 on reaching a settlement.

In some situations, it may be possible to demonstrate what the arm’s length price should be during the course of testing the transfer price used by the business. In other cases case teams may need to build up a case from scratch, possibly by using a different methodology.

This chapter looks at some of the practical issues which may be encountered in calculating an arm’s length price. This is not a straightforward exercise. The method adopted must be in accordance with the OECD Transfer Pricing Guidelines and the criteria used must be based on all of the facts and circumstances.

Case teams must leave a clear audit trail or explanation as to how the transfer pricing was calculated because:

  • The business is entitled to apply the same degree of scrutiny to the proposed solution as the HMRC team gave to the transfer pricing adopted in their return.
  • The group may make a claim for a corresponding adjustment in the other country. - see INTM423000 onwards on Mutual Agreement Procedure and the basis for corresponding adjustments. The UK competent authority must be able to
  • understand how the case team calculated the transfer price and how those figures were used to settle the case.
  • explain how the arm’s length price was calculated.