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HMRC internal manual

International Manual

Transfer pricing operational guidance: Evidence gathering: Establish the facts

Finding and testing the facts

The first step towards establishing the arm’s length price is to find and test the facts. Only then can case teams begin to compare what has happened between the connected parties with the arm’s length position.


Teams will rightly be conscious of the costs to the business of both their own, and their advisers’ work on researching, interpreting and presenting the facts. Sometimes HMRC or the business or their advisers may feel that time spent on fact-finding is putting off consideration of the real issues. But it is a false economy to skimp on fact-finding. If case teams and the business do not invest time and resources in establishing the facts to the necessary level of detail, unnecessary difficulties and misunderstandings may be created. As a result resolving issues takes more time and resources.


Check back to the risk assessment


The risk assessment will have summarised what was known about the business and the transactions in question before the enquiry was opened. This information will have come from a range of published and other sources. Some of it may be may be incomplete or inaccurate, so it should be examined critically.


Informed assumptions may have been made when building up a picture of the group’s transfer pricing. Elsewhere although the facts are not in doubt, questions may still need to be asked to establish details. Teams should ask the business to provide answers where knowledge is incomplete.

See INTM482010 onwards for detailed guidance about risk assessment.


What actually happens?


It is obviously essential to correctly identify the actual transactions between associated enterprises before pricing them for transfer pricing purposes.


Such identification should be based on the actual conduct of the associated enterprises rather than be restricted by the terms of the written contracts between them as, due to the possible lack of the same divergence of interests between them that exists between independent enterprises:

  1. contracts may not be as comprehensive as would those between independent enterprises and may be silent on significant elements of the functions performed, assets used and risks assumed by the parties. and


  1. it may be the case that the actual conduct of the associated enterprises does not fully accord with the contractual terms

(see paragraph 1.46 of the Guidelines)


Similarly, the transfer pricing report prepared for the group may be based on what is supposed to happen.


For example, where changed structures are introduced, they are usually accompanied by new operating instructions and procedures for staff, showing how functions are to be carried out. Other functions are carried out by other parts of the MNE. Case teams must establish what actually happens once the new structure has been put into operation. This may well involve looking at prime documents and working papers of key personnel within the MNE. Meetings with key members of staff may also be needed.


See INTM485021 onwards for detailed guidance on determining actual transactions.


Obtaining information from third parties


In some cases, case teams may need to obtain information from third parties in order to test how a transfer pricing structure works. Approaching third parties for information is often contentious and may well provoke objections from the business, so the group should be given every opportunity to provide the information. The Compliance Handbook at CH23600 onwards contains extensive guidance about information requests to third parties.


Where one of the parties is not located in the UK, it may be possible to obtain the required information under Exchange of Information (see INTM483060). Case teams must contact CSTD Business, Assets & International if they consider they need to obtain information through an exchange.