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HMRC internal manual

International Manual

Transfer pricing operational guidance: Evidence gathering: Bargaining power

Role of bargaining power

Although the term ‘bargaining power’ is not used in the OECD Transfer Pricing Guidelines the concept is implicit in references to relative bargaining and competitive positions, for example at paragraphs 1.55 and 3.43.

The concept of relative bargaining power between connected parties was a feature of DSG Retail Ltd and others v HMRC (TC00001), heard by the UK Special Commissioners (now the First-tier Tax Tribunal) in 2008.

The Commissioners heard expert evidence from an economist appearing for HMRC who explained that the extent to which value in excess of a ‘normal’ rate of return is created is limited by competition. Where competition exists it will eventually force higher returns (‘economic profits’) down to a normal level. If a lack of competition allows economic profits to arise then these are distributed between the parties according to the ability of each party to protect itself from normal competitive forces.

DSG Retail Ltd (DSG) had that ability. That was because DSG had the advantage of selling warranties at the point of sale as the largest retailer of domestic electrical goods in the UK. In contrast the insurance and service activities were routine and subject to normal competition. DSG had greater bargaining power.

Bargaining power also impacted on the selection of a comparable independent transaction, since the proposed comparable did not have similar bargaining power to DSG. The Commissioners accepted the evidence of HMRC’s expert economist witness for HMRC that the UK retailer had ‘… almost all the long term bargaining power’.

The issue of bargaining power is unlikely to affect pricing between related parties in the same way as between independent parties. During the fact-finding process, case teams should consider any evidence that one entity would be in a particularly strong or weak bargaining position if it were engaging in the transactions under review at arm’s length rather than with a connected party.

The use of bargaining power should be discussed with a transfer pricing specialist before it is raised during an enquiry.