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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing operational guidance: Evidence gathering: Industry standards

The OECD Transfer Pricing Guidelines, at paragraph 1.16, discuss the idea that trading transactions at arm’s length involve both parties considering and comparing options open to them. In looking at those options, they will take account of how the different choices affect the value of the transaction.

This is clearly difficult to do when looking at an intra-group transaction. The aim is to mirror the conditions that would be found between two independent parties. This may involve making considered adjustments to the terms and prices of the transaction actually entered into between connected persons.

The OECD Guidelines conclude that in no event can unadjusted industry average returns themselves establish arm’s length conditions.

Case teams should scrutinise carefully any claims that transfer pricing is in accordance with industry averages and is therefore arm’s length.

Arrangements between third parties for pricing the use of an intangible would be likely to be agreed after a consideration of many facts including:

  • The type of valuable intangible and the type of good that might be sold, which is based on that technology.
  • The size of the respective parties.
  • The likely sales and profit expectations.
  • The territory for the licence.
  • Whether the licence is exclusive or non-exclusive.
  • The length of the licence agreement.
  • How each party expects to benefit.

This dynamic may be missing from the relationship between connected parties. It’s always necessary to consider how these commercial factors would have influenced the bargain struck between third parties.