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HMRC internal manual

International Manual

Intra-group funding: group finance companies and the treasury function: Applying a transfer pricing method

The functional analysis should lead to a thorough understanding of the business. The next step is to apply an OECD-authorised transfer pricing method to the functional analysis to determine the appropriate arm’s length price for the transactions.

It is not possible to be prescriptive as to what methodology is appropriate for a treasury or group finance company, given the wide range of business models which those terms encompass; in many cases it will be appropriate to focus on the interest-rate turn and establishing the appropriate level of capital for the business.

There are certain fact patterns to which particular methodologies are more likely to be appropriate.

Provision of services only

Normally, fully-fledged treasury companies (applying the distinction employed in INTM503010) bear the lending risk so in most cases it will not be appropriate to use a cost plus methodology to determine the arm’s length price. In circumstances where the functional analysis supports the conclusion that the company does not bear the lending risk then the cost plus methodology may be appropriate.

The other circumstance when a cost plus methodology may be appropriate is where the group finance or treasury company provides services other than those associated with its borrowing and lending activities.

Claims that a group finance or treasury company is a service-only company should be looked at critically to establish whether the UK company is acting as a dependent agent of an overseas group (see INTM266140).

Comparable Uncontrolled Price

The possibility that transactions can be priced using CUPs should not be overlooked in more straightforward circumstances. Market information on lending rates has the potential to be used as a comparable uncontrolled price. At arm’s length, certain services related to the raising of finance are rewarded by fees or commissions and a suitable CUP may be available.

Profit split

Where treasury operations are located in more than one location and the transactions between them are closely interrelated, as can be the case with treasury companies, the profit split method may be the most appropriate of the OECD approved transfer pricing methodologies.

As mentioned in INTM503020, it may well be possible to incorporate the outcome into an Advance Thin Capitalisation Agreement, to establish an agreed basis of return for 3-5 years to come.