Transfer pricing rules

HMRC has published guidance on the transfer pricing rules for taxing multinational companies, amid concerns about possible abuse of the regulations by large companies seeking to cut their tax bills, reports Harris & Co chartered accountants.

In its guidance, HMRC states that ‘multinationals have considerable freedom to establish business operations wherever they choose and will take a number of factors into account when deciding where to locate, including the local tax regime.’

It goes on to say: ‘The transfer pricing rules are complex and can be difficult to apply to transactions that only take place within a multinational group. In some cases, they are exploited by business in an attempt to reduce the amount of tax that has to be paid.’

The new guidance makes clear that taxable profits on global trade between companies that are part of the same multinational group should be calculated using the ‘arms’s length price’, as if the transaction were between two independent companies. Where tax administrations take different views on how the rules should apply, then part of a multinational’s profits can be taxed in both countries.

HMRC points out that the UK’s transfer pricing rules are based on an agreed international standard developed by the Organisation for Economic Co-operation and Development (OECD), and says that the UK is closely involved with the OCED’s planned review of how these are working, in the light of concerns about profit shifting by some multinationals.

The guidance warns that in some cases, where assets or risks are held by a company based in a low-tax country, ‘the current transfer pricing rules will not prevent some profits being attributed to that company, even if it only has a few employees and does not take an active part in the business’.

HMRC says it will challenge arrangements that do not allocate enough profit to the UK in accordance with the rules. The department’s Transfer Pricing Group has secured £4.1bn of additional tax since its formation in 2008, and in the 2012 Autumn Statement the government announced additional resources to identify and challenge more transfer pricing issues.