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18th april 2024

On the 26th of January, 2024, HM Revenue & Customs (HMRC) published on the analysis of risk allocation when delineating controlled transactions, and the consequences for pricing transactions in accordance with the arm’s length principle (“UK Guidance”).

HMRC’s guidance sets out its views on a number of contentious interpretative issues pertaining to the OECD Transfer Pricing Guidelines. Specifically, the guidance reinforces the importance of granular analysis of control of economically significant risks when designing and documenting transfer pricing policies for UK entities. When contractual risk allocation is respected under the accurately delineated transaction, the new guidance emphasizes that all contributions to control of economically significant risks need pricing. This means that if the outcome of any important business risk is a large profit, or a large loss, those who manage/control the risk should be allocated their fair share of the financial outcome. The guidance states that in cases where key risks are managed through highly integrated control activities, a profit split method may be appropriate.

A central principle of the guidance is the relationship between risk and profit potential. HMRC expands upon the Transfer Pricing Guidelines and states that (i) taking on economically significant risks and the effective control of those risks explain MNEs capacity to generate excess earnings or ‘residual profits’; and (ii) the effort expended to control economically significant risks is reasonably proportional to the profit that derives from their successful control.

This clearly suggests HMRC’s view is that the entities contributing to the control of the group’s economically significant risks should be entitled to a commensurate share of residual profits or losses.


  • Companies in France who have transfer pricing documentation requirements, should be careful to not oversimplify the role that risks play in respect of a functional analysis and its subsequent impact on any TP methodology. It is quite common in France, as it is in most other jurisdictions, to provide significant detail as it relates to functions, and sometimes assets as it relates to the preparation of a functional analysis, and then to over-simplify the review of the risks, in relation to any particular intercompany transaction. One can be sure that the French tax authorities (“FTA”) will be fully aware of this UK guidance, and given the proximity of the two countries to each other, and the amount of cross-border flows between the two countries, that the FTA will very likely apply similar thinking, in its review of documentation prepared in response to French requirements.
  • On that basis, and particularly when there is excess profit/loss to be considered, French taxpayers should be thinking more carefully around the concept of the management and control of the company’s most significant risks, as it could have an important bearing, on how a tax authority may view things.
  • In general, when it relates to individuals of critical importance (i.e. senior leaders and executives) to a business, French taxpayers should be cautious in quickly applying a cost plus methodology. Historically cost plus structures have been very quickly put in place. This type of guidance begs for an in-depth investigation into these types of arrangements, possibly representing a situation whereby seemingly simple transfer pricing methodologies could get completely turned upside down. The same is confirmed by French case law*.
  • Equally, it should be expected by French companies who find themselves dealing with HMRC in matters related to the two competent authorities (i.e. proceedings associated with the MAP article in the France-UK Treaty, or otherwise in respect of Bilateral Advance Pricing Arrangements), that this UK Guidance will very likely not be overlooked.
  • All in all, this UK Guidance will complicate transfer pricing in France, and for any jurisdiction dealing with the UK.



* CE, 4 October 2021, n°444130, RKS or Montreuil Administrative Court, 14 January 2021, n°1812789, Sté Engie


Lori Whitfield
KPMG Avocats