Transfer Pricing and HMRC: Raising the Bar for MNEs

26^th september 2024

HMRC continues to be very active as it relates to providing transfer pricing advice. Earlier this month, it published their Guidelines for Compliance (GfC) dealing with transfer pricing (TP) risks. This is an important set of documents intended to provide HMRC’s view on the application of complex, widely misunderstood or novel areas of the tax rules to practical situations. The GfC reflect an increased focus by HMRC on encouraging voluntary compliance and are a response to requests from businesses for greater transparency and clarity from HMRC to help them manage tax risk.

The guidance is intended to help multinationals understand HMRC’s expectations through the transfer pricing documentation process.  It achieves this purpose through the following:

• Provision of “best practice” examples;
• Their views of where/when “things go wrong”, including most common errors encountered;
• Sufficient content indicating the importance of engagement across various functional areas of the business including most notably tax and finance; and
• Accentuating the importance of evidencing “real-time” analysis, of high enough quality.

In our recent experience, HMRC are increasingly willing to seek penalties in TP cases, including penalties for deliberate understatement where a business knowingly fails to review or refresh its TP policies. As such, this communication is quite timely.

One of the items mentioned in the guidance is HMRC’s view that businesses should identify one or more ‘UK risk leads’ – senior finance, risk or tax personnel – responsible for managing transfer pricing in accordance with the Guidelines. It is clear that HMRC expects businesses to ensure that a suitably senior, experienced and authorised person is in place to handle TP matters.

The Guidelines also reiterate the need for robust and up to date documentation, regularly reviewed by the UK risk lead and amended as necessary.

Of equal importance is the effective implementation of the TP policy, by ensuring that intra-group contracts, internal processes controls and accounting systems are consistent with the TP approach. There is a substantial annex on supporting business records and information with examples that HMRC would expect to see in relation to specific circumstances and areas of analysis.

The importance of strong transfer pricing governance comes up time and time again.  In particular the following are noted:

• a reasonable amount of work is needed to establish the facts and the facts should be reviewed by the business;
• it’s important that multi-territory analyses be sufficiently localized;
• functional interviews are extremely important to ascertain important people functions undertaken in the UK;
• analyses should not be simply rolled forward, without ascertaining that that is, in fact, the correct way to proceed;
• business changes should be carefully monitored as it relates to its impact on transfer pricing policies and documentation; and
• important to have on hand the right information in order to meet an evidential standard contemporaneously.

In other words, it appears that the bar continues to rise as it relates to transfer pricing analyses and documentation in the UK. This comes as no surprise given the amount of ongoing guidance from the OECD, as well as all governments’ concern as it relates to improper transfer pricing and profit shifting. Transfer pricing documentation should nonetheless be produced with an eye on materiality and risk. Decisions, on approach, should then be made accordingly.

The GfC provide significant additional insight and detail in areas where HMRC think this helps taxpayers to meet HMRC’s expectations. Businesses are not obliged to follow them, but the clear identification of risk indicators strongly suggests that doing so should reduce the risk of unanticipated tax, interest and penalty costs.