Issue 11 – Transfer Pricing - goods and services exchanged between companies under common control ??
Transfer Pricing
Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control.
The price used must be at an arm's length such that the price charged is comparable to that which would be charged to a 3rd party. It also ensures that the appropriate level of profit is taxed in the correct jurisdiction.
Who needs to apply Transfer Pricing?
UK legislation provides an exemption from transfer pricing rules for transactions carried out by a business that is a small or medium sized enterprise.
The definition of small and medium is that set down in EU directive 2003/361/EC.
Small Medium
Employees <50 <250 and
Turnover <€10m <€50m or
Balance sheet (gross assets) <€10m <€43m
The exemption does not apply where a business has transactions with or provisions which include a related business in a territory with which the UK does not have a double tax treaty with an appropriate non-discrimination article.
The exemption is tested on an annual basis. There is no grace period for SME - once you hit the threshold you are in the rules immediately and therefore businesses which are rapidly expanding will need to be mindful of the limits, understand how and when the rules might apply and plan accordingly.
Transfer Pricing Methods
· Comparable Uncontrolled Pricing (CUP): The price which the company charges an unrelated third party.
· Cost Plus Method: In the absence of a CUP, cost plus is the most appropriate and widely used method when the activities involved are comparable to those undertaken by independent enterprises.
· Resale Price Method (RPM): The resale‐price method is used to determine the price to be paid by a reseller for a product purchased from an associated enterprise and resold to an independent enterprise.
· Profit Split: Associated companies sometimes engage in transactions that are interrelated. Therefore, they cannot be examined on a separate basis. For these types of transactions, associated companies normally agree to split the profits.
· Transactional Net Margin Method (TNMM): The TNNM compares the net profit margin realised from the controlled transactions with the net profit margin realised from uncontrolled transactions.
What governs transfer pricing?
Many companies will have different ways of determining the profits they will make on certain products and services however there is a governing body called the Organisation for Economic Cooperation and Development (OECD) that countries voluntarily are involved in.
Base erosion and profit sharing also known as BEPS is an agreement which is used to address collaborations between countries for proper transfer pricing. It was introduced by the OECD to address the challenges of the digitalisation of the economy.
Documents that may need preparing.
Intercompany Loan Agreement - The purpose of a loan agreement is to detail what is being loaned and when the borrower must pay it back as well as how. The loan must be treated as it was given to a 3rd party company.
IP Licence Agreement - The agreement allows a company (licensee) to use the IP belonging to another company in the Group (licensor).
Management Services Agreement - An agreement for services provided by one company in a group (the Provider) to another company in the same group (the Recipient).
Recent Guidance on transfer pricing
Transfer pricing has been impacted by Covid-19. For further guidance on the above please see the link to the OECD Guidance on the transfer pricing implications of the COVID-19 pandemic: https://www.oecd-ilibrary.org/social-issues-migration-health/guidance-on-the-transfer-pricing-implications-of-the-covid-19-pandemic_731a59b0-en
Final Thoughts
Whether you’re a small and medium sized business or a large- scale operation, transfer pricing can present international tax issues. There are also opportunities to optimise the impact of Transfer pricing policies on the company’s effective tax rate whilst complying with global compliance regulations.
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?? A huge thank you to Misha Patel, our Tax Manager, who has put together this content for us. If you had any questions or wanted to discuss this in more detail, reach out to us and let us know.
We hope you have enjoyed this article and have picked up a few takeaways that will help you if you invest into capital expenditure and want to know how the new relief will benefit you.
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Team ihorizon
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Articles to date:
- Issue 11 - Transfer Pricing - Services between companies under common control
- Issue 10 - Capital Allowances - The new super-deduction
- Issue 9 - Pitch Deck Refresher - What should you be thinking of including in your deck
- Issue 8 - EMI Options - Engaging your team through EMI options
- Issue 7 – Growth Shares – How they could work for you as an incentivisation strategy
- Issue 6 – Brexit – Post transition period updates to impact on VAT & Tax for our clients
- Issue 5 – Client Spotlight, our friends at DataForm on their sale to Google
- Issue 4 – Navigating the new SME R&D Tax Credit Cap as a Startup
- Issue 3 – Brexit – Impact on VAT & Tax for our client base
- Issue 2 – Focus on Financial Management Information - How to read your reports
- Issue 1 – Launching ihorizon Sigma, our R&D product
- The Launch
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