It’s been a year since HMRC published its transfer pricing Guidelines for Compliance (GfC7) – what better time to recap, reflect, and review further HMRC transfer pricing initiatives and activity?
I’ll begin with a recommendation for all groups within the scope of UK transfer pricing rules to review and refamiliarise themselves with the GfC7 (Part 1 will be less taxing for the non-specialist!), and the clarity and transparency it brings to HMRC’s transfer pricing compliance expectations.
The impact of this guidance is far reaching. In setting out HMRC’s expectations, it is likely to continue to shape how HMRC deals with transfer pricing compliance activity in the future – something we have seen in practice in risk assessments and BRR settings – noting that inspectors are pointing at it when gathering evidence and establishing the facts of a case under enquiry.
“[GfC7] may also be useful as an additional tool for case teams in identifying evidence and documentation that business may have available to support filing positions” at INTM485020.
Two major developments in the last year supplement and augment the importance of GfC7:
The GfC7 provides a great practical tool to help build certainty over transfer pricing tax compliance, covering the typical transfer pricing lifecycle and providing useful detail on the doing and ’how-to’ of tasks, such as planning, policy setting, implementation, analysis, and documentation. Read more on the key and recurring themes.
It also highlights some common pitfalls, including:
HMRC used GfC7 to promote best practices for documentation, warning against taking high-level (unvalidated, boilerplate) documentation approaches, commenting:
HMRC frequently encounters transfer pricing documentation which is too high level and insufficiently evidenced. In these circumstances HMRC is unable to assess from the documentation whether an arm’s length return has been filed. This can lead to additional compliance costs for businesses. (Part 2.5)
I have attempted below to list some of the approaches valued by HMRC, pitted against documentation quality issues:
The guidance usefully expands on HMRC’s prior guidance on transfer pricing record keeping (at INTM483030 and Intm450000), with GfC7 Annex A providing an extensive list of underlying records examples, data, and sources of information. Key expectations are reiterated regarding properly establishing and checking facts, real-time and robust analysis, monitoring for change over default roll-forwards, appropriate process controls and ongoing monitoring of pricing implementation, and evidence gathering.
This all gels rather neatly (no doubt purposely so!) with the new guidance on meeting filing obligations - particularly on matters of fact – within HMRC’s latest guideline publication, GfC13.
I will not attempt to summarise the GfC13, as it is important guidance that should be read in its full context, broadly relating to UK tax returns (of which transfer pricing is one narrow component).
However, I will focus on the implications for transfer pricing compliance of the key reminder set out in GfC13: “You must take care that it [your return] is correct in both matters of fact and matters of law.”
On matters of fact, where we already have the GfC7 and its clear guidance on a proportionate evidence-based approach, there are overlaps with GfC13 (emphasis added):
It is normally relatively obvious to an experienced professional if a matter is complex or novel. HMRC states taxpayers can satisfy themselves that their tax returns are correct by taking steps such as consulting a professional advisor trained and competent for the task at hand. High-profile examples of the perils of not taking advice from a competent professional adviser are all too common. However, the OECD Transfer Pricing Guidelines are subjective and complex. Therefore, “finely balanced” positions and “improbable interpretation” feel like the most relevant GfC13 scenarios to apply in transfer pricing work, particularly when dealing with high-risk situations (for example, when GfC7 high-risk indicators and trigger events are in play). In addition, for larger groups, this is likely to be front of mind when considering if they need to report an uncertain tax treatment.
Finally, and on the topic of uncertainty, the GfC13 makes it abundantly clear that HMRC thinks it is not appropriate to file a return with a transfer pricing position along the lines of (in my words) “a party acting at arm’s length might possibly have agreed this, but probably wouldn’t have.”
As always with transfer pricing issues, there is a lot of detail in the guidance with which to come to grips. We can guide you on how we think HMRC will use these guidelines (for instance, in Business Risk Reviews and checking SAO compliance) and how you could use them. For example, a sensible first step is to compare your current approach and processes with GfC 7: we can work with you on this to identify any risk areas and advise on building new processes to address them.
For more information on GfC7, or transfer pricing in general, please consult your regular BDO contact or the author of this article.
Simon Wood
BDO in United Kingdom
Why the Guidelines are Important
I’ll begin with a recommendation for all groups within the scope of UK transfer pricing rules to review and refamiliarise themselves with the GfC7 (Part 1 will be less taxing for the non-specialist!), and the clarity and transparency it brings to HMRC’s transfer pricing compliance expectations.The impact of this guidance is far reaching. In setting out HMRC’s expectations, it is likely to continue to shape how HMRC deals with transfer pricing compliance activity in the future – something we have seen in practice in risk assessments and BRR settings – noting that inspectors are pointing at it when gathering evidence and establishing the facts of a case under enquiry.
“[GfC7] may also be useful as an additional tool for case teams in identifying evidence and documentation that business may have available to support filing positions” at INTM485020.
Two major developments in the last year supplement and augment the importance of GfC7:
- HMRC’s publication of GfC13 - GOV.UK to provide help ensuring that documents filed with HMRC are correct and complete; and
- HMRC TP scope & documentation consultation– including the potential introduction of the International Controlled Transaction Schedule (For prior coverage, see Managing Transfer Pricing -- Coping With the Latest Risks.
GfC7
The GfC7 provides a great practical tool to help build certainty over transfer pricing tax compliance, covering the typical transfer pricing lifecycle and providing useful detail on the doing and ’how-to’ of tasks, such as planning, policy setting, implementation, analysis, and documentation. Read more on the key and recurring themes.It also highlights some common pitfalls, including:
- Misjudging the test of proportionality (size, nature, complexity; missed triggers and risk indictors, for example)
- Insufficient resources and budgeting committed to transfer pricing
- Insufficient evidencing (record keeping and analysis)
- Work performed late (defaulting to defence over the ‘right answer’)
- Non-UK prepared analysis (where UK business not properly reflected)
- High-level approaches (inappropriate scenarios)
Spotlight on Documentation
HMRC used GfC7 to promote best practices for documentation, warning against taking high-level (unvalidated, boilerplate) documentation approaches, commenting:HMRC frequently encounters transfer pricing documentation which is too high level and insufficiently evidenced. In these circumstances HMRC is unable to assess from the documentation whether an arm’s length return has been filed. This can lead to additional compliance costs for businesses. (Part 2.5)
I have attempted below to list some of the approaches valued by HMRC, pitted against documentation quality issues:
The guidance usefully expands on HMRC’s prior guidance on transfer pricing record keeping (at INTM483030 and Intm450000), with GfC7 Annex A providing an extensive list of underlying records examples, data, and sources of information. Key expectations are reiterated regarding properly establishing and checking facts, real-time and robust analysis, monitoring for change over default roll-forwards, appropriate process controls and ongoing monitoring of pricing implementation, and evidence gathering.
This all gels rather neatly (no doubt purposely so!) with the new guidance on meeting filing obligations - particularly on matters of fact – within HMRC’s latest guideline publication, GfC13.
GfC13
I will not attempt to summarise the GfC13, as it is important guidance that should be read in its full context, broadly relating to UK tax returns (of which transfer pricing is one narrow component).However, I will focus on the implications for transfer pricing compliance of the key reminder set out in GfC13: “You must take care that it [your return] is correct in both matters of fact and matters of law.”
On matters of fact, where we already have the GfC7 and its clear guidance on a proportionate evidence-based approach, there are overlaps with GfC13 (emphasis added):
- “[S]ufficient checks to satisfy…the information…is correct and complete”
- Arriving at the correct figures requires identifying the relevant facts
- Use all proper sources of information
- Take all steps a prudent and reasonable person in your position would take
- In proportion to…the level of your uncertainty, the potential impact on your charge to tax or duties, the complexity of any tax arrangements you have chosen to adopt”
- Make sure your tax return is based on established facts
- Checking the wording of contracts and other legal agreements
- Confirming how and where activities are carried out rather than relying on assumptions
- Seeking professional valuations when appropriate”.
It is normally relatively obvious to an experienced professional if a matter is complex or novel. HMRC states taxpayers can satisfy themselves that their tax returns are correct by taking steps such as consulting a professional advisor trained and competent for the task at hand. High-profile examples of the perils of not taking advice from a competent professional adviser are all too common. However, the OECD Transfer Pricing Guidelines are subjective and complex. Therefore, “finely balanced” positions and “improbable interpretation” feel like the most relevant GfC13 scenarios to apply in transfer pricing work, particularly when dealing with high-risk situations (for example, when GfC7 high-risk indicators and trigger events are in play). In addition, for larger groups, this is likely to be front of mind when considering if they need to report an uncertain tax treatment.
Finally, and on the topic of uncertainty, the GfC13 makes it abundantly clear that HMRC thinks it is not appropriate to file a return with a transfer pricing position along the lines of (in my words) “a party acting at arm’s length might possibly have agreed this, but probably wouldn’t have.”
Use Them Before They Are Used Against You
As always with transfer pricing issues, there is a lot of detail in the guidance with which to come to grips. We can guide you on how we think HMRC will use these guidelines (for instance, in Business Risk Reviews and checking SAO compliance) and how you could use them. For example, a sensible first step is to compare your current approach and processes with GfC 7: we can work with you on this to identify any risk areas and advise on building new processes to address them.For more information on GfC7, or transfer pricing in general, please consult your regular BDO contact or the author of this article.
Simon Wood
BDO in United Kingdom