United Kingdom

UK Concept and Regulation

Transfer Pricing in the UK is regulated in Part 4 of the Taxation (International and Other Provisions) Act, enacted in February 2010 and came into force for all accounting periods ending on April 1, 2010.

In July 2022, the UK Government published a draft bill as part of Tax Law 2022/23, which will make it a requirement for large multinational groups to keep transfer pricing documentation in a standardized format, according to the Transfer Pricing Guidelines of the Organization for Economic Co-operation and Development (OECD).

Arm’s Length Principle

The UK Transfer Pricing rules are based on the internationally agreed Arm’s Length Principle. The Arm’s Length Principle application approach is set out in the OECD Guidelines and, therefore, is the international consensus on the Transfer Pricing of transactions carried out by associated enterprises (controlled transactions), i.e., the price at which they should be carried out for tax purposes.

This principle reflects the conditions under which independent enterprises transact with each other and are determined by the market.

Related Parties

The condition of participation establishes the degree of relationship required between the parties and may be met through direct or indirect control. 

Regarding a legal entity, “control” means the power of a person to ensure that the affairs of the legal entity are conducted based on that person through the holding of shares, voting rights, and powers conferred by a document governing the legal entity. 

Regarding a corporation, “control” means the right to a share exceeding 50% of the assets or income of the corporation.

Direct control is mostly met through voting control; on the other hand, indirect control will arise in any of the following situations:

  • A person who has direct control if certain additional rights and powers were attributed to this, including the rights and powers of related persons and future rights and powers.
  • A person who is a 40% shareholder in a joint venture and another shareholder who owns at least 40% of the venture.
  • A person acting together with others regarding a financing arrangement would have direct control if the rights and powers of the others were attributed to this.

Transfer Pricing Methods in England

Current OECD methods are accepted, but the employed one must be according to the functional and risk profile of the entity. Other methods may also be employed if justified and appropriate.

  • Comparable Uncontrolled Price Method (CUP)
  • Resale Price Method (RPM)
  • Cost Plus Method (CPM)
  • Transactional Net Margin Method (TNM)
  • Profit Split Method (PSM)

Transfer Pricing Obligations

Master File

A general description of the MNE group’s business should be provided, including the characteristics of its business operations worldwide, general Transfer Pricing policies, and the worldwide allocation of income and economic activity. Tax administrations’ reviews should assist in assessing any significant Transfer Pricing risks. This file would normally be drafted by the parent group company.

Local Report

More detailed information related to controlled transactions should be provided to complement the information in the Master File. It documents the taxpayer’s compliance with the Arm’s Length Principle in its material transfer pricing positions affecting a specific jurisdiction. It focuses on specific information relevant to the transfer pricing analysis related to transactions between the local country subsidiary and associated enterprises. Likewise, it includes relevant financial information, comparability analysis, and the selection and application of the most appropriate Transfer Pricing method.

Country by Country Report (CbCR)

Information is required for each tax jurisdiction regarding the allocation worldwide of income, taxes paid, and certain indicators of the location of economic activity in the tax jurisdictions in which the group operates. It is only required for groups with revenues exceeding €750 million and is filed annually, generally by the ultimate group parent entity.

Penalties for Non-Compliance

Penalties relating to transfer pricing documentation arise from the general record-keeping requirements. Two main penalties can be applied: A penalty for failure to keep or file documentation and a tax penalty for a deliberate or careless error.

  • The fixed penalty for failure to keep or produce documentation records is £3,000.
  • The tax penalty depends on whether the inaccuracy is considered careless (maximum penalty of 30% of the potential loss of income), deliberate but not concealed (70%), or deliberate and concealed (100%).

Non-compliance with the reporting requirements and Country by Country report (CbCR) can generate penalties ranging from £300 to £3,000. Daily penalties can also be applied when information is not consistently provided.

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