ATXP6 UK
Syllabus A4. Corporation Tax A4c. Taxable total profits

A4cv. Transfer Pricing

Syllabus A4cv)

Advise on the impact of the transfer pricing and thin capitalisation rules on companies

What is transfer pricing?

HMRC wants to ensure that companies cannot reduce the total UK corporation tax by substituting a transfer price which is below an arm’s length price for transactions between companies where one company controls the other or both are controlled by the same person.

The transfer pricing legislation covers not only sales but also lettings/hiring of property and covers loan interest.

Where transfer pricing policies are under review the basic aim is to produce an arms length price, i.e. the price which might have been expected if the parties had been independent persons dealing with each other in a normal commercial manner unaffected by any special relationship between them.

The OECD model will direct that the UK taxable total profits are adjusted to reflect the arms length market value rather than the transfer price if using the transfer price results in an overall reduction in the UK tax liability.

UK companies must apply the transfer pricing legislation in respect of transactions between a resident and a non-resident company.

It must also apply if both companies involved are UK resident.

There are, however, exemptions from the transfer pricing rules.

The main exemption to the transfer pricing rules applies if the advantaged company is small or medium.

In the exam question, it will state whether the company is small or medium - if this company is benefitting from the transfer pricing arrangement, then the prices do not need to be adjusted to reflect market value.

Illustration

A Ltd. (large company) sells 5,000 units to B. Ltd. at £1.50. 

The market value of each unit is £3.50 

What effect will the transfer pricing legislation have on this transaction?

  • Solution

    The transfer pricing legislation applies.

    A Ltd. must increase its taxable total profits by £10,000 (£2*5,000)