Transfer Pricing – Consider this situation. You have a client based in the UK that has set up a subsidiary in an overseas territory. All the business that occurs within the overseas territory is done through the subsidiary. As it’s a service business, there are no movements of goods between the entities but the overseas company does provide substantial accountancy and IT services back to its UK parent company and receives a small amount of management services back. The overseas subsidiary is remunerated at cost for its services but no Service Agreement exists and it earns no mark-up. The UK parent does not charge for its services.
You are satisfied that your client is quite definitively an SME under HMRC rules and a double tax treaty is in place between the countries which contains an appropriate anti-discrimination article. As such, you and your client have concluded that it does not fall within the transfer pricing regulations.
So what now?
All is well until the overseas company is audited by its tax authorities. It is asked to provide full disclosure of any transactions with connected parties, as well as its service agreements and transfer pricing documentation. In transpires that the overseas company does fall within the regulations of the overseas tax authority.
The example above serves to demonstrate that any company with cross-border operations, cannot rely solely on UK tax legislation and the large number of double tax treaties in determining what its TP requirements are, especially when reliance is based on the exemption for SMEs, as this definition can vary between countries, even if such an exemption exists.
So how can you make sure your clients are compliant in all jurisdictions and not just the UK? We would always recommend that best practice is to conduct all cross-border connected party transactions at arm’s length and with associated documentation in place. In most instance this will not be overly burdensome and will ensure no unforeseen issues later on.
How can we help with transfer pricing?
For clients who just want to make sure they fall outside the rules, it is key to make sure that any analysis must be done from the perspective of both countries and not solely with regard to the UK SME rules. HMRC have a published list of countries where the tax treaty contains an appropriate anti-discrimination article, which is needed to allow the SME exemption, but this only relevant from the UK perspective and does not mean that the rules in the overseas country will exactly align.
If you have clients that you think would benefit from a review of their overseas operations and associated documentation and structuring, please get in touch. We offer a fixed price SME transfer pricing risk review and action plan for businesses to provide clear steps to compliance in the relevant jurisdictions.
