Practical Brexit guidance for longer-term contracts: Transfer pricing
In our first set of guidelines we covered some solutions to deal with EU customer concerns about entering into longer-term contracts with UK exporters in light of the uncertainty surrounding Brexit. As discussed, setting up a trading subsidiary in an EU country isn’t difficult and could overcome some buyer resistance, but there are consequences which have to be considered, and transfer pricing is one of them.
This is a practice which has been used in the past to move revenue and profit between associated companies within an international group to a more favourable tax jurisdiction.
As a result, the OECD has produced a set of guidelines which over 60 member countries have signed up to and which are designed to provide some basic rules which can be applied with some consistency by tax authorities.
The rules of nearly all countries permit related parties to set prices in any manner, but allow the tax authorities to adjust those prices (for purposes of computing tax liability) where the prices charged are outside an arm's length range.
Transfer pricing rules in most countries are based on the "arm’s length principle" – that is to say that any price adjustment by a tax authority will be based on the prices which would be paid between suppliers on an arm’s length basis to ensure that revenue and profit manipulation is minimised. The problem is that if you get things wrong, and a tax authority feels that your pricing policy is designed to avoid paying the right amount of tax to them, then the penalties involved in some jurisdictions can be substantial.
So, if to set your customers’ minds at rest, you decide to set up a subsidiary in an EU jurisdiction, how can you ensure that you won’t be subject to double taxation or penalties from HMRC or their EU equivalents?
We’ve offered some general guidance below, but as each jurisdiction is likely to be slightly different, it’s important to take specialist advice before committing to a specific policy. So let us know if we can help.
Complying with Transfer Pricing Guidelines
- Set out the terms between your UK company and its EU subsidiary in a clear distributor agreement.
- These terms should be similar to those applicable to your non-subsidiary distributors including terms for payment.
- Charge your subsidiary at prices similar to those you charge arm's length customers.
- Some tolerance may be allowed to provide for volume sales, market conditions and any value to be added by the subsidiary.
- As a result, some allowance may be available to cover the subsidiary’s running costs.
- If you get it right, your customer is happy dealing with an EU company and you can return revenue and profit to the UK.
If you would like further information or specific guidance on a particular EU jurisdiction, contact Russell Bell, Senior Consultant.
Published: 24 Aug 2016