Transfer

Pricing Forum
Transfer Pricing for the International Practitioner
Transfer Pricing Controversy
QUESTIONS:
1. What are the main sources of transfer pricing controversy (transfer pricing audits and disputes) in your jurisdiction –
e.g., characterization, choice of method, choice of comparables, comparability adjustments, related party agreements
and re-characterization, operation of the transfer pricing policies? Do auditors receive instruction to focus on these
areas, or are they main sources of controversy because auditors focus on them by themselves?
2. Do transfer pricing controversies arise more often in certain businesses or industries than in others; and if so, do you
see this as being related to the industry’s treatment of the main sources you outlined above, or for some other reason?
3. Are any recent or proposed changes in national statute, case law or guidance (perhaps as a reaction to the BEPS proj-
ect) generating or expected to generate new transfer pricing controversy?
4. What do you see as the best ways of avoiding controversy – e.g., doing more thorough functional analysis, benchmark-
ing, making comparability adjustments, ensuring that there are detailed transfer pricing agreements or other documen-
tation, or formal or informal agreement with the tax administration?

Volume 7, Issue 4
DECEMBER 2016
www.bna.com
 5. What are the options for achieving a successful outcome of controversy – e.g., settlement
through negotiation, alternative dispute resolution, litigation, invoking MAP at an early
stage, APA with a roll-back? In your jurisdiction, what are the practical advantages or draw-
THE TRANSFER PRICING FORUM
is designed to present a comparative
backs from any of these?
study of typical transfer pricing 6. How can greater certainty be achieved about the future treatment of transfer pricing ar-
issues by Country Panelists who are rangements – e.g., APAs, improving the documentation, changing the policies, improving the
distinguished transfer pricing ways the policies are operated?
practitioners in major and emerging
industrial countries. Their
discussions focus on practical
questions posed by guidance, case
law and practice in their respective
jurisdiction, with practical
recommendations whenever
appropriate.

THE TRANSFER PRICING FORUM

is published quarterly by
Bloomberg BNA, 1801 South Bell
Street, Arlington, VA 22202-4501.
Editorial inquiries may be directed to
the managing editor at +1 (703)
341-5948. For customer service,
call +1 (800) 372-1033 in the U.S.
Outside of the U.S. call BBNA in
London at (+44) 20 7487 5858.

娀 Copyright 2016 Bureau of National

Affairs Inc., Arlington, VA. 22202.

Authorization to photocopy selected

pages for internal or personal use is
granted provided that appropriate
fees are paid to Copyright Clearance
Center (978) 750-8400,
http://www.copyright.com. For
authorization of other uses, contact
the TM Reprint Permission
Coordinator at (703) 341-5937, or
send a written request via fax (703)
341-1624, or e-mail tm@bna.com. For
more information, see
http://www.bna.com/corp/copyright.

Permission to reproduce Bloomberg

BNA material may be requested by
calling Tax Management at +1 (703)
341-3000.

www.bna.com

Board of Editors
Managing Editor
Renee Bartoli
Bloomberg BNA
United States

Editor
Wenjie Lu
Bloomberg BNA
United States

Editor
Tiwa Nwogu
Bloomberg BNA
United States

2 12/16 Copyright 姝 2016 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760
United Kingdom
Danny Beeton and Andrew Cousins
Duff & Phelps, United Kingdom
Murray Clayson and Loviisa Langdon
Freshfields Bruckhaus Deringer, United Kingdom
1. What are the main sources of transfer pricing
controversy (transfer pricing audits and disputes)
in your jurisdiction – e.g.,characterization, choice
of method, choice of comparables, comparability
adjustments, related party agreements and
re-characterization, operation of the transfer
pricing policies? Do auditors receive instruction to
focus on these areas, or are they main sources of
controversy because auditors focus on them by
themselves?
T he main sources of transfer pricing contro-
versy in the UK include non-acceptance of the
taxpayer’s characterisation of a transaction,
non-acceptance of the choice of transfer pricing
method (particularly where internal comparable un-
controlled prices have been ignored) and non-
acceptance of the transactions or companies put
forward as comparables.
HMRC’s inspectors have discretion to select areas in
which to challenge transfer pricing arrangements,
and are empowered by comprehensive guidance on
risk assessment and technical issues, but ultimately
they cannot proceed with an enquiry unless they have
the authorisation of the central Transfer Pricing
Board.
2. Do transfer pricing controversies arise more
often in certain businesses or industries than
in others; and if so, do you see this as being
related to the industry’s treatment of the main
sources you outlined above, or for some other
reason?
The industries most exposed to transfer pricing chal-
lenges are those in which intangible property is most
important, such as pharmaceuticals, the technology
sector and luxury goods, and those in which pro-
longed losses are most common, such as high end re-
tailing (after expensive store fit-outs) and
pharmaceuticals (because of the time required to
secure regulatory approvals and to build up accep-
tance of a drug in the local market).
The re-characterization of transactions is most
likely to occur where significant intangible property is
12/16 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760
12/16 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760
involved, while challenges to methods and compa-
rables are more likely to occur where HMRC ques-
tions the functions and risks of one of the parties.
3. Are any recent or proposed changes in national
statute, case law or guidance (perhaps as a
reaction to the BEPS project) generating or
expected to generate new transfer pricing
controversy?
Statute
Updates to legislation
The UK transfer pricing rules are contained in Part
4 of the Taxation (International and Other Provisions)
Act 2010 (TIOPA). The OECD Transfer Pricing Guide-
lines are a reference point in the UK regime: section
164(4) TIOPA states that certain provisions, including
section 147 which contains the arm’s length principle,
should be interpreted in such a manner as best se-
cures consistency with OECD principles. The defini-
tion of ‘‘the transfer pricing guidelines’’ in section
164(4) was updated by the Finance Act 2016 to incor-
porate the revised OECD Transfer Pricing Guidelines,
including the Base Erosion and Profit Shifting (BEPS)
Actions 8-10: 2015 Final Report. Therefore, when ap-
plying UK law to allocate profit on an arm’s length
basis between entities, greater focus should now be
placed on true value creation, underlying substance,
control of risk and actual decision-making. Similarly,
less emphasis should be placed on contractual alloca-
tions, formal risk assumption and provision of capital
without functionality. In line with OECD guidance,
non-recognition of transactions should be avoided
unless arrangements are not commercially rational.1
HMRC are of course enthusiasts for the tightening of
guidelines. However, some aspects of the changes may
controversially be regarded as going beyond the arm’s
length principle and it remains to be seen in such
cases how far the guidelines will be applied unques-
tioningly by the English courts, for example, in rela-
tion to minimal functional entities, where a risk-free
rate of return may be recommended by the guidelines
even where substantial capital is at risk.
81
81
 The use of hindsight (i.e. taking account of income
generated) is proposed by the guidelines in relation to
‘‘hard-to-value’’ intangible assets.2 Arguably, this is in
itself contrary to the arm’s length principle.3 In com-
ments received on the public discussion draft of BEPS
Action 8, it was noted that the use of ex-post data
should only apply to a ‘‘small set of transactions, where
the taxpayer can provide little evidence that, at the time
of the transaction, there was a basis for valuation.’’4 It
seems likely that taxpayers will resist the use of hind-
sight where possible.
Section 357GE(1) of Corporation Tax Act 2010
(CTA), which defines the OECD transfer pricing guide-
lines for the purposes of patent boxing5 was also
amended by Finance Act 2016 to capture the BEPS
Actions 8-10 Final Report.
These updates will have effect in respect of section
164(4) for corporation tax purposes in relation to ac-
counting periods beginning on or after April 1, 2016
and for income tax purposes in relation to the 2016
tax year. For the UK Patent Box, the update will have
effect for accounting periods beginning on or after
April 1, 2016.
The UK has also facilitated the country-by-country
(CbC) reporting provisions of BEPS Action 13 in Fi-
nance Act 2015 (FA 2015) and introduced implement-
ing regulations in February 2016 (The Taxes (Base
Erosion and Profit Shifting) (Country-by-Country Re-
porting) Regulations 2016) which came into force on
March 18, 2016. Controversially, Finance Act 2016 has
introduced the possibility that certain groups of com-
panies will also have to publish a country-by-country
report when publishing their group tax strategy.
Under paragraph 17(6) of Schedule 19 to the Act, the
Treasury ‘‘may by regulations require the group tax
strategy to include a country-by-country report.’’ Imple-
menting regulations are therefore required before this
measure has effect. It is to be hoped that the UK will
not feel evangelically impelled to hurry public CbC
Reporting into effect, even though it has forsaken its
original commitment to reporting as a (private) tax
authority risk assessment tool. Companies are un-
likely to embrace this measure: it is possible that poli-
ticians and the media will misinterpret such
information and consequentially misrepresent com-
mercial arrangements, as the background informa-
tion provided in the tax strategies will not be
comprehensive.
Future changes
Some of the anti-hybrid and mismatch rules found
in Part 6A of TIOPA (implementing BEPS Action 2)
apply specifically in relation to parties under common
control, for example, hybrid payer deduction/non-
inclusion mismatches.6 From January 1, 2017, the
transfer pricing definition of direct and indirect man-
agement will apply for these purposes also.7
Secondary Adjustments
HMRC launched a consultation earlier this year
into the proposed introduction of a secondary adjust-
ment rule into the UK transfer pricing regime. The
consultation is now closed and HMRC are in the pro-
cess of analysing feedback. Depending on the out-
come of the consultation, the government will
consider including new measures in Finance Bill
2017. Secondary adjustments would seek to address
financial benefit arising from incorrect pricing which
currently remains after the application of existing
rules. The UK’s transfer pricing rules calculate the tax-
able profits on the price that would have been charged
82 12/16 Copyright 姝 2016 by The Bureau of National Affairs, Inc.
at arm’s length. This is achieved via an adjustment
(the ‘‘primary adjustment’’) to the price, which is effec-
tive for tax purposes. As the primary adjustment is
only effective for tax purposes, any cash benefit from
non-arm’s length pricing can accumulate in an over-
seas company, possibly located in a low tax country.
The tax effects of this cash benefit can be reversed by
a secondary adjustment rule, which applies a tax
charge on the excess cash arising on non-arm’s length
pricing. In particular, HMRC are considering the use
of imputed interest-bearing loans. The proposed
changes have attracted criticism: for example, the
Chartered Institute of Taxation, in its response to the
consultation, firmly opposed the proposals, citing
complexity, a potential increase in double taxation
and cash-flow problems as reasons for its views. The
OECD Transfer Pricing Guidelines do not forbid na-
tional tax authorities from using secondary adjust-
ments, but encourage them to ‘‘structure such
adjustments in a way that the possibility of double taxa-
tion as a consequence thereof would be minimised.’’8
Interest Restriction
The U.K. government has been consulting on a pro-
posed ‘‘Interest Restriction’’ rule which will limit the
amount of interest expense that U.K. groups with
more than £2m of interest expense will be allowed to
offset against their income for tax purposes (to 30% of
their taxable earnings before interest, tax and amorti-
zation). The second consultation phase on the new
rule having ended on August 4, the next steps are pub-
lication of draft legislation by the end of this year fol-
lowed by the release of final legislation with Finance
Bill 2017 to take effect next April. Unless there is
grandfathering for existing financing arrangements,
many larger companies will need to refinance, involv-
ing new related party loans and/or guarantees. The
government will widen the carve-out for public benefit
infrastructure projects and the detail of this change is
expected to be made public before the end of 2016.
The Diverted Profits Tax
The government announced in the 2014 Autumn
Statement that it would introduce the Diverted Profits
Tax (DPT) to counter ‘‘aggressive tax planning’’ by mul-
tinationals diverting profits from the UK. The mea-
sure came into force in April 2015 and is contained in
sections 77 to 116 of, and Schedule 16 to, Finance Act
2015. This means that groups with calendar year ac-
counts had to make their first DPT disclosures by
March 31, 2016. The amount of DPT is 25% of taxable
diverted profits, in addition to interest. HMRC is un-
derstood to view DPT as a tool to ensure appropriate
transfer pricing policies. The two regimes are linked:
under section 83 of Finance Act 2015, profits are ex-
cluded from DPT if HMRC accepts the group’s trans-
fer pricing, and a credit against DPT for any UK
corporation tax paid can be obtained under section
100. However, sections 83 and 100 will only apply for
three years and three months after the end of the rel-
evant accounting period. Therefore, in order to avoid
double taxation, transfer pricing discussions may
have to be accelerated.
HMRC has the power to issue a preliminary notice
in relation to DPT if it has a reasonable belief that DPT
applies. The taxpayer is allowed to make representa-
tions on limited grounds in response, and has 30 days
to do so. HMRC then has 30 days to consider the rep-
resentations before deciding whether to issue a formal
charging notice in respect of that preliminary notice.
If a formal charging notice is issued, the taxpayer
TP FORUM ISSN 2043-0760
must pay the disputed tax upfront before negotiating
with HMRC for a year. An appeal by the taxpayer is
only possible at the end of that year.
Though tax payers may wish to challenge the valid-
ity of the decision to issue such notices, the legislation
has been designed to minimise the possibility of judi-
cial review, and abuse of process will be hard to prove.
HMRC is entitled to make decisions based on infor-
mation available, even when there is not ‘‘enough’’ in-
formation.
Critics say that the DPT legislation is too widely
drafted and incompatible with double taxation trea-
ties and EU law. The Law Society in its response to the
DPT measures in the Finance Bill 2015 said the tax
was so widely drafted that it created uncertainty and
undermined the rule of law. The City of London Law
Society noted that the DPT ‘‘cuts across the principle
that companies are free to arrange their affairs in the
most tax efficient way.’’
There is greater scope for re-characterisation of
transactions under the DPT rules than under the
transfer pricing rules in TIOPA. The DPT allows trans-
actions to be re-characterised if they lack ‘‘economic
substance’’, while under the transfer pricing rules,
‘‘non-recognition’’ of transactions should only be used
if the transaction is commercially irrational.
Case law
Generally, HMRC considers cross-border transactions
to be the biggest source of tax inaccuracies.9 HMRC is
currently scrutinising almost £21.8bn of potential tax
underpayments by large businesses, of which £3.8bn
relates to transfer pricing.10 However, case law in this
area remains sparse.
As UK law is now to be interpreted as described in
the ‘‘Statute’’ section above, the question arises as to
how far UK courts are prepared to go in this exercise,
and ultimately what would happen if an English judge
found that the arm’s length principle could not be bent
so far as to secure consistency with OECD guidelines.
This issue has so far not been seriously tested. (While
transfer pricing rules should be interpreted in line
with OECD principles, the same does not apply to
DPT.)
DSG Retail
One of the very few cases to consider what is now
Part 4 of TIOPA 2010 is DSG Retail Ltd & others v Rev-
enue and Customs Commissioners (2009 UKFTT 31).
This case established that transfer pricing rules can
apply in situations where there is no contractual rela-
tionship between the UK taxpayer and its associated
company. DSG Retail Ltd (DSG Retail) procured the
provision of after-sale warranties to its customers on
behalf of third party companies, who then reinsured/
sub-contracted most of the risk with Dixons Insurance
Services Ltd, an Isle of Man company within the DSG
group. The DSG group could therefore retain almost
all of the premium paid by the customers in a way
which avoided UK tax. The tribunal held that this fell
within the UK transfer pricing regime, even though
the contacts were not directly between the two DSG
group companies. The Special Commissioners found
that the ‘‘provision’’ was in effect between these two
group companies, and ‘‘the series of contracts was not
itself the provision which took effect between those enti-
ties, but the means by which the arrangement was given
effect.’’11 The tribunal noted the importance of looking
for comparable transactions, as stressed in the OECD
12/16 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760
guidelines, and considered a number of comparables
presented by the parties, rejecting all of them for want
of adequate comparability. Instead, the tribunal found
that a residual profit-split approach should be used to
attribute profits to DSG Retail, after leaving DISL a
modest rate of return on its capital. DSG Retail de-
served the preponderance of the profit because it en-
joyed the point-of-sale advantage (in a sense, a
valuable intangible); DSG Retail was the entity with
the greater relative bargaining power.
Abbey National
The First Tier Tribunal decision in Abbey National
Treasury Services Plc v Revenue and Customs Commis-
sioners (2015 UKFTT 0341) considered amongst other
things whether share issues could fall within the
ambit of the transfer pricing rules. The taxpayer,
Abbey National Treasury Services Plc (ANTS), was a
UK company and a wholly-owned subsidiary of an-
other UK company, Abbey National plc (Abbey Na-
tional). ANTS was party to a number of in-the-money
interest rate swaps with third parties worth £160m.
ANTS issued Abbey National 1,000 £1 tracker shares
(for £1,000), the terms of which entitled Abbey Na-
tional to receive a non-cumulative dividend in respect
of the swap cash flows received by ANTS, subject to
ANTS having sufficient distributable reserves. The
two entities also entered into a compensation agree-
ment whereby if ANTS did not have sufficient distrib-
utable reserves to make payments on the tracker
shares, it was required to pay amounts received under
the swaps to Abbey National. The intention was that
the swaps would be de-recognised for accounting pur-
poses, producing a tax relievable accounting debit.
One of the questions before the tribunal was whether
the issue of shares was a ‘‘provision’’ for transfer pric-
ing purposes. The tribunal found that nothing pre-
cluded a share subscription from being a provision,
and it also constituted ‘‘commercial or financial rela-
tions’’ in the sense envisaged by the OECD commen-
taries. The subscription for the tracker shares was not
at arm’s length, and while transactions should not
generally be disregarded under the OECD guidelines,
in this situation no transaction was the appropriate
arm’s length comparator. Thus, in addition to the
scheme failing on technical corporation tax grounds,
the transfer pricing rules could cause the tracker
shares to be ignored, this also defeating the planning.
While the tribunal considered both the OECD guide-
lines and the UK legislation (which was to be inter-
preted in accordance with those guidelines), it did not
find them contradictory, and therefore did not address
the issue of how to proceed if they were to conflict.
Union Castle
Union Castle Mail Steamship Company Limited v
HMRC (2016 UKFTT 526 (TC)) concerned a very simi-
lar corporation tax avoidance scheme as that in the
Abbey National case. Interestingly, on the transfer
pricing aspects, the tribunal in this case reached the
opposite decision to that in Abbey National and found
that the issue of shares was not a ‘‘provision’’ for the
purposes of transfer pricing. The tribunal held that
whilst there was nothing in the OECD guidelines that
expressly excluded equity transactions (as noted in
the Abbey National case), they were not expressly in-
cluded either.
Given the conflicting outcomes in these cases, it
seems likely that, sooner or later, a higher level deci-
sion will be required to clarify the position. Aside
from the application of transfer pricing to share trans-
83
actions, the recharacterisation/derecognition aspect
will remain highly controversial.
Expected Controversies
In terms of expected controversies, we are aware of
recent disputes involving the payment of trademark
royalties and guarantee fees, so that one might infer
that HMRC have developed some expertise and argu-
ments in these areas which it might be willing to
reuse. Similarly, further challenges may be made in
two areas in which HMRC has achieved notable suc-
cesses in court and in a well-known settlement,
namely involving (1) captive insurance/reinsurance
arrangements and the insertion of a third party into a
series of transactions (see the discussion of the DSG
case above), and (2) the transfer of early stage ‘‘crown
jewel’’ intangible assets out of the UK in the pharma-
ceutical industry.
A group of UK heads of transfer pricing observed re-
cently that the introduction of the UK Diverted Profits
Tax appeared to have encouraged HMRC inspectors to
use ‘‘DPT-like thinking’’ to transfer pricing arrange-
ments, in the sense of challenging the characterisation
of companies and transactions (in fact there was a
suspicion that inspectors were being encouraged to
think in this way by HMRC’s management).
The same group commented that they expected the
BEPS project to lead to a lot more transfer pricing en-
quiries and MAP work involving the UK over the next
2-3 years. However, they feared that HMRC is under-
staffed for this additional work, or for negotiating
APAs which might prevent such controversy.
In light of the recent decision of the UK to leave the
European Union, some businesses, notably those in
regulated financial services, may need to restructure
themselves. This may give rise to transfer pricing con-
troversy pursuant to the Transfer Pricing Aspects of
Business Restructurings, as implemented in Chapter
9 of the OECD guidelines.
4. What do you see as the best ways of avoiding
controversy – e.g., doing more thorough functional
analysis, benchmarking, making comparability
adjustments, ensuring that there are detailed
transfer pricing agreements or other
documentation, or formal or informal agreement
with the tax administration?
Avoiding a transfer pricing controversy in the UK is
probably best achieved by taking up the offer of col-
laborative working with larger taxpayers’ HMRC Cus-
tomer Relationship Managers, who are ready to
discuss transfer pricing matters ‘‘in real time.’’ Failing
that, documentation that clearly explains how the
business works is probably more valuable than a de-
tailed benchmarking exercise. Bilateral Advance Pric-
ing Agreements (APAs) are available for material
transactions for which the appropriate transfer pric-
ing treatment is not obvious.
UK corporate taxpayers are already encouraged by
HMRC to prepare a global value chain analysis (VCA)
for DPT purposes. At a recent seminar, a group of UK
heads of transfer pricing noted the benefits of a ‘‘nar-
rative’’ as opposed to a ‘‘numerical’’ VCA, in that it
could be more flexible in terms of textual amend-
ments to reflect changes in the company or its busi-
ness environment. They were willing to incorporate a
VCA in their transfer pricing documentation because
84 12/16 Copyright 姝 2016 by The Bureau of National Affairs, Inc.
it is a useful tool ‘‘to explain the business’’. However, in
terms of use of VCA by HMRC, the view was that
HMRC would make little use of the analysis because
a) they already obtain similar information from large
companies and b) they do not appear to read transfer
pricing documentation, at least until a serious contro-
versy has begun.
5. What are the options for achieving a successful
outcome of controversy – e.g., settlement through
negotiation, alternative dispute resolution,
litigation, invoking MAP at an early stage, APA
with a roll-back? In your jurisdiction, what are the
practical advantages or drawbacks from any of
these?
The main routes to a successful outcome once contro-
versy has started would include settlement, alterna-
tive dispute resolution (ADR) and the courts. In the 12
months to June 2015, ADR had been used in over 450
cases with a 75 per cent success rate (being fully or
partially resolved).
If an agreement cannot be reached at the audit stage
and the taxpayer disagrees with the decision made by
HMRC, the taxpayer can ask for a review, make an
appeal to an independent tribunal or do both. HMRC
operates a formal internal review process, which gives
taxpayers the opportunity to have decisions reviewed
internally before commencing any formal appeal pro-
cess.
Section 218 of TIOPA 2010 makes provision for an
APA to be made between HMRC and the taxpayer to
determine a method of resolving transfer pricing
issues before a tax return is made. HMRC will also
consider applying the method for dealing with trans-
fer pricing issues on a ‘‘roll-back’’ basis to earlier years
not covered by an APA.
Achieving success in a UK transfer pricing contro-
versy will often involve access for HMRC to people ‘‘in
the business,’’ whose explanation of operational mat-
ters and responsibilities will carry great weight.
HMRC are open to being persuaded by arguments and
methods that have been accepted in courts outside the
UK, or outside the ambit of tax.
Where the parties cannot agree, the matter is first
referred to the First Tier Tribunal, then to the Court of
Appeal and, ultimately, the Supreme Court. (So far, no
transfer pricing case gone beyond the FTT). In terms
of recent UK transfer pricing disputes, few cases are
prepared for trial but of the ones that have been, one
is thought to have related to the payment of royalties
to a non-UK company by a UK financial services com-
pany, while the other is believed to have concerned the
payment of guarantee fees by a UK company to its
non-UK parent in a case involving implicit support
and re-characterization issues. These appear however
to have ended with closure orders by HMRC (i.e. no
further tax to pay), though it is not known why.
A group of UK heads of transfer pricing recently
commented that HMRC works in real time in a collab-
orative manner and makes quick decisions on
whether to move forward into a controversy situation,
giving UK corporate taxpayers the benefit of being
able to invoke the Mutual Agreement Process (MAP)
quickly after the relevant year end.
TP FORUM ISSN 2043-0760
6. How can greater certainty be achieved about
the future treatment of transfer pricing
arrangements – e.g. APAs, improving the
documentation, changing the policies, improving
the ways the policies are operated?
HMRC published a refreshed ‘‘Litigation and Settle-
ment Strategy’’ in 2011, of which Paragraph 7 identi-
fies a number of ways in which HMRC is actively
seeking to reduce the scope for disagreement,
through:
s well-framed legislation;
s guidance;
s rulings and clearances processes;
s HMRC’s risk based approach to compliance work;
and
s relationship management for large and complex
customers.
HMRC has observed in ‘‘Resolving Tax Disputes,’’ its
commentary on the litigation and settlement strategy,
that ‘‘Where possible, much uncertainty may be re-
solved through dialogue on a pre-return and perhaps
pre-transaction basis. Sharing risk assessment infor-
mation in particular cases can be a valuable way to en-
courage taxpayers to make returns in ways that allow
HMRC to accept them without further enquiry.’’
HMRC’s preference is for collaborative working. As
it goes on to state in the commentary, however, ‘‘By
definition, it is not possible for HMRC (or a customer)
to be unilaterally collaborative. Collaborative working
requires both HMRC and the customer (and any
agent, where relevant) to work together on a coopera-
tive, non-adversarial basis in order to resolve a dis-
pute.’’
Formal or informal rulings and APAs can be ob-
tained. There are a number of provisions in the legis-
lation under which it is possible to obtain a formal
clearance from HMRC about the treatment of particu-
lar transactions. It is also possible to obtain non-
statutory or informal rulings.
An APA can cover the attribution of income to a per-
manent establishment in or outside the UK, the extent
to which income is treated as arising outside the UK;
and the transfer pricing treatment of provision-s
made between associated taxpayers. APAs are also
available in respect of thin capitalisation and are gen-
erally dealt with under a separate advance thin capi-
talisation agreement (ATCA). Statement of Practice
(SoP) 2010 (SP2/10) provides guidance on how the
APA process operates and HMRC guidance on ATCAs
is found in SP1/12.
Requests for APAs will only be considered in the
case of complex transfer pricing issues where there is
12/16 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760
difficulty in establishing reliable market comparables
that enable transfer pricing methods to be accurately
employed to determine arm’s length conditions in ac-
cordance with the OECD transfer pricing guidelines.
A unilateral APA application will be accepted if the ap-
plicant is able to demonstrate that a bilateral agree-
ment would unnecessarily complicate and delay the
process and/or the other party to the transaction is a
non-treaty jurisdiction or a treaty jurisdiction where
there is no APA process. The November 2016 update
of SP2/10 indicated a stronger HMRC preference for
bilateral APAs.
Dr. Danny Beeton is a Managing Director, Transfer Pricing in
Duff & Phelps’ London office, Andrew Cousins is a Director in
Duff & Phelps’ London office, Dr. Murray Clayson is a Partner in
the Tax Practice of Freshfields’ London office and Loviisa
Langdon is a Trainee Solicitor in the London office of
Freshfields.
They may be contacted at:
daniel.beeton@duffandphelps.com
andrew.cousins@duffandphelps.com
http://www.duffandphelps.co.uk/
murray.clayson@freshfields.com
loviisa.langdon@freshfields.com
http://www.freshfields.com/en/united_kingdom/
NOTES
1
Paragraph 1.122 of the guidelines as amended by the
BEPS Actions 8-10: 2015 Final Reports.
2
Paragraph 6.192 of the guidelines as amended by the
BEPS Actions 8-10: 2015 Final Reports.
3
The OECD has come on a journey since its own vocal
criticism of the US ‘‘commensurate with income stan-
dard’’ as being contrary to the arm’s length principle: see
e.g. Tax Aspects of Transfer Pricing within Multinational
Enterprises: The United States Proposed Regulations’’
(January 1993).
4
Paragraph 2.4 of Response by Chartered Institute of
Taxation.
5
The Patent Box regime offers an effective 10% UK cor-
poration tax rate for certain profits which are attributable
to patents.
6
Section 259EA(7)(b) TIOPA 2010.
7
As implemented by the Finance Act 2016.
8
OECD Transfer Pricing Guidelines, page 153, paragraph
4.71.
9
Financial Times: ‘‘HMRC eyes tax gains from cross-border
transactions’’, August 9, 2015.
10
Financial Times: ‘‘HMRC steps up inquiries into cross-
border deals by big business’’, November 27, 2016.
11
Paragraph 87 of DSG Retail Ltd & others v Revenue and
Customs Commissioners (2009 UKFTT 31).
85