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MGI continues to provide an insight into the latest business news and trends using its blog channel on the popular accountancy website www.accountingweb.co.uk. We welcome contributions from all of our members, with the most recent article being a piece by Watson Buckle partner John Kinsella, about transfer pricing.

Transfer pricing issues

Transfer pricing – the pricing of assets, services and funds transferred within an organisation – is a constant source of worry for the financial authorities who fear the prices set may not reflect the true costs within the company, and may instead be used to minimise tax, for example by using artificially high transfer prices to shift profits from a high-tax to a lower-tax country. They may also distort the apparent performance of a company, by falsely making one division appear more profitable than another.

This has led to the rise of transfer pricing regulations and enforcement, making transfer pricing a major tax compliance issue for multi-national companies. In common with most countries, the UK has legislation requiring cross-border trading and financial transactions to be conducted according to the Arm’s Length Standard, which states that the terms and pricing of transactions within a company should be the same as if the transactions had been between two completely independent parties.

The UK’s penalty rules are tough – if understatement of UK tax is found to have taken place, either by negligence or fraud on the part of the taxpayer, the penalty is the equivalent of up to 100 per cent of the tax due. Taxpayers are also required to keep a record of why they believe they have complied with the arm’s length test, with a penalty of £3,000 per tax return for failure to keep proper records.

Taxpayers, therefore, need to strike a balance between maximising potential tax-saving opportunities while at the same time ensuring their transfer pricing strategy is robust enough to withstand any investigation from HM Revenue and Customs. At Watson Buckle, we are used to dealing with the ins and outs of cross-border transactions, both through our existing multinational client base and our membership of the international MGI network. For more information or advice please contact us.

John Kinsella
Watson Buckle

If you would like to contribute a blog on any business or finance-related topic in future, please contact Paul Winder.