News & publications

Transfer pricing has long been a bugbear of groups trying to do business cross-border.  It is an imprecise science; it is difficult and costly to ensure compliance and it is difficult to predict the approach of any given tax authority.  The risk of double taxation is great (for example, a transfer pricing adjustment could be made by one taxing authority without the other necessarily agreeing to give the taxpayer the benefit of a corresponding adjustment).

One potential solution open to UK businesses which claim they are being taxed otherwise than in accordance with transfer pricing principles is the "mutual agreement procedure" contained in many UK tax treaties.  This allows a taxpayer to make an application to request HMRC to consult with the relevant treaty partner to agree an approach which does not lead to double taxation for the taxpayer.

Historically, the mutual agreement procedure has been under-used (only around 50 applications were made last year).  Much of the reason for this is that the process is complex, time consuming and relies on HMRC and the other tax authority being sufficiently motivated to reach agreement.

The fact that HMRC has identified this as an area which requires guidance is encouraging, especially given the results of a recent Commission report into double taxation in the EU (see recent Comment here).  The statement of practice itself is an advance on previous guidance and a helpful clarification of HMRC's approach (particularly in respect of the references to the possibility of arbitration).

However, there remains much uncertainty (to be fair to HMRC, this is inevitable given that agreement in any case will always be reliant on another tax authority).  Therefore, despite the new guidance, making an application under the mutual agreement procedure is likely to remain sufficiently complicated and time consuming that only those with the largest and most complex problems will do so.

For details of how to obtain the full text of the new statement of practice click here.

Follow all our latest tax updates on Twitter