Transfer Pricing in the UK and the rest of the world has become a major issue over the last decade. Whilst the USA and Australia were first in implementing the requirement to document a company's Transfer Pricing procedures this has now become a requirement in the vast number of countries throughout the world.
Transfer Pricing refers to the pricing of assets, intangibles and services transferred between two entities within one organisation. The various tax authorities throughout the world are concerned that the amounts being charged between these two organisations are not at the same price as if one of them had been a third party. By charging less in one country will mean that the taxation revenue in that country will be reduced.
No two countries have identical rules for Transfer Pricing but the application of the arms length principle, based on the Organisation for Economic Co-operation and Development (OECD) guidelines, means a certain amount of global harmonisation.
Transfer Pricing documentation in the UK has been a requirement since 1999, compared to the USA and Australia who go back to 1994. The requirement is for a company who sells or purchase a product or service to or from an overseas associate, company or branch, to provide documentary evidence of the transactions and the basis on how the price has been agreed. It is also a requirement for this to apply to transactions within the UK. The documentation should also include a comparison against third party customers.
When completing a Tax return in the UK, you have to state any adjustments for Transfer Pricing, so the documentation should be completed before the signing of the return.