On 26 January, HMRC released updated TP guidance on the delineation of transactions as regards risk. The new guidance contains a lot of interesting comments, which no doubt will take some time to digest, but here are a few initial observations.
Fundamentally, HMRC’s guidance follows the OECD Transfer Pricing Guidelines. As you can see in the first highlighted section above, the updated document reaffirms the position that:
“Understanding the contractual assumption of risk is a crucial first step in the analysis, which is necessary before proceeding to later steps.”
Those ’later steps’ include pricing the transaction.
I was particularly struck by paragraphs 42 and 43, also highlighted above, which include the following statements:
“Contractual terms may have inherent value, irrespective of underlying functions or control,”
and
“The accurate delineation of a controlled transaction includes not simply analysing risk as part of a functional analysis, but overlaying that on the contractual terms of the transaction…”
This re-affirms the basic point that the arm’s length principle applies to transactions. It also emphasises the fundamental point that understanding the contractual terms is an essential part of delineating a controlled transaction. And that, applying this to the setting and implementation of forward-looking price-setting policies, the proposed contractual terms of controlled transactions (including risk allocation and the contractual structure of remuneration) needs to happen before comparable uncontrolled transactions can be considered.
Although this position is not new – because it was already inherent in the OECD Transfer Pricing Guidelines – the HMRC guidance is significant in demonstrating that the bar for TP audit-readiness has been raised, and includes TP functional analysis and related documentation which is fully supported by appropriate agreements.
