Chapter INTM514020
| Published date | 09 April 2016 |
| Record Number | INTM514020 |
The basic transfer pricing legislation at TIOPA10/S147 requires that the actual provision be compared with what would happen at arm’s length. Looking at comparable businesses operating at arm’s length can give some indication as how close the transactions under review are to meeting the arm’s length standard. There is guidance on approaches and potential pitfalls with transfer pricing comparables in the chapter starting at INTM485000. In most cases it is very difficult to find a single comparable which can do this, because so many factors are at work in lending and borrowing decisions, but the results of other businesses can shed light on common factors affecting a particular sector or industry. These can indicate how a business within that sector might be likely to behave if it was operating at arm’s length from its sources of funding.
Even businesses in the same sector may appear very different, especially if only the bare figures are analysed. Two businesses in the same sector may present very different funding profiles, for example, if one has been gradually growing over a number of years while the other has recently undertaken the takeover of a competitor.
At the individual company level, it may be difficult to identify reliable comparables. Comparables submitted in support of proposals for a thin cap agreement often include companies working with different business models, for example where data on private equity buy-outs is submitted in support of more traditional long-term businesses. Commercial databases used to find comparables will perhaps not distinguish buy-outs from long term deals. Comparables are also often offered which are for businesses which, from HMRC’s’ perspective, may have the same issues as the company under review, that they are also part of a larger group and involved in funding relationships which are not arm’s length. Given that most transfer pricing work involves multinational groups, this difficulty is to be expected
Useful comparables for thin cap cases are perhaps more difficult to find than for transactions in goods and services, despite the apparent simplicity of funding transactions. This is because, amongst other things:
- the type of information which is available publicly is unlikely to reveal much about the underlying strategy and direction of the business; funding is often inextricably linked to issues that are commercially sensitive, such as acquisition goals.
- HMRC can only make use of publicly available...
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