On 30 January 2024, the UK HMRC revised its transfer pricing operational guidance by including a new section on the accurate delineation of actual transactions and the analysis of risk. The updated transfer pricing operational guidance is as
Scope of this guidance
- This guidance addresses HMRC’s application of the ‘6-step process for analyzing risk’ (‘the 6-step process’) within Chapter I of the OECD Transfer Pricing Guidelines (‘TPG’).
- The significance of risk in a transfer pricing analysis has been a subject of debate amongst commentators following the 2017 and subsequent updates to the TPG. In order to improve certainty in this area, HMRC is seeking to clarify its interpretation of (i) the 6-step process and (ii) its place within a transfer pricing analysis.
- Chapter I, including the risk framework, is focused on economically relevant characteristics and the accurate delineation of controlled transactions. Risk assumption is only one of several aspects that are relevant to accurate delineation, and it is important to view this guidance in that context. The TPG acknowledges that the guidance on risk within Chapter I is extensive, which is reflective of the complexity in this area as opposed to indicating an inflated importance over other factors. It does, as a matter of fact, represent significantly more pages relative to the other aspects of a functional analysis required for accurate delineation, for example, functions or assets, but (per paragraph 1.59): “The expanded guidance on risks reflects the practical difficulties presented by risks: risks in a transaction can be harder to identify than functions or assets, and determining which associated enterprise assumes a particular risk in a transaction can require careful analysis.”
- Though this guidance focuses on risk and specifically the 6-step process, it should not be interpreted that HMRC views the delineation of risk as having more significance than functions or assets or the other economically relevant characteristics or circumstances of the parties to transactions.
- Further, it is important to note that the primary focus of this guidance is delineation, not pricing. It is premature to form conclusions about pricing at the accurate delineation stage of a transfer pricing analysis, which is a matter for Chapter II onwards. The last step of the 6-step process does note, however, that a party may be compensated with a share of potential upside benefits and downside costs commensurate with its contribution to the control of an economically significant risk without it having contractually assumed or been allocated that risk, which can naturally lead to the consideration of pricing outcomes in later chapters.
- Because Step 6 has been a particular focus of disagreements of interpretation, this guidance does go on to consider, in general terms, what the TPG says about the transfer pricing methods which may be applied. In particular, this includes whether the Transactional Profit Split Method (‘TPSM’) might be appropriate and if so, the question of which profits might be split. It explains HMRC’s general views but does not draw any definitive conclusion which may be applied to all cases. Each particular transaction must be considered in light of its specific facts and circumstances. For this reason, any examples within this guidance have no wider application to specific cases and only seek to illustrate particular points within this guidance.
- This guidance represents HMRC’s interpretation. It highlights a number of circumstances where it is recommended that case teams discuss disputes with the Transfer Pricing Team in CS&TD Business, Asset & International.
