Transfer Pricing - UK to US

Transfer Pricing - UK to US

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A US incorporated company currently charges a management fee of cost plus markup of 5% to its UK parent for services rendered in the US, namely the running of a sales office. Any sales 'generated' by the US subsidiary are invoiced through the UK company direct to customers. The costs of providing the service after the sale is made are incurred by the UK company. No physical goods are transferred, the service is provided through an online platform.

At present, there's no evidenced transfer pricing policy in place to justify the above, so this clearly needs to be addressed. Whilst I'm at it, I'm interested in gaining other people's opinion - would looking at it from the angle of "How much would a third party charge as a mark-up on their cost to undertake the equivalent work?" be acceptable? I'm thinking something more like 15% would be an acceptable uplift - I'd certainly be more than happy to run a company where a guaranteed profit would be made each year for a service delivered by someone else.

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By Paul Soper
17th Sep 2012 22:39

UK vs US

From a UK point of view the issue would only arise the the company were "large" which implies turnover/balance sheet totals of more than £43/£50 million and more than 250 employees.  The UK aspect would be what an external entity would charge (see Waterloo plc v HMRC where this very issue was raised in connection with a share incentive scheme - how much would an issuing house charge to set up such a scheme?).  The US perspective may be quite different and operate at a significantly lower level.   The US issue can be explored by some sort of advance pricing agreement but UK authorities may only give assurance if it is 'sufficiently complex' - which it probably isn't!  Ultimately your protection from attack (potentially by BOTH taxing authorities) is to have evidence of comparable pricing or, if not available, then use a cost plus/sellinfg price minus model using the GROUP profit percentage.  Hope this helps.

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