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Transfer pricing between UK co and parent in Italy

Undercharging

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A UK Ltd co is wholly owned by a company in Italy (which has a higher corporation tax rate than UK) . The goods purchased from the Italian company are purchased for a rate which is higher than their market value resulting in a gross loss for the UK company.

Although there are no tax implications of doing this as far as I am aware because although this increased the loss in the UK, our CT rate is lower. Are there any 'accounting issues' with these transactions which would result in an adjustment to be made or anything else I should be thinking of? 

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By Tax Dragon
17th Sep 2020 08:00

What is happening with the loss? How is it being funded year on year?

There are restrictions on the tax use of losses that might apply in such situations.

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By Matrix
17th Sep 2020 08:13

The transactions should be on arm’s length term. Doesn’t seem very commercial to me, have you asked the client why and advised that it is not tax efficient?

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Replying to Matrix:
Psycho
By Wilson Philips
17th Sep 2020 08:50

Matrix wrote:

The transactions should be on arm’s length term.


Says who?

And it could be very tax-efficient. We don’t know enough.

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Replying to Matrix:
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By Wanderer
17th Sep 2020 08:20

Matrix wrote:

The transactions should be on arm’s length term.

For tax there's an SME exemption:-
https://www.gov.uk/hmrc-internal-manuals/international-manual/intm412070
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Psycho
By Wilson Philips
17th Sep 2020 08:18

It is incorrect to say there are no tax implications - the UK loss is greater than it otherwise would be. However you don’t mention the size of the companies, which would dictate whether or not the T/P provisions would apply.

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By SA2016
17th Sep 2020 08:49

Thank you all, the company is a SME but was the exemption for tax purposes not removed from April 17?

The loss is being funded by the parent company by providing extended credit terms.

The loss will be carried forward at the moment.

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Replying to SA2016:
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By Wanderer
17th Sep 2020 08:58

Wasn't it 2019 and then when the overseas tax rate was lower, and certain other conditions?

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By whitevanman
17th Sep 2020 09:26

It would be interesting to know why UK is over-paying, not least because TP is not the only possible problem. The simple test of wholly and exclusively is also in point (albeit rarely mentioned).

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Replying to whitevanman:
Psycho
By Wilson Philips
17th Sep 2020 10:48

That is probably because W&E is rarely in point for situations like this (but, I concede, could be).

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