How will Brexit impact transfer pricing for UK businesses?


Jonathan Russell

Jonathan Russell

International Tax Senior Manager


For businesses conducting transactions with related parties, transfer pricing (TP) is an important consideration – and with Brexit looming, businesses conducting transactions with related parties across borders will need to be aware of the impact this could have.

The “at arm’s length” principle of transfer pricing regulations dictates that transactions between related parties, such as intra-group trading, should be priced at the same level as they would if the parties were not related.

Under the UK’s Small and Medium Enterprise exemption, groups with fewer than 250 staff and less than either €50m turnover or €43m Balance Sheet total are exempt from applying TP rules.

Currently, to comply with EU legislation, the UK’s TP rules apply to “UK to UK” transactions as well as cross-border transactions. This requirement may be removed in the long to medium term as the UK prepares to leave the EU.

As Brexit approaches, TP should be taken into account when reviewing group operations, structure and financing. A group that currently takes advantage of the SME exemption in the UK may not have aligned pricing policies with the arm’s length principle. With the removal of the EU Parent Sub and Interest Royalties Directives, now is an opportune time to review pricing to ensure that profits accrue in the correct territories and there is no unnecessary tax being suffered in extracting profits that should have accrued in the UK.

Once the UK leaves the EU it will also lose access to the EU Arbitration Convention (EUAC). In the case of TP disputes regarding double taxation (taxpayers being taxed on the same income in both countries), the EUAC provided a binding mechanism and timeline for disputes to be settled by reference to an independent advisory body, thereby eliminating double taxation.

In the absence of access to the EUAC, taxpayers will rely on the Mutual Agreement Procedure (MAP) in the treaty networks. MAP provides a framework for two states to work together using their best endeavours to resolve double taxation, but the stats demonstrate that in a third of cases this doesn’t happen. Some UK / EU member state treaties include an arbitration provision (and more will do so after the Multi Lateral Instrument came into force for the UK on 1 October 2018) but it remains to be seen whether the more flexible treaty and MLI arbitration provisions are as effective and efficient as the EUAC in resolving double taxation.

Get in touch

If you think you may be affected by changes to transfer pricing legislation brought about by the UK leaving the EU, our team of International Tax experts can help you review your current arrangements and implement any necessary measures ahead of the Brexit deadline. Get in touch with me or your usual Johnston Carmichael adviser.