Transfer pricing red alert

Top companies are rushing to put their transfer pricing documents in order following a major clampdown by the Inland Revenue on transactions designed to avoid corporation tax.

The move, which followed a tightening of the rules governing transfer pricing in the March Budget, is part of a major initiative by the Revenue?s international division designed to restrict companies that have used internal transfer pricing arrangements to minimise their tax exposure.

The Revenue has built up teams in both its international division and large business units to tackle companies that have paid little tax in the past after extensive transfer pricing arrangements have been put in place.

Officials have begun to end the practice of relying on correspondence with companies it suspects of hiding ill-egal arrangements, experts said. Instead, teams of Revenue officers have demanded to see original documents.

Bob White, head of transfer pricing at Deloitte & Touche, said: ?To date it has not usually been the case that they look at original documents unless they suspect fraud and the Special Compliance Office was involved.

Now they want to make those checks routinely and see the situation at first hand.? Experts at Ernst & Young and Coopers & Lybrand said they had seen the same developments.

Christopher Pearce, finance director of Rentokil Initial and head of the 100 Group of FDs, said he had seen a distinct change in the Revenue?s policy. ?This is something the 100 Group is concerned about and we have had meetings with the Revenue to put forward our concerns.?

Marjorie Williams, head of the newly created large business units at the Revenue, has said she believes multinationals have saved millions of pounds through dubious transfer pricing arrangements.

Over the last two years, Rupert Murdoch?s News International and pharmaceutical giant Glaxo Well-come have successfully fought long battles to defend their tax payout following complicated transfer pricing arrangements.

But so far, much of the Revenue?s fire has been aimed at smaller companies, said White. ?It looks like the Revenue is using smaller companies to cut its teeth.?

The Revenue confirmed it had targeted transfer pricing arrangements for special

scrutiny, but attempted to play down the significance of the move. A spokeswoman said the initiative was ?allied? to the spend-to-save policy which had been gathering momentum since Gordon Brown?s first Budget last July.

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