The transfer pricing implications of Brexit
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

The transfer pricing implications of Brexit

Westminster

The UK’s decision to leave the European Union could have two significant impacts on the transfer pricing environment in the UK: freedom from the relevant EU Directives, and movement of companies or financial and other assets, either into or out of the UK.

In a nationwide referendum on June 23 the UK voted to leave the EU. Politicians in the UK and Europe must negotiate how this decision should best be put into practice, meaning the long term impact for UK legislation and practice on transfer pricing is uncertain.

Multinationals will need to consider how the changes made during the exit negotiations affect their transfer pricing. In particular, companies will need to examine the impact of the UK no longer being subject to EU Directives and how assets and companies can be moved into, or out of, the UK. 

EU Directives

In terms of the EU Directives, the UK may no longer have to comply with the EU’s transfer pricing framework that includes the following requirements:

Requirement

Commentary

The EU common transfer pricing documentation format

To date, the EU has only recommended rather than required this format.

The European arbitration convention for resolving transfer pricing disputes

Member states have been very reluctant to use this mechanism.

The EU’s interpretation of country-by-country reporting (CbCR)

Subsidiaries of UK companies located within the EU would still need to report according to the EU format. If the parent company is not an EU tax resident and does not file a report, it must do so through its EU subsidiaries. Individual member states can choose whether to introduce such secondary reporting for the 2016 fiscal year, but becomes mandatory from the 2017 fiscal year.

The EU’s draft version of the BEPS Action 4 interest restriction rule

The UK is already developing its own interpretation.

Restrictions on state aid

The European Commission has begun applying transfer pricing rulings and APAs to infer very large underpayments of tax.

Draft proposals for a Common Consolidated Corporate Tax Base (CCCTB)

This would replace the international arm’s-length principle of transfer pricing.

EU impact assessments

The UK must perform EU impact assessments to ensure that any proposed change to UK tax legislation is in conformity with EU law.

European Court of Justice (ECJ) judgments

There is a possibility that ECJ judgments may require changes in UK transfer pricing legislation.


More generally, the UK may choose to comply with certain relevant Directives in order to avoid EU sanctions, or a post-Brexit deal with the EU may require the UK to accept certain EU Directives and/or the jurisdiction of the ECJ in certain matters. This would be the case, for example, if the UK were to pursue either of the following routes:However, the impact of Brexit on UK transfer pricing might not be too dramatic. This is because the EU’s Directives which bear on transfer pricing are broadly designed to implement the OECD’s guidance in this area, which itself is explicitly embodied in the UK’s transfer pricing legislation.

A bilateral agreement with the EU, similar to the series between Switzerland and the EU. The UK would negotiate the best deal that it could achieve with the EU – for example, in addition to not being subject to EU tax rules, Switzerland is not subject to EU state aid rules.

It should be noted, however, that the EFTA is not an EU-affiliation mechanism, amounting only to a free trade agreement between its four members (Iceland, Liechtenstein, Norway and Switzerland) for goods and services, together with some coverage of areas such as investment and the free movement of persons. Thus, even if the UK were to join the EFTA, it would still be obliged to negotiate its relationship with the EU within one of the two mechanisms outlined above (EEA or bilateral).

Depending on market sentiment after a Brexit, relative confidence in the UK economy may cause companies to move their assets or operations to or from the UK, with transfer pricing implications and requirements that could include the following:



  • Debt capacity and interest rate reviews for new investments;

  • Comparison of alternative intellectual property (IP) holding jurisdictions, IP valuation and transfer and royalty rate reviews;

  • Supply chain reviews including risk allocation and centralisation of high value functions; and

  •  Resolution of existing transfer pricing audits or litigation.



Other implications for funds include debt capacity and interest rate reviews for new private equity investments and banks and financial institutions may require due diligence of multinational borrowers’ after-tax financial forecasts.

In terms of an immediate transfer pricing response to what is still only the possibility of Brexit, and a Brexit that could take a wide range of forms, we recommend that businesses should prepare for the possibility of having to replace or top up third party finance with related party finance. In addition, they should also begin (as a precautionary measure) to consider alternative locations for their IP and their activities, taking into account a lower UK exchange rate and tax rate, but potentially less access to European markets and a higher cost of capital. Finally, they should consider whether transfer pricing bench marking studies might need to be updated sooner than planned.

For more information, contact Danny Beeton, Managing Director, at +44 207 089 4771, Shiv Mahalingham, Managing Director, at +44 207 089 4790 and Richard Newby, Managing Director, at + 33 014 006 4065.


 

Danny Beeton Duff&Phelps

Danny Beeton, Managing Director, Transfer Pricing

 

Shiv Mahalingham

Shiv Mahalingham, Managing Director, Transfer Pricing

Richard Newby Duff&Phelp

Richard Newby, Managing Director, Transfer Pricing



more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article