INTM450102 - Transfer pricing records: categories of transactions

Annex II to Chapter V of the 2022 Transfer Pricing Guidelines requires that the Local File includes information for each material category of controlled transactions.

A category of controlled transactions broadly covers a grouping of similar types of transactions that can be reliably priced on the same basis. A category of controlled transactions may consist of a single controlled transaction or multiple transactions that can be aggregated into a single category.

Controlled transactions may be aggregated into a single category if:

• the economically relevant characteristics (see INTM485022) are materially the same
• the transfer pricing methodology and pricing are the same

Controlled transactions that have the same economically relevant characteristics but are priced using different methodologies cannot be aggregated into a single category. Each transaction that is priced differently will form its own category of controlled transaction.

Where a category includes multiple transactions with different counterparties, Annex II to Chapter V requires that the Local File includes an identification of the different associated enterprises involved and that the amount of intra-group payments and receipts is broken down by tax jurisdiction of the foreign payor or recipient.

Example 1:

A UK entity provides IT services to a connected company in Country A. The UK entity also provides sales and marketing strategic services to the same company in Country A. As the nature of these services is different and the functional analysis is different for each transaction, the transactions are likely to rely on different benchmarking. Therefore, these will form 2 separate categories of transactions.

Example 2:

A UK entity manufactures components which it sells to a connected company in Country B for further processing into finished products. Several different components are manufactured however the functional analysis of the UK entity is consistent across each component and the characteristics of the components are very similar. The UK entity treats the sale of each of the different components as a separate transaction however each transaction has the same methodology and margin. These transactions can be aggregated into a single category of transaction.

Example 3:

A UK entity provides R&D services to connected companies in Country C, Country D and Country E. Whilst the exact functions performed by UK staff may vary slightly per counterparty, the nature of the services is sufficiently similar for these to be grouped together such that they are priced in the same way and rely on the same set of comparables. These transactions may be aggregated into a single category of services however a breakdown of the quantum received from each counterparty and details of any allocation keys used should be set out within this category.

Example 4:

The scenario is the same as in Example 3, however there are certain economic characteristics that differ for the connected company in Country E such that the services cannot be priced in the same way as the services provided to the other connected companies. This would form a separate category of transaction to that in Example 3.

Low Value-Adding Services

For intra-group services that satisfy the conditions at paragraph 7.45 of the 2022 Transfer Pricing Guidelines these may be included as a single category of transaction, including where they are provided by or to multiple different counterparties. Where the approach set out in Chapter VII of the 2022 Transfer Pricing Guidelines is adopted, the Local File should include the information outlined in section D.3 of Chapter VII to the extent it is not covered by the information set out in Annex II to Chapter V. See INTM440071 for additional guidance on low value-adding services.

Further guidance on grouping of financial transactions is found INTM450103.