INTM450104 - Transfer pricing records: materiality of a category of controlled transactions

Annex II to Chapter V refers to material categories of controlled transactions. To determine the materiality of a category of controlled transactions for a UK entity, all the transactions within the category must be aggregated. It is the aggregated position that is used to assess the materiality of the category as a whole. Where a category of controlled transactions consists of a single controlled transaction, only that transaction should be taken into account when assessing the materiality of the category.

HMRC considers that a de minimis threshold of £1 million can be applied to each category of transactions. Where the aggregate value of the transactions within a category is no more than £1 million, those transactions do not need to be reported in the Local File.

When determining whether a category of controlled transactions is material, the appropriate value to consider is the aggregate arm’s length price of the transactions. The Local File is an entity-based document and as such materiality should be viewed from the perspective of the UK entity preparing the Local File rather than the MNE group as a whole.

For categories of transactions above the de minimis threshold, materiality should be considered on a case by case basis taking into account all the relevant facts. It is not possible to set out a singular rule for what constitutes a material category of controlled transaction due to the variety of business and transaction types that may need to be reflected within a Local File.

HMRC considers that certain categories of transactions will always be considered material due to their nature and complexity, and these should always be included in the Local File, regardless of value. For the following material categories of transactions, the de minimis threshold does not apply:

  • transactions priced using a profit split methodology
  • transactions concerning the transfer or licence of intangible assets
  • transactions concerning Hard to Value Intangibles
  • transactions concerning the transfer, use, or right to use key or strategic assets that are required for the entity to carry on its business
  • transactions concerning global or regional strategic or leadership services
  • transactions concerning Cost Sharing Agreements or Cost Contribution Agreements
  • transactions concerning business reorganisations, including where functions, assets or risks have been moved into or out of the UK during the relevant period
  • commencement or cessation of transactions in the relevant period

For all other categories of transactions, entities should make their own determination of what is considered material, taking into account all the relevant facts and circumstances. It is important that entities set out their chosen approach to materiality in the Local File.

Factors to consider when determining whether a category of controlled transactions that exceeds the de minimis threshold is material can include the following:

  • size of the UK entity
  • nature of the transaction – consideration of whether a different materiality approach or threshold should be taken for different categories of controlled transactions
  • level of risk relating to the category of controlled transactions
  • impact of the transaction on the UK entity’s profit or loss position
  • industry of the MNE group and UK entity

This list is not exhaustive, and care should be taken to select the appropriate materiality criteria for each UK entity.

Any transactions that are excluded from the Local File either because they fall below the de minimis threshold or because they are deemed to not be material for other reasons must still be priced in accordance with the arm’s length principle.

Example 1:

A UK entity provides intra-group IT services to a connected company in Country A. This is a single category which includes multiple transactions (see INTM450101). The total aggregate value of the arm’s length return received for the services in this category is £800,000. As this category does not exceed the £1 million de minimis threshold, details of this category do not need to be reported in the Local File.

If one of the transactions included in this category increased to £1.2 million, all the transactions within the category would need to be included as the category as a whole is considered to be material.

Example 2:

A UK entity typically applies a threshold based on a percentage of its turnover when considering materiality. However, the UK entity licences out intangible assets that it developed and owns for use by connected companies in other jurisdictions. As this is considered a material category of transaction, the entity includes full details in its UK Local File regardless of the value of the transaction.

Example 3:

A UK entity has performed contract manufacturing for a connected company in Country B for many years, as well as limited risk distribution for a different connected company in Country B. The contract manufacturing is a legacy function and relates solely to a specific product line which represents a very small percentage of the UK entity’s profit before tax, therefore it has previously been considered as not material under the UK entity’s approach. The UK entity only includes details regarding its distribution functions in the Local File.

During the relevant accounting period, the UK entity ceases to perform this contract manufacturing and the activity is moved to another connected company in Country C. The UK entity begins a new manufacturing operation on behalf of Country B. As this represents a business reorganisation, the UK entity includes details of these transactions in its Local File regardless of the value of the transaction.