On 26 May 2016, and again following on from a commitment made in Budget 2016, HMRC published a consultation document proposing the introduction of secondary adjustment rules into the UK’s transfer pricing regime.

The focus of the consultation are arrangements whereby connected persons make payments to one another that exceed the “arms’ length” amount. Although existing rules would ensure that the parties are taxed as though an arm’s length amount were paid (the primary adjustment),   the recipient is still able to retain and enjoy the excess. A secondary transfer pricing adjustment would ensure that cash benefits of incorrect transfer pricing are appropriately taxed.

The consultation notes that secondary adjustment is an “internationally recognised” approach. Although it seeks views on whether such rules should be introduced in the UK, it seems likely that the Government is committed to doing so. The key issues would therefore seem to concern how the rules should operate.

The Government’s stated preference would be to treat the excess profits as a deemed loan (for tax purposes only) bearing imputed interest, which would be taxed as income for the deemed lender. The rate of deemed interest would be set at a pre-determined market-adjusted rate and would continue until such time as the excess cash is repatriated to the UK.

The deadline for response is 18 August 2016, and any legislation will be included in the Finance Bill 2017.

The consultation document can be viewed here.