Transfer pricing disputes: the role of an independent economic adviser

Against a backdrop of continued scrutiny, the importance of strong tax disputes teams is clear. Understanding UK legislation, HMRC’s powers and procedures, and the available routes to dispute resolution is essential to protecting a taxpayer’s position.

In transfer pricing, however, the legal position is only part of the task. It must also be supported by a credible explanation of the underlying economics: why the pricing is appropriate, how the analysis supports it, and whether the evidence can withstand scrutiny.

Different expertise, working together

Transfer pricing disputes can raise questions that require both legal and economic analysis. Applying the OECD Transfer Pricing Guidelines to commercial arrangements involves understanding the functions performed, assets used and risks assumed or controlled by related parties, as well as how value is created across a group and whether the pricing reflects what independent parties would have agreed.

Depending on the issue, this may involve functional analysis, value chain analysis, the assessment of an arm’s-length price or return, or a benefits test examining whether intra-group services provide economic or commercial value to the recipient.

These questions call for a detailed understanding of the business and the economic reasoning underpinning the pricing. Legal and economic expertise are complementary: legal advisers develop the legal arguments and manage the dispute, while economic analysis can help establish whether the pricing and supporting evidence withstand scrutiny.

A law firm with a highly capable tax disputes team may therefore benefit from working with a transfer pricing economist who can examine the economic substance of the arrangements and provide independent analysis to support its advice.

Where economic analysis matters

In a transfer pricing dispute, the critical question is often whether the economic evidence supports the taxpayer’s pricing. This requires examining whether the functional analysis reflects how the business actually operates, whether the pricing methodology is appropriate to the transaction, and whether the comparables are sufficiently reliable to support the conclusions reached. The underlying assumptions must also be consistent with the commercial facts.

For intra-group services, a further question arises: what benefit did the recipient actually receive, and does the evidence support the charge made? Consider a dispute over the pricing of services provided between group companies. An existing benchmarking study may identify a range of margins earned by potentially comparable businesses, but that range does not, by itself, establish that the selected comparables are appropriate or that the price charged is arm’s length.

A transfer pricing economist can examine these issues, test alternative approaches and assess how different assumptions affect the resulting price or profit allocation. This may reveal weaknesses in an existing analysis, identify evidence that needs further consideration, or help establish which conclusions the available evidence can reasonably support.

The objective is not to produce economic analysis in isolation, but to ensure that the economic evidence is relevant to the issues in dispute and provides a sound foundation for the legal team’s arguments.

Extending the legal team’s capability

Rey Knolls provides independent economic and financial analysis to support UK transfer pricing advice and disputes. This includes reviewing existing analyses, assessing pricing methodologies and comparables, undertaking functional and economic analysis, and evaluating the financial implications of competing positions.

This enables legal teams to test the taxpayer’s position, identify weaknesses in the supporting evidence and develop a more robust response, combining their legal expertise with specialist economic analysis on a matter-by-matter basis.

The strongest transfer pricing disputes combine legal precision with economic substance. Rey Knolls provides the latter.