What is the Inland Revenues approach to transfer pricing?
The Inland Revenue has announced that they are convinced that spread at exercise is not an arm’s length method of pricing the subsidiary’s cost. (Whilst this is inconsistent with the proposed statutory corporate tax relief, they justify this on the grounds that they believe the statutory deduction is a more generous tax break than the arm’s length price). They prefer to use a method based on the fair value of the option at grant (spread over the vesting period) or, alternatively, a method based on a hypothetical purchase of shares on the open market at grant. In cases where these methods give, or are likely to give, a lower recharge than the spread, the Inland Revenue will seek to limit the deduction accordingly, on the basis of transfer pricing laws. The issues underlying this approach are complex and contentious, and companies that are adversely affected by this approach should consider them carefully. Whilst the Inland Revenue believes that their approach will generally give a lower
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