Transfer pricing — the pricing of transactions between related entities within the same corporate group — is one of the highest-risk areas of international tax for UK companies with Indian subsidiaries, and for Indian companies with UK operations. Both HMRC and the Indian Income Tax Department have dedicated transfer pricing teams and have significantly increased their audit activity in recent years. Getting transfer pricing wrong can result in double taxation, substantial penalties, and protracted disputes with tax authorities in both countries.
The Arm's Length Principle
The foundation of transfer pricing is the arm's length principle: transactions between related parties must be priced as if they had been entered into between independent parties in comparable circumstances. In practice, this means UK parent companies must charge their Indian subsidiaries market rates for management services, IP licences, and intercompany loans — and Indian subsidiaries must charge market rates for IT services, shared services, or other functions they provide to the group. A proper foundation during initial India company setup ensures these intercompany agreements are legally sound from day one.
The arm's length price is determined by reference to one of six OECD-recognised transfer pricing methods: Comparable Uncontrolled Price (CUP), Resale Price Method, Cost Plus Method, Transactional Net Margin Method (TNMM), Profit Split Method, and Others. TNMM is the most commonly used method in UK-India transfer pricing, as it requires less detailed comparable data than CUP while still providing a robust arm's length benchmark.
Documentation Requirements in Both Countries
Both the UK and India require contemporaneous transfer pricing documentation — meaning the documentation must be prepared before the tax return is filed for the year in question, not after an enquiry has commenced. In the UK, HMRC requires a Master File and Local File in line with the OECD's BEPS Action 13 recommendations. In India, the Income Tax Act requires a comprehensive transfer pricing study including the functional analysis, industry analysis, economic analysis, and benchmarking exercise, which must be certified by a Chartered Accountant.
Common UK-India Transfer Pricing Pitfalls
The most common transfer pricing errors in UK-India structures include: charging management fees to the Indian subsidiary without adequate evidence that services were actually rendered and benefited the subsidiary; using a cost-plus mark-up that is inconsistent with market benchmarks; failing to document intercompany loans with a formal loan agreement and market interest rate; and inconsistently applying the transfer pricing policy year-over-year, which creates risk of challenge in both jurisdictions. Leveraging experienced UK accounting services can help align local statutory reporting with broader group TP policies.
Advance Pricing Agreements
For businesses with significant intercompany transactions, an Advance Pricing Agreement (APA) — a binding agreement with the tax authority on the transfer pricing method and price for future transactions — can provide certainty and eliminate audit risk. Both the UK and India have APA programmes, and bilateral APAs negotiated between HMRC and the Indian tax authority are available for UK-India transactions. The APA process is time-consuming (typically 2–4 years) but the certainty it provides can be extremely valuable for large or complex intercompany arrangements.
Payline Worldwide's transfer pricing team provides documentation, benchmarking, and advisory services for UK-India business groups. We help you establish defensible arm's length prices, prepare compliant documentation in both jurisdictions, and respond to transfer pricing enquiries from HMRC and the Indian Income Tax Department. Contact us for a complimentary transfer pricing risk assessment.
