Scaling internationally is an exciting moment for any high-growth business, but it’s also a tax minefield if you don’t plan ahead. Transfer pricing is one of those topics founders often ignore until it’s too late. And when it’s too late, the cost isn’t just financial – it’s strategic.
That’s why we brought together Steve Leith, CP’s Head of Tech & High Growth, and James Peck, our Head of Tech & High Growth Tax, for a one-hour, no-BS webinar. The goal? Giving you practical insights to help you scale successfully without tripping over tax traps.
WHY TRANSFER PRICING MATTERS EARLY
When should you start thinking about transfer pricing?
It’s a question Steve and James hear a lot in their conversations with high-growth businesses.
If you’re expanding beyond the UK – setting up subsidiaries, hiring overseas, or entering new markets – transfer pricing should be on your radar from day one. Beyond compliance, it helps you tell the right story to tax authorities and investors alike.
HMRC’s 2025 consultation proposes removing the SME exemption for medium-sized enterprises (thankfully this has been dropped for now, as confirmed following the budget in November 2025) and introducing an International Controlled Transactions Schedule (ICTS) for “large” companies. This means “large” businesses will need to prepare more documentation and report cross-border transactions from 2026 onwards.
In the US, Section 482 of the Internal Revenue Code governs transfer pricing. There’s no de minimis threshold – so even small intercompany transactions must meet the arm’s length standard. The IRS has also introduced a simplified approach under OECD’s Pillar One “Amount B” for baseline distribution activities, effective January 2025.
SUBSIDIARIES, SALES TEAMS & PERMANENT ESTABLISHMENT
Let’s say you’re growing into the US market. Initially, you might trade from the UK without a taxable presence under US law.
However, if your customers start saying they don’t want to engage with your UK entity, the need arises to create a US subsidiary.
Hiring senior talent adds another layer. Stock options are hard to offer through an Employer of Record (EOR). And a US subsidiary with a defined stock option plan is much more attractive.
But with boots on the ground, you’re creating permanent establishment (PE) risk. Thanks to the work originally undertaken through OECD Action 7, and the updated OECD Model Tax Convention commentary in November 2017 and November 2025, the definition of PE has tightened to prevent artificial avoidance. Common triggers include:
- Fixed place of business: offices, warehouses, or long-term project sites (and even home workers!).
- Dependent agents: individuals negotiating or concluding contracts on your behalf.
- Service PE: extended service projects in jurisdictions like India or Malaysia.
Failing to manage PE risk can lead to back taxes, penalties, and even dry tax charges if you need to migrate entities later.
THE RULES OF TRANSFER PRICING (AND HOW THEY DIFFER)
Before the 2025 Budget, transfer pricing rules varied by jurisdiction:
- UK: Historically, certain SME Group’s enjoyed UK transfer pricing exemptions, but reforms are looking at narrowing this. Thankfully, the UK SME exemption is not being altered yet, but HMRC is keeping this under review. Therefore, we do expect some form of transfer pricing compliance or mandatory documentation for medium-sized businesses in future. Remember, if the exemption does not apply (i.e. there the transaction is with a non-qualifying territory), mandatory documentation already exists for SMEs with cross border transactions.
- US: No SME exemption. Documentation isn’t mandatory, but failing to prepare it risks penalties under IRC Section 6662. The IRS expects robust functional analysis and method selection (CUP, resale price, cost-plus, profit split). The US has a specific 10 point transfer pricing documentation template.
- OECD Guidelines: Still the global benchmark, updated in 2025 to include Amount B for routine distribution and marketing activities, aiming to simplify compliance.
HOW DID THE 2025 AUTUMN BUDGET CHANGE THESE RULES?
The government is tightening international tax rules to align the UK more closely with OECD standards. As a result, we’ve seen a number of new changes:
- New ‘International Controlled Transactions Schedule’ (ICTS) – For accounting periods starting on or after 1 January 2027, large groups will need to file a standardised annual schedule detailing all cross-border related-party transactions.
- Updated UK permanent establishment & profit attribution rules – The aim is to bring the UK legislation in line with the OECD Model Tax Convention definition.
- Simplifications for UK–to-UK transactions – Many domestic intercompany transactions will be excluded where there is no risk of UK tax loss, reducing unnecessary admin for purely UK-based groups.
Together, these changes mean more disclosure, more transparency and more scrutiny for international groups. If you’re scaling internationally, ask yourself:
- Do your current intercompany charges, royalties, cost allocations and service fees stack up under OECD-style scrutiny?
- Will your finance systems be ready to collect and report structured cross-border data for ICTS?
- Could overseas employees or contractors accidentally create a PE exposure, especially given the new commentary on “home workers” in the OECD Model Tax Convention?
- Are your intercompany agreements up to date and aligned with how the business actually operates?
- Are you fundraising or planning an exit? TP and PE issues are a common diligence red flag for investors.
DEVELOPMENT CENTRES: COST PLUS & BEYOND
Perhaps you’re thinking about setting up a development centre overseas? It’s a great move from a cost efficiency and talent access perspective, but there are tax implications to consider.
Development centres often operate on a cost-plus model, adding a markup (typically 5–15%) to costs to reflect functions and risks. The OECD recommends benchmarking against comparable uncontrolled transactions. But beware: misclassifying costs or applying arbitrary markups can trigger audits.
THE FOUNDER FACTOR: TAX RESIDENCY RISKS
With rising UK tax rates and talk of wealth taxes, some founders are eyeing lower-tax jurisdictions. But this creates new challenges for corporate tax residency.
In the UK, residency hinges on central management and control, i.e., where strategic decisions are made. In the US, it’s where the entity is incorporated. If all board meetings happen in the UK, HMRC could argue your US subsidiary is UK-managed, creating dual tax residency. That means paying tax in both jurisdictions without a credit offset – a nightmare scenario that MAP procedures under the US-UK treaty can take years to resolve.
REPATRIATING PROFITS
Post-Brexit, the EU Interest and Royalties Directive no longer applies. UK companies now face withholding tax on dividends, interest and royalties paid from EU subsidiaries unless treaty relief applies. Rates vary from 5% to 25%, depending on the jurisdiction and treaty terms. Creating sub-holding companies in treaty-friendly jurisdictions can help – but only if they have genuine commercial substance (no treaty shopping).
DRY TAX CHARGES
Exit or migration charges arise when a company ceases to be resident in one jurisdiction and moves to another. These are dry tax charges – tax on paper gains without cash inflow. Avoid this with proactive planning and governance, including local board meetings and clear operating models.
OUR TRANSFER PRICING TAKE: KEEP IT SIMPLE, START EARLY
Transfer pricing is a strategic tool that can shape your global growth story. Start early. Keep it simple. Flex your model as you scale. The cost of getting it wrong? Dry tax charges, double taxation, and a lot of headaches.
At Cooper Parry, we help high-growth businesses scale internationally without tripping over tax traps. If you’re planning to expand overseas – or already have – let’s talk.
