INTM489135 - Unassessed Transfer Pricing Profits Conditions: ETMO Examples
Source: gov.uk (2025-12-04)


UTPP will apply to accounting periods beginning on or after 1 January 2026. This guidance will be updated with detailed examples by 1 January 2026. For earlier accounting periods please use the diverted profits tax guidance at INTM489500 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm489500)

Example 1

Company A is UK-resident. In the accounting period ended 31 December 2026, it pays £20m to the group parent Company B for head office services. The arm’s length price for those services is £15m. Company B is resident in Country B which has a corporation tax rate of 20%. The UK corporation tax rate is 25%.

The unassessed transfer pricing profits are the £5m of profit which would have been reflected in Company A’s self-assessment if the head office services were priced at arm’s length.

The corresponding amount is the £1m of corporation tax charged on the £5m of unassessed transfer pricing profits received by Company B.

The underlying corporation tax amount is the £1.25m of corporation tax that would have been charged on the unassessed transfer pricing profits in the UK.

£1m is exactly 80% of £1.25m, and so there is no ETMO.

However, the next year Company B makes losses. Under the loss relief rules of Country B, it carries those losses back and relieves the £5m of unassessed transfer pricing profits from the previous year, so that the £1m of tax paid is refunded in full.

The ETMO test is therefore revisited. The corresponding amount becomes nil (because the foreign tax was refunded), while the underlying corporation tax amount is unchanged; the 80% test is therefore met and there is an ETMO.

Example 2

Company C is UK resident in 2026 and pays corporation tax on its profits at 25%. It makes royalty payments to another group company, Company D in Country D.

Company D holds intellectual property (IP) used by Company C. Country D does not charge corporation tax on Company D’s profits.

In the accounting period ended 31 December 2026, the gross royalty payments total $100m and are subject to withholding tax at 5%. HMRC considers that Company C performs and exercises control over the full development, enhancement, maintenance, protection and exploitation (DEMPE) functions associated with the IP, and that Company D does not perform or control any DEMPE functions. On this basis Company C would be entitled to the returns from exploiting the IP at arm’s length and Company D would only be entitled to a risk free return of $10m a year for its legal ownership of the IP.

The unassessed transfer pricing profits are the $90m difference between the $100m actual provision and the $10m arm’s length provision.

The corresponding amount is the tax due and payable by Company D, which is the $4.5m withholding tax that it is treated as having paid on the $90m unassessed transfer pricing profits.

The underlying corporation tax amount is the UK corporation tax at 25% that would have been charged on the $90m unassessed transfer pricing profits, so $22.5m.

The corresponding amount of $4.5m is therefore less than 80% of the underlying corporation tax amount of $22.5m (it is 20%), and so there is an ETMO.

Example 3

The facts are the same as above, but this time Country D charges corporation tax at 24% on Company D’s profits and payments to Country D are not subject to withholding tax.

In the accounting period ended 31 December 2026, the gross royalty payments by Company C total $100m and are not subject to withholding tax. In the same accounting period Company D has the benefit of losses to cover all of its profits.

The corresponding amount is the tax due and payable by Company D. If no account was taken of the loss relief then its increase in relevant taxes payable on the $90m unassessed transfer pricing profits would be $21.6m. Therefore the 80% payment test would be met and there would be no ETMO. However, once account has been taken of the losses then no corporation tax was actually charged and so the corresponding amount is nil.

The underlying corporation tax amount is the UK corporation tax at 25% that would have charged on the $90m difference between the $100m actual provision and the $10m arm’s length provision, so $22.5m.

The corresponding amount of nil is therefore less than 80% of the underlying corporation tax amount of $22.5m, and so there is an ETMO.