“Foreseeably relevant” information or a “fishing expedition” in a transfer pricing case?

The United Kingdom First-tier tax Tribunal has declined to order the disclosure of  a US parent company's group consolidated financial statements and US entity level financial statements in a case concerning a transfer pricing enquiry by the HMRC. the enquiry by the UK tax authority was into transactions between the US parent company and its UK resident subsidiary. The case usefully casts light on when information is “reasonably required “ for the administration of UK tax law and when it might be “foreseeably relevant" for exchange of information under article 26(1) of the OECD and UN Model treaties.

In Lifeplus Europe Ltd v HMRC [2026] UKFTT 797 (TC), the Tribunal considered whether  parent company financial statements  were "reasonably required" by HMRC to check the UK resident subsidiary’s tax position or whether it was a “fishing expedition”. Although the domestic term "reasonably required" in Finance Act 2008, Schedule 36 paragraph 1 is not identical to the “foreseeably relevant”  treaty term, there are close parallels.

Transfer pricing audit

HMRC’s transfer pricing enquiry started in 2016 and by the time of the demands for the parent company accounts were made in 2023, enquiries had been opened into all  accounting periods from 2014 to 2023. The long running enquiry had passed through the hands of three different Revenue Officers none of whom were transfer pricing specialists. The enquiries appeared to have been triggered by a reduction in operating margin in applying the Transactional Net Margin Method (TNNM) reported by the UK company following the obtaining of a transfer pricing study by a US accounting firm.

Treaty exchange of information

After failing to obtain the parent company accounts from the UK company over a period of years, in 2020 the UK requested the information from the United States Internal Revenue Service under Article 27(1) of the US-UK Tax Treaty. The IRS responded as follows:

   "We maintain that the financial statements of Eurark LLC [the US parent] comprise the activities and balances of foreign subsidiaries not relevant to your investigation… The role and contributions of Lifeplus Europe Limited [the UK subsidiary] to the consolidated group are explained and addressed in the transfer pricing study".

Although the standard in the US-UK Treaty is “information as is necessary” for the administration of tax law, the emphatic rejection of the request by the IRS makes the language difference of little significance in this case.

Scope and focus of transfer pricing enquiry

At the heart of the dispute over the relevance of the documents demanded, was the scope and focus of the transfer pricing enquiry. This resulted in a significant part of the decision examining the UK transfer pricing rules which incorporate Article 9(1) of the OECD Model and the OECD Transfer Pricing Guidelines into UK domestic law. The only transaction under enquiry appeared to be the sale of nutritional supplements and healthy body products by the US parent to the UK subsidiary for resale to third-party customers.  The taxpayer had applied the Transactional Net Margin Method (TNNM) with the UK subsidiary as the tested party and the Operating Margin the appropriate Profit Level Indicator. HMRC were contending for the Comparable Uncontrolled Price (CUP) method.

During earlier stages of the enquiry, the UK company said that contracts with third-party suppliers did not exist, and an HMRC request for “All agreements or contracts [the US parent] held with associated entities during the period 1 January 2014 to 31 December 2022” was dropped. The taxpayer provided some evidence to explain why it did not agree with the CUP method. At one stage,solely for the purpose of settling the dispute that had been ongoing for a considerable period of time, the taxpayer proposed a “management charge by the parent company" and provided financial data for this purpose, supporting an adjustment reducing gross profit based on information obtained from the parent company.

Arguments

HMRC argued that they had concerns with the taxpayer's transfer pricing study, particularly in relation to how the taxpayer’s functions were described and that the parent company’s accounts would provide primary evidence of the scale of the global business, and the UK company's comparative contribution to it. HMRC could not accept the taxpayer’s self-certification and said that supporting evidence was of great relevance to both the taxpayer's declared tax position  and HMRC’s proposed adjustments to the CUP analysis.

The taxpayer argued that there was no rational connection between the accounts and whether the they should have selected the CUP method, instead of TNMM.

Unsurprisingly, the parties differed on the relevance of the fact that the IRS declined to provide the parent company's financial statements on the basis of their irrelevance, and that the request was a fishing expedition.

Reasonably required information

The Tribunal ruled that a document or  information is 'reasonably required'  where the request is “genuinely directed” to a “genuine exercise of checking the taxpayer's tax position". The request for information must be "genuinely directed to the purpose for which the notice may be given" and  "cannot be unreasonable, or entirely without foundation".

On this basis, the Tribunal considered that HMRC must identify a tax issue to which the information sought relates in a genuine and legitimate investigation that is not in bad faith. However, it is not necessary for HMRC to demonstrate that a liability to tax will in fact arise on conclusion of the investigation as a valid investigation may lead to the conclusion there is no liability.

What constitutes 'fishing' must be considered in the light of the "reasonably required" test. Consequently, while there may be “an element of uncertainty or speculation on HMRC's part", it does not allow mere speculation or allow HMRC to "fish" for possible issues" (…)." A mere desire for background information was held insufficient to justify the issue of a notice – that would amount to "fishing".

The Tribunal noted that the OECD Transfer Pricing Guidelines state that once one-sided method, such as TNNM, is chosen as the most appropriate method and the tested party is the domestic taxpayer, the tax administration generally has no reason to further ask for financial data of the foreign associated enterprise.  It  further decided that “it is not for HMRC to unilaterally impose a selection of the transfer pricing method without any input from the tested-party.” In my view, the better way to explain this is that, in the absence of potentially comparable transactions, the CUP method cannot be applied and the financial statements of an associated enterprise are unlikely themselves to evidence such sale and purchase transactions.

Documents within the taxpayer's possession or power

A second UK domestic legal requirement for documents to be provided to HMRC is that they are within the person's possession or power.

It was uncontroversial that the parent’s financial statements were not in the possession of the UK subsidiary. Both a legal and a de facto power to obtain documents is sufficient for this purpose. Legal power is an "enforceable legal right" to possession or to take copies of  a document.

In this case, some of the taxpayer's directors  and officers were directors or officers of the parent company. The parent company had also provided certain financial information  to support a proposed adjustment reducing gross profit.  The taxpayer asked the parent company for the documents, which they declined on the basis that the parent was a privately held company and its accounts are not required to be publicly available under US laws. The parent regarded them as confidential, only the owners and a few executives were permitted access to them. Te Tribunal accepted these requests as serious attempts to obtain the documents requested. The fact that limited financial information had been provided by the parent did not amount to a general consent to provide information or documents. Each company was a separate legal person even within a corporate group and neither had a legal right to the documents of the other. The subsidiary did not have a legal right to access the documents without the consent of the parent which  declined to volunteer them.

The Tribunal rejected the argument that the taxpayer's directors could, and should, take individual positive action, using their alleged influence over the parent, on the basis that, an exercise of de facto power could only be by way of actions lawfully open to the directors. This was not the case here, because it would compel the directors to act in breach of their statutory duties not to create a conflict of interest as between the parent and the subsidiary.

Observations