REV BN 17 - Corporation Tax Reform: Transfer Pricing

 
 

Who is likely to be affected?

1. Businesses, which have transactions with connected businesses, such as companies in the same group.

General description of the measure

2. This measure will:

  • end transfer pricing and thin capitalisation requirements for small and medium sized enterprises, in most circumstances;
  • abolish separate thin capitalisation requirements and subsume them within general transfer pricing requirements;
  • extend the scope of transfer pricing requirements for other businesses, which currently apply only to cross-border transactions, so that they apply to transactions within the UK as well;
  • allow the connected UK business to make a corresponding adjustment in the calculation of its taxable income; and
  • exempt companies that are dormant at 1 April 2004 from transfer pricing requirements for as long as they remain dormant.

Operative date

3. These changes apply in relation to the calculation of profit that arises on or after 1 April 2004. In recognition of the practical issues for businesses in introducing or adapting systems to enable them to comply with transfer pricing requirements, there will be a temporary relaxation of penalties for failing to keep evidence to demonstrate that a result is an arm’s length result. This relaxation will last until 31 March 2006.

Current law and proposed revisions

4. Section 770A of, and Schedule 28AA to, the Income and Corporation Taxes Act 1988 (ICTA) require a business to calculate its taxable income by reference to an arm’s length result for transactions with connected businesses outside the scope of UK taxation, where this would increase the amount of the business’ income subject to UK tax.

5. Changes will :

  • extend the scope of Schedule 28AA to include transactions within the UK;
  • repeal parts of Section 209 of ICTA and include thin capitalisation rules within Schedule 28AA;
  • exempt small and medium-sized enterprises from the requirements of Schedule 28AA except in relation to transactions with a related business in a territory with which the UK does not have a double tax treaty containing a suitable non-discrimination article; and
  • enable the Inland Revenue, in exceptional circumstances, to require a medium-sized enterprise to apply transfer pricing rules.

6. Most of the changes were proposed in an Inland Revenue Technical Note “Corporation Tax Reform: The Next Steps”, published for consultation with draft legislation in December 2003, following an earlier document issued in August 2003. In light of comments received during the consultation, the Finance Bill changes will also contain measures to:

  • exempt companies that are dormant at 1 April 2004 from transfer pricing requirements for as long as they remain dormant, which will mean they will continue to be relieved from the requirement to obtain an audit under the Companies Act 1985 and will not be required to make a tax return;
  • allow groups of companies to elect for tax liabilities that arise within special securitisation structures as a result of transfer pricing requirements to be met by a company outside the structure. The election will be subject to the approval of the Board of Inland Revenue.

Further advice

7. A new page is being created on the Inland Revenue Internet site, which will contain draft guidance about the application of transfer pricing requirements. This page will be made available shortly with some initial material. Further material will be added as it becomes available. The Inland Revenue would welcome comments on the scope and content of this guidance.

8. The Inland Revenue can confirm that the changes will be compatible with existing legislation governing the treatment of exchange gains and losses on intra group foreign currency loans used to match exchange gains and losses on assets, and will not disrupt such hedging arrangements. Draft guidance will be published explaining this interface.

9. If you have any questions about this change, please visit the page mentioned at point 7 above - /international/transfer-pricing.htm or contact Neil Rider on 020 7438 7710.

www.inlandrevenue.gov.uk

 

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