INTM432020 - TIOPA10 Part 4: how it works - Outline of TIOPA10 Part 4

The complete text of this legislation is at TIOPA10/Part 4. Although the legal effect remains the same, it is organised rather differently from ICTA88/SCH28AA. This guidance refers to TIOPA/Part 4 throughout, with some reminders to the previous legislation.

Broadly, TIOPA10/Part 4 operates as follows:

TIOPA10/S147 contains the basic transfer pricing rule, which is based on the arm’s length principle. In summary, it provides that where a ‘provision’ is made between two persons '’by means of a transaction or series of transactions’ and the necessary participation condition is met that provision (“the actual provision”) is compared to the arm's length provision (which would have been made between independent enterprises). If there is a difference in the provisions then , so long as the actual provision confers a potential UK tax advantage on one or both of the affected persons, an adjustment is to be made to the taxable profits of the tax-advantaged person(s). (see INTM432030)

TIOPA10/S147(1)(c) and (7) ensure that non arm’s length disposals and appropriations of oil and gas extracted in the UK or from the UK Continental Shelf are valued under the rules set out in ITTOIA05/S225F onwards and CTA10/S281 onwards, rather than under TIOPA10/Part 4. This ensures that valuation of this oil and gas for corporation tax purposes continue to match the valuation used for Petroleum Revenue Tax purposes (INTM432120).

TIOPA10/S148 explains when the participation condition is met. The condition is a control test and with the help of additional interpretative sections at TIOPA10/S157 to S163 and TIOPA10/S217 (which imports the definition of “control” in CTA10/S1124) it provides, in effect, that the condition is met where one of the two persons controls the other or both are controlled by the same person(s). The condition is also met in joint venture situations where a company or partnership is controlled by persons each having at least a 40% interest. (INTM432060)

TIOPA10/S149 to S156 are interpretative sections, which among other things set out rules for

• the construction of ‘transaction’ and ‘series of transactions’ for the purpose of Part 4 (TIOPA10/S150) - see INTM432050 
• what is meant by ‘arm’s length provision’ (TIOPA10/S151) which includes what was previously ICTA88/SCH28AA Paragraph (1)(3) (the case where provision is made or imposed but no provision would have been made between independent enterprises) - see INTM432040
• what ‘arm’s length provision means where the actual provision between two companies relates to a security issued by one of those companies (TIOPA10/S152 to S154)
• the interpretation of “potential advantage in relation to United Kingdom taxation” (TIOPA10/S155) - see INTM432100.

TIOPA10/S164 provides that TIOPA10/Part 4 is to be construed in a manner consistent with the effect given to the arm’s length principle as expressed in the OECD Model Tax Convention and elaborated upon in the OECD Transfer Pricing Guidelines which support the model. (INTM432030)

TIOPA10/S165 to S173 sets out exemptions from the requirement in TIOPA10/S147 to apply the arm’s length principle in calculating profit arising on or after 1 April 2004, for pre-existing dormant companies that remain dormant, and for small and medium sized companies in most circumstances. (INTM432100)

TIOPA10/S174 onwards provide for a UK taxpayer to claim compensating relief where a provision made between the two UK taxpayers gives rise to a transfer pricing adjustment to the tax computations of the other taxpayer involved . The purpose is to prevent the same profits being taxed twice in the UK. (INTM432160)

TIOPA10/S188 applies only where there is a claim for an adjustment under TIOPA10/S174 and the claimant is entitled to double taxation relief in respect of foreign tax suffered on income arising from the transactions in connection with which the claim is made. It serves to restrict the amount of double taxation relief to that which would have been available had the arm’s length provision applied. (INTM432160)

TIOPA10/S195 onwards allows balancing payments (or in certain cases a transfer of responsibility for discharging tax liability) to be made in circumstances where an adjustment could be made under TIOPA10/S174 onwards in respect of profits arising on or after 1 April 2004.

TIOPA10/S205 applies the transfer pricing rules to transactions across the ‘ring fence’ around UK and UK Continental Shelf oil and gas extraction activities (as defined by TIOPA10/S206). This ring fence prevents taxable profits from these activities being reduced by losses, reliefs, etc. attributed to other activities. (INTM432120)

TIOPA10/S208 onwards sets out the rules around determinations which require or are exempted from the sanction of the Commissioners of Revenue & Customs.

TIOPA10/S212 sets out special rules concerning the hearing of appeals in which transfer pricing matters are at issue. (INTM434070)

TIOPA10/S213 provides that the transfer pricing rules shall not apply for the purpose of computing capital allowances or balancing charges made under CAA2001.

TIOPA10/S214 provides that the transfer pricing rules shall not apply for the purpose of computing chargeable gains or allowable capital losses. (INTM432140)

TIOPA10/S215 describes the manner of giving effect to transfer pricing adjustments

TIOPA10/S216 and S217 define certain terms used in the schedule.