INTM432030 - TIOPA10 Part 4: how it works - Basic rule and OECD construction
TIOPA10/S147 (previously ICTA88/SCH28AA/Para1) contains the basic transfer pricing rule, which is founded on the arm's length principle. It is widely drawn and is subject to the rules of interpretation in TIOPA10/S164.
The basic rule is set out in TIOPA10/S147(3) and (5). It requires a person’s or persons’ profits and losses to be calculated for tax purposes by substituting an arm’s length provision for an actual provision if certain criteria are met.
Those criteria are that a ‘basic pre-condition’ is satisfied (TIOPA10/S147(2)(a)) and the actual provision confers on the person or persons a potential advantage in relation to UK taxation (TIOPA10/S147(2)(b) and (4)(b)).
The ‘basic pre-condition’ is defined in TIOPA10/S147(1) being where
- an actual provision (see INTM432040) has been made or imposed between any two affected persons by means of a transaction or series of transactions (TIOPA10/S147(1)(a))
- a ‘participation condition’ is met (TIOPA10/S147(1)(b))
- the actual provision is not within TIOPA10/S147(7) which relates to oil transactions (TIOPA10/S147(1)(c)); and
- there is a difference between the actual provision and the arm’s length provision, i.e. that which would have been made between independent enterprises (TIOPA10/S147(1)(d))
The ‘participation condition’ is defined in TIOPA10/S148 and is met when one of the two affected persons was directly or indirectly participating in the management, control or capital of the other, or a third person was participating in the management, control or capital of both the affected persons (see INTM432090).
Considering the provision between two connected persons extends to asking whether such provision ‘would’ have been made between independent enterprises. However, this can only be done to the extent recommended in the OECD guidelines; see INTM464130.
What is meant by potential UK tax advantage is explained at TIOPA10/S155 - see INTM432100. The wording of the section means that TIOPA10/S147(3) or (5) can only be applied where the resulting transfer pricing adjustment would be an increase in taxable profits or a reduction in tax losses. This `one way street` approach is a core feature of the legislation.
TIOPA10/S164 says that the schedule is to be construed in a manner as best secures consistency with:
- the expression of the arm's length principle in Article 9 of the OECD Model Tax Convention on Income and on Capital (`Article 9`) and
- the guidance in the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the `OECD Transfer Pricing Guidelines`).
Where interpretations of the basic rule conflict, the OECD material takes precedence.
The reference to the OECD Transfer Pricing Guidelines means:
| i | For corporation tax accounting periods beginning prior to 1 April 2011 or income tax years 2010-2011 or earlier, documents published by the OECD before 1 May 1998 (‘the 1995 Guidelines’) | |
| ii | For corporation tax accounting periods beginning on or after 1 April 2011 or income tax years 2011-2012 or later, the Transfer Pricing Guidelines approved by the OECD Council on 22 July 2010 (‘the 2010 Guidelines’) with any documents, updates or supplements published in the future included only if they are designated by an order made by the Treasury |
It is anticipated that in the vast majority of cases the application of either version should result in the same outcome given that the fundamental purpose of both is to provide guidance to assist in confirming or establishing the arm’s length price for the tested transaction. The 2010 Guidelines contain considerably expanded practical guidance on carrying out comparability analyses and the application of the transactional profit methods (see INTM463020 and INTM463060 to INTM463080). It might therefore be useful and informative to refer to them with regard to any accounting periods under consideration. However, the strict statutory position remains that the 2010 Guidelines apply only for corporation tax purposes to accounting periods beginning on or after 1 April 2011 and for income tax purposes for the tax year 2011-2012 and subsequent tax years in accordance with TIOPA10/S164(4).
Note: Except where otherwise stated, future references in these instructions to paragraphs within the OECD Transfer Pricing Guidelines are to the 2010 version with the equivalent 1995 paragraph (where applicable) given in brackets following
The legislation requires interpretation in accordance with Article 9 and the OECD Transfer Pricing Guidelines regardless of whether there is a double taxation agreement between the states of the affected persons and regardless of the specific wording of any such agreement.
