INTM432040 - TIOPA10 Part 4: how it works - Meaning of 'provision' in TIOPA10/Part4

Introduction

The term ‘provision’ is not defined in the legislation. It is, however, broadly analogous to the phrase `conditions made or imposed` in Article 9 of the OECD Model Tax Convention, and embraces all the terms and conditions attaching to a transaction or series of transactions. However, although the term provision is arguably wider than the phrase `conditions made or imposed`, TIOPA10/S164 means that it must never be interpreted as such. That is, the scope of TIOPA10/Part4 (previously ICTA88/SCH28AA)can be no wider than the scope of Article 9, as informed by the OECD Transfer Pricing Guidelines.

The actual provision

The actual provision is that which has been made between the two connected parties.

The arm's length provision

The arm's length provision is that which would have been made between independent enterprises. If no provision would have been made or imposed between independent persons then the legislation allows the advantaged person's profits to be computed accordingly - thus reflecting the arm's length position.

In comparing the actual provision with the arm's length provision it is necessary to look at all of the terms and conditions of the transactions in question and to adjust them to arm's length terms if necessary.

An example of this would be where a royalty agreement had been entered into between two parties which binds those parties to terms for a longer period than would be normal between independent parties. The legislation requires the taxpayer to consider and if necessary adjust such structural aspects of the agreement, in addition to the actual royalty rate contained in the agreement. This is further explored in the practical guidance at INTM464130.

See also INTM432055 regarding consideration of ‘provision’ by the Special Commissioners in DSG Retail Limited v HMRC (TC00001).