INTM432130 - TIOPA10 Part 4: how it works - FOREX: general
For accounting periods beginning after 30 September 2002
Exchange gains and losses are not directly subject to the transfer pricing regime because of the provisions in CTA09/S447 to CTA09/S452.
However, where there are transactions in respect of loan relationships which are not at arm’s length, certain exchange gains and losses are to be left out of account under Part 5 Chapter 15 of CTA09.
Inward loans
Where a company owes money, the loan relationships rules describe it as having a ‘debtor relationship’. The profits and losses taxable under the loan relationships rules include exchange gains and losses.
If an adjustment under TIOPA10/Part 4 in respect of interest on the loan is made on the basis that the whole or part of the loan could or would not have been made between independent parties, CTA09/S447 ensures that the same proportion, of the exchange gains or losses will be left out of account in determining the loan relationship debits or credits. This means, for example, that exchange gains and losses will usually be left out of account for loan relationships purposes where thin capitalisation adjustments are made under TIOPA10/Part 4.
CTA09/S447(5) ensures that exchange gains or losses on a debtor relationship are not double-counted.
It is important to remember, though, that not every debtor loan relationship on non-arm’s length terms comes within TIOPA10/Part 4. For example, no adjustments to exchange gains and losses are made in respect of interest-free inward loans or where the amount of interest paid is below the arms length amount.
For further information see CFM38530 and CFM38540.
Outward Loans
As far as outward loans are concerned, CTA09/S449 to CTA09/S451 (which govern the treatment of exchange gains and losses on creditor relationships) are not explicitly tied to the operation of TIOPA10/Part 4.
So, where transfer pricing rules operate to impute interest (or a higher rate of interest) on the whole of an outward loan, all the exchange gains and losses will continue to be recognised in full for loan relationships purposes. Exchange gains or losses on creditor loan relationships are to be left out of account only where, and to the extent that, there is no corresponding debtor relationship, i.e. the loan fulfils an equity function.
For further information see CFM38560 onwards.
Loans for unallowable purposes
FA 2002 assimilated exchange gains and losses into the loan relationships regime and so the unallowable purposes rule at CTA09/S441 now extends to exchange gains and losses on loan relationships.
For further information see CFM38100 onwards.
Treatment of loans [or derivatives] matching assets
Companies holding foreign assets may hedge their foreign currency risks by taking out matching loans [or entering into currency swap contracts]. Guidance on the interaction between transfer pricing legislation and legislation governing the treatment of exchange gains and losses on such loans or derivatives is given in INTM432135.
For accounting periods beginning on or before 30 September 2002
FA93/S136 to FA93/S138 provided for the ring fencing of exchange losses on a loan or forward currency contract entered into otherwise than on arm’s length terms. Such losses are available for relief only against future exchange gains arising on the same loan or contract.
For outward loans where ICTA88/SCH28AA applied to impute interest or higher rate of interest, any exchange losses continued to be allowed in full.
Before financial instruments were brought within the loan relationship regime, losses on non-arm’s length transactions on financial instruments could be restricted under FA94/S167.
