INTM436060 - Transfer pricing before CTSA

Section 773(4): the extended meaning of transaction: intangibles, services and outward loans

ICTA88/S770 ICTA 1988 is couched in terms of transactions in 'property'. It relates to the buying and selling of things. However, there are a great many ways in which businesses can undertake trading transactions without necessarily selling and selling what the Business Tax Group at Business International refers to as 'widgets'. ICTA88/S773(4) extends the scope of ICTA88/S770:

Sections 770, 771, except subsection (5)(b), and 772 and this section shall, with the necessary adaptations, have effect in relation to lettings and hirings of property, grants and transfers of rights, interests or licences and the giving of business facilities of whatever kind as they have effect in relation to sales, and the references in those sections to sales, sellers, buyers and prices shall be deemed to be extended accordingly.

Intangibles and services

ICTA88/S773(4) applies to transactions which are not in tangible traded goods, and so includes, amongst other things:

  • rent and hire charges
  • management charges
  • reward for services
  • transactions in intellectual property for the use of trademarks, patents, secret processes, etc (where royalty payments and licence fees are or should be payable)
  • research and development activity

Outward investment

The 'giving of business facilities of whatever kind' was a sweeping up provision, which included transfer pricing aspects of outward investment - the giving of loans at less than commercial interest, etc. This area is covered in detail in the Intra-group funding module, starting at INTM501000. That aspect of ICTA88/S773(4) is considered at INTM501040.

The practical module, starting at INTM460000, deals with ways of selecting and tackling transfer pricing cases, including many of the activities mentioned above, but the basic approach remains the same: that transactions should, for tax purposes, be priced on an arm's length basis, whether that be an arm's length rent, an arm's length rate for the use of a trademark, etc.

The Special Commissioners' decision in the Waterloo case (SpC301) had wide implications, but essentially it was considering the meaning of the phrase 'business facilities of whatever kind' in ICTA88/S773(4) and what was meant by saying that the legislation applied to these types of activities 'with the necessary adaptations'. This case is considered on the next page.

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