INTM432110 - TIOPA10 Part 4: how it works - Exemptions: overview

Pre-existing dormant companies

For the purposes of calculating profits arising on or after 1 April 2004, companies that were dormant for an accounting period ending on 31 March, or for the whole of the 3 months prior to 1 April 2004, are exempt from the basic transfer pricing rule in TIOPA10/S147 for as long as they remain continuously dormant (TIOPA10/S165).

For further detail on this exemption, see INTM432114.

Small and medium sized enterprises

For the purposes of calculating profits arising on or after 1 April 2004, TIOPA10/S166 onwards exempts small and medium sized enterprises (see INTM432112 for definition) from the basic transfer pricing rule in TIOPA10/S147, except:

• in relation to transactions with a resident of a territory with which the UK does not have a tax treaty containing a suitable non-discrimination clause; or,
• where the taxpayer elects to disapply the exemption for a particular chargeable period; or,
• if the Commissioners of Revenue & Customs give a medium-sized enterprise a transfer pricing notice requiring the basic transfer pricing rule to be applied in the computation of their profits and losses for that chargeable period

For further detail on this exemption, see INTM432112.

UK-UK transactions

There is no exemption from the basic transfer pricing rule for transactions between UK companies for the purposes of calculating profits arising on or after 1 April 2004 even if those profits arise from transactions entered into before that date.

Where transfer pricing adjustments are made in respect of UK-UK transactions, TIOPA10/S174 onwards provides a mechanism for avoiding a double charge to tax (see INTM432160).

For the purposes of calculating profits arising before 1 April 2004, an exemption from the basic provisions was provided in relation to UK-UK transactions by ICTA88/SCH28AA/PARA5(2) onwards which specified that, subject to certain conditions being satisfied, such transactions would not give rise to a UK tax advantage.. The conditions, which must be satisfied by both parties, were:

1. the person must either be within the charge to income tax and be UK resident, or be within the charge to corporation tax in respect of the profits arising from the relevant activities;
2. no part of the income must be exempt from UK tax; and
3. the person must not be entitled to double taxation relief (either by credit or expense) in respect of any of the profits arising from the relevant activities.

One of the consequences of these conditions is that transactions between a UK company and the overseas permanent establishment of a UK affiliate are subject to the legislation, even in respect of profits arising before 1 April 2004. In those circumstances it would be possible for non-arm's length transfer pricing to give rise to a loss of UK tax.

The term `relevant activities` was interpreted narrowly in accordance with the definition of that term at ICTA88/SCH28AA/PARA14. Thus for example if a transaction was undertaken with the permanent establishment of another company, relevant activities for that company would be those of the permanent establishment alone, insofar as they were distinguishable from those of the company as a whole.

Where the exemption is not available because the conditions described at a-c above are not fulfilled, there was a mechanism in ICTA88/Sch28AA/PARA6 for avoiding a double charge to tax from any resulting transfer pricing adjustment.