OT20332 - Corporation Tax General

Transfer Pricing. CTSA Periods.

Under ICTA88\sch28AA:

(i) the new transfer pricing rules continue to apply to cross ring fence transactions even where both parties are UK resident [para11(1) and (2)]. But

the rules are extended to cover cross ring fence transactions within a single company. [para11(3)]. Where a company carries on both ring fence and non ring fence activities these are treated for the purposes of Schedule 28AA as if they were separate businesses carried on by separate companies under common control.

on the other hand transactions between one ring fence company and another ring fence company are no longer caught by the transfer pricing rules as they are outwith the terms of para 11(2).

Transfer pricing adjustments to cross ring fence transactions are subject to the "one way street" principle - they can only be made where the substitution of an arm’s length price would increase ring fence profits. Thus, if a group’s head office services, for example, are charged out to its ring fence business at cost, Schedule 28AA cannot be invoked by the company to substitute a higher arm’s length price that would reduce its ring fence profits for tax purposes.

Where an adjustment to ring fence profits falls to be made under para 11(2) Schedule 28AA and the other party is a UK company, it can claim a corresponding adjustment to its computations, by virtue of para 6; and the same principle applies, by virtue of para 1(2), if the adjustment is made within a single company under para 11(3). If the effect of the corresponding adjustment would be to reduce non-ring fence profits on which UK CT would be paid for the period concerned, there may be no overall tax effect. In such cases the question of whether an adjustment should be made to ring fence profits may not in practice be worth pursuit.

(ii) the normal transfer pricing rules continue to be overridden where transactions are subject to s493 [para 10].

(iii) the new transfer pricing rules apply in the case of all companies to transactions between the overseas branch of a UK resident and an associated UK resident, so the special rule for oil companies is no longer required and has been dropped.

(iv) The control test continues to be extended to cover sales of oil produced by a company in which the buyer and its associates have an interest of 20% or more [para 9]. But the special valuation rules at s771(6) have been dropped. (Again, these points will not generally be relevant to North Sea companies, since their non-arm’s length sales will be within s493.)