TTM07300 - The Ring Fence: Transfer pricing: Outline

We need transfer pricing rules to prevent connected parties manipulating prices so as to maximise income within the tonnage tax ring fence and minimise the taxable profits outside the ring fence.

(As the taxable profits within the ring fence are fixed by reference to the tonnage of the ships operated, any reduction in the taxable profits outside the ring fence would not be matched by an increase in the taxable profits within the ring fence.)

Tonnage tax ring fence

The transfer pricing provisions in ICTA88/SCH28AA are therefore extended to cover transactions across the tonnage tax ring fence between persons within the charge to UK tax (and between divisions within a company). These provisions are applied as if the party inside the tonnage tax ring fence was not within the charge to UK tax.

Transactions between a partnership and its members may be caught if the partnership includes both a tonnage tax partner and a non-tonnage tax partner, (see TTM13300).

Scope

The transfer pricing rules apply to transactions (i.e. provisions made or imposed) which are not at arms length (as defined in Sch 28AA). This means that transactions with companies outside the tonnage tax group may be caught. See example below.

Example

Company A (a pure tonnage tax company) and Company B (a non-tonnage tax company belong to tonnage tax group G.

Company C is a joint venture tonnage tax company, owned 50% by Group G (but not controlled by Group G), and 50% by Group H (a non-resident group).

Transactions between Company B and Company C may be caught by the transfer pricing rules, even though B and C are not in the same tonnage tax group.

References