Transfer pricing: legislation: rules: introduction
An introduction to the UK’s transfer pricing legislation
The purpose of the legislation is to counter potential tax loss generated by non arm’s length pricing (see INTM412050) of a business provision (INTM412080) between persons that are not independent (INTM412100). More detail on this basic principle is at INTM412040.
The legislation is not conditional on whether the setting of the actual transfer price was tax driven. It operates by comparing the taxable profit or loss arising from the actual provision with the taxable profit or loss from the arm’s length provision, and replacing the actual provision with the arm’s length provision if it produces a greater taxable profit or lower tax loss. It only acts to reduce a profit or increase a loss through a compensating adjustment; see INTM412130.
There are exemptions from transfer pricing for some companies in some situations. Details can be found at INTM412070.
Self Assessment returns are required to reflect any adjustments to taxable profits or losses that arise from the application of the arm’s length principle, subject to the provisos above.
Legislation for accounting periods ending on or after 1 April 2010 (and income tax years 2010/11 onwards) is at Part 4 Taxation (International and Other Provisions) Act 2010 (‘TIOPA10’).
ICTA88/SCH28AA is the legislative basis for transfer pricing for earlier accounting periods ending on or after 1 July 1999 (and income tax years of assessment 1999/2000 onwards). This guidance refers to TIOPA10 throughout (with some reminders of the earlier legislation).
The legislation provides for the arm’s length principle to be applied to a provision between parties. This is not necessarily limited to single transaction between parties: there may be a wider provision.
TIOPA10/S164 provides that the legislation is to be construed in a manner that best secures consistency with:
- the expression of the arm’s length principle in Article 9 of the OECD Model Tax Convention on Income and on Capital (`Article 9`) and
- the guidance in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the `OECD Transfer Pricing Guidelines`).
This provides a principle for interpreting the legislation, but does not permit the OECD Transfer Pricing Guidelines to override the legislation.
Any references to OECD Transfer Pricing Guidelines means:
- For corporation tax accounting periods beginning prior to 1 April 2011 or income tax years 2010-2011 or earlier: documents published by the OECD before 1 May 1998 (‘the 1995 Guidelines’)
- For corporation tax accounting periods beginning on or after 1 April 2011 or income tax years 2011-2012 or later: the Transfer Pricing Guidelines approved by the OECD Council on 22 July 2010 (‘the 2010 Guidelines’) with any documents, updates or supplements published in the future included only if they are designated by an order made by HM Treasury.
- The OECD is the Organisation for Economic Co-operation and Development, based in Paris. It is a forum for member countries to discuss and compare policy approaches to a wide range of issues, including taxation (see INTM421010).
It is anticipated that in the vast majority of cases the application of either version should result in the same outcome given that the fundamental purpose of both is to provide guidance to assist in confirming or establishing the arm’s length price for the tested transaction. The 2010 Guidelines contain considerably expanded practical guidance on carrying out comparability analyses and the application of the transactional profit methods (see INTM421020, INTM421070 and INTM421080). It might therefore be useful and informative to refer to them with regard to any accounting periods under consideration. However, the strict statutory position remains that the 2010 Guidelines apply only for corporation tax purposes to accounting periods beginning on or after 1 April 2011 and for income tax purposes for the tax year 2011-2012 and subsequent tax years in accordance with TIOPA10/S164(4).