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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer pricing: legislation: rules: the basic transfer pricing rule


TIOPA10/S147(3) and (5) contains the basic transfer pricing rule, which is founded on the arm’s length principle (see INTM412040).

The rule requires a person’s or persons’ profits and losses to be calculated for tax purposes by substituting an arm’s length provision for an actual provision if certain criteria are met, which are that

  • a ‘basic pre-condition’ is satisfied (TIOPA10/S147(2)(a)) and
  • the actual provision confers on the person or persons a potential advantage in relation to UK taxation (TIOPA10/S147(2)(b) and (4)(b)).

The meaning of provision is at INTM412050, and the meaning of person is covered at INTM412060.

The ‘basic pre-condition’

is defined by TIOPA10/S147(1) as being where

  • an actual provision (see INTM412050) has been made or imposed between any two affected persons by means of a transaction or series of transactions (see INTM412050 and TIOPA10/S147(1)(a))
  • the ‘participation condition’ is met (TIOPA10/S147(1)(b))
  • the actual provision is not within TIOPA10/S147(7) which relates to oil transactions (TIOPA10/S147(1)(c)), as they have their own rules, see INTM412120; and
  • there is a difference between the actual provision and the arm’s length provision, i.e. that which would have been made between independent enterprises (TIOPA10/S147(1)(d)).

The ‘participation condition’

is defined in TIOPA10/S148 and is met when one of the two affected persons was directly or indirectly participating in the management, control or capital of the other, or a third person was participating in the management, control or capital of both the affected persons (see INTM412060).

Considering the provision between two connected persons extends to asking whether such provision ‘would’ have been made between independent enterprises. However, this can only be done to the extent recommended in the OECD guidelines; see INTM440200.

Potential advantage

TIOPA10/S155 provides that there is a potential advantage in relation to UK taxation if a person’s:

  • taxable profits for a chargeable period are reduced, or
  • tax losses for a period are created or increased
  • as an effect of the provision not being on an arm’s length position.

Where there is a potential advantage, it should be addressed in the return relating to the period in which it arises.

Often only one party to the transaction will be potentially advantaged by the actual provision. However, if both parties to the transaction are potentially advantaged by it, then both would need to make an adjustment.