Transfer pricing: legislation: rules: Compensating adjustments
Compensating adjustments associated with UK transfer pricing adjustments
Where a transfer pricing adjustment has been made to one party to an actual provision another party, who is not a potentially advantaged party (see INTM412020), may make a claim under TIOPA10/S174 to adjust their taxable profits if the relevant criteria are met.
The criteria are:
- Only one of the parties to the provision is an advantaged person in respect of that provision; and
- The other affected person is within the charge to income or corporation tax in respect of the relevant profits (and thus is a “disadvantaged person”); and
- The advantaged person has made a return or has been given a relevant notice on the basis of the arm’s length provision (TIOPA10/S176).
The disadvantaged person has two years to make a claim from the date the advantaged person makes their return or is issued with the relevant notice.
In a case where an enquiry results in a transfer pricing adjustment but the disadvantaged person has already submitted a return for the relevant period then the disadvantaged party will be able to amend their return accordingly.
A claim does not affect the credits brought into account in respect of closing trading stock, or closing work in progress for accounting periods ending on or after the last day of the accounting period of the advantaged person in which the actual provision was made or imposed.
A claim will not generally affect how exchange gains or losses from loan relationships or derivative contracts are accounted for. See CFM61000 onwards.
Further legislation applies where the provision relates to a security. See INTM413110.
Where a transfer pricing adjustment reduces the amount of the deduction for payment of a royalty in computing the profits of a potentially advantaged person and the person to whom the royalty is paid is chargeable to tax in respect of that royalty under ITTOIA05/S579, that latter person is a “disadvantaged person” and may make a claim under TIOPA10/S174.
Giving effect to such a claim may require repayment of tax withheld by the advantaged person upon payment of the royalty under the provisions of Chapters 6 and 7 of Part 15 ITA07 to the extent that the tax has been withheld on royalties in excess of the arm’s length amount.
Controlled Foreign Companies
Where a UK company has made a transfer pricing uplift of profit as a potentially advantaged person and the counter party to the transaction is a Controlled Foreign Company (CFC) then a compensating adjustment is given in the computation of profit of the CFC because of the assumptions made in undertaking this calculation.
Where there has been a transfer pricing uplift in calculating the profit of a CFC and a UK company is the other party to the transaction then TIOPA/S179 applies and a compensating adjustment is only available if the whole of the apportionable profits are apportionable to UK resident companies under ICTA88/S747(3) and tax is chargeable under ICTA88/S747(4) on the whole of those apportioned profits.
See INTM255600 for more information on CFC computation of chargeable profits.