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HMRC internal manual

International Manual

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Transfer pricing: the main thin capitalisation legislation: Transaction or series of transactions

What is meant by “provision”?

The basic precondition in TIOPA10/S147(1)(d) permits an adjustment where the actual provision differs from the arm’s length provision. TIOPA10/S147 (7) defines provision as being a transaction or series of transactions. These terms are defined in TIOPA10/S150 (previously SCH28AA/PARA3).

S150(1) says that, for this Part of TIOPA10, ’transaction’

includes arrangements, understandings and mutual practices (whether or not they are, or are intended to be, legally enforceable),

and a series of transactions is defined at S150(2) as

a number of transactions each entered into (whether or not one after the other) in pursuance of, or in relation to, the same arrangement

Transactions within a series do not have to occur in a recognisable sequence. They may be simultaneous or removed in time from one another, but they have to be part of an overall arrangement or scheme.

The meaning of series of transactions is further widened by TIOPA10/S150 (4), which sets out a number of situations that do not prevent a series of transactions being recognised as such. There may be a series of transactions, even if, in relation to the “affected persons” (INTM412030):

  • there is no transaction in the series to which both those persons are parties,
  • the parties to any arrangement in pursuance of which the transactions in the series are entered into do not include one or both of those persons, and
  • there is one or more transactions in the series to which neither of those persons is a party

By recognising a series of transactions, the transfer pricing legislation can apply to more complex and indirect financial structures in the same way that it does to the most straightforward borrower / lender situation. However, irrespective of the complexity or number of transactions which make up the “series”, it should always be borne in mind that this legislation is still about a provision within TIOPA10/S147 between two persons that results in a tax advantage; see INTM412020 and INTM413050.

Examples of “series of transactions”

A simple example of indirect finance which would fall within the definition of a series of transactions is a UK borrower being lent money by an entirely unconnected third party bank, with a party connected to the borrower guaranteeing the loan.

A more complex example is where a company in the same group as the UK borrower has provided a guarantee to one bank, which then provides a guarantee to a second bank, and the second bank then lends money to the UK borrower. Here there is a step - between the first and second banks - which does not involve either the parent or the borrower. This is still a series of transactions, and one which, though difficult to detect, would fall within the scope of the thin capitalisation legislation. Apart from the provision of a guarantee, the most likely situations where the provision might consist of a series of transactions would be where an intermediary is acting in a nominee or agency capacity in providing finance cross border between group companies.

In guarantee cases of this nature, the questions to ask in considering the provision are:

  • Without the guarantee(s) would the borrower have been able and willing to borrow on these terms?
  • Had the borrower and the guarantor been at arm’s length from one another, would they have entered into the guarantee?

The specific sections concerning the factors to be considered when evaluating a loan between companies where the loan is guaranteed are TIOPA10/S152 and TIOPA10/S153 (INTM413110).