INTM489435 - The Unassessed Transfer Pricing Profits Examples: Example 10 - Banking group

For the purposes of this example, we have assumed that the UK banking entity’s profits are not liable to the banking surcharge in this accounting period.

If it was reasonable to assume that arrangements involving a UK bank were designed to avoid or reduce the banking surcharge, then this would need to be taken into account in the ETMO and TDC analysis. The banking surcharge targeted anti-avoidance rules (BKM400000) may also apply.

Facts

  • Company A is a UK banking entity which is part of a multinational banking group.
  • As part of “recovery and resolution” planning, the banking group places crucial back-office shared services into a separate service company, Company B located in Country B. The services performed are high value and are performed by specialist staff in Country B. Country B has a lower corporation tax rate than the UK.
  • Company A pays an arm’s length fee to Company B for its back-office services.

Analysis

  • The provision is back-office services provided by Company B to Company A.
  • There are no unassessed transfer pricing profits. The staff of Company B are performing high value roles in providing the services, and the fees received by Company B from group entities are attributable to the ongoing functions of its staff. There is no contrivance in this arrangement.
  • If the fee paid by Company A was in excess of the arm’s length amount such that there were unassessed transfer pricing profits, then the provision could give rise to an ETMO because Company B’s profits are subject to a lower corporation tax rate than Company A’s profits.
  •  When applying the TDC, the banking group’s decision to establish a separate service company which performed back-office business recovery services was commercial. However, further fact finding would likely take place and consideration would need to be given to the reasons why the back-office functions were located in Company B and the reasons why the fees charged were in excess of the arm’s length amount, before a conclusion was drawn on whether tax was also a key factor behind the design of the arrangements.