MTT21125 - Calculating the effective tax rate: Adjusted profits: Intra-group transactions – Permanent differences arising from transfer pricing adjustments
Adjustments are required in certain cases where there is a transaction between two members of the same group that are located in different territories, and the transaction is recorded differently in the underlying profits accounts of each of those members.
There are two different cases in which an adjustment will be required. In each of these cases, the adjustment ensures that the transaction will be reflected in the adjusted profits in accordance with the transfer pricing adjustment. Note that this only applies to the value at which the transaction is recorded, not the timing of the transaction.
This adjustment is set out in section 150 of Finance (No.2) Act 2023.
Transfer pricing adjustment results in corresponding permanent differences for each counterparty
An adjustment is required where:
- there is a transaction between two members of a multinational group that are located in different territories,
- in the underlying profits accounts of those members, that transaction is not recorded in the same amount, is not recorded on an arm’s length basis, or is not recorded at all, and
- each member records a corresponding permanent difference in respect of the transaction, as a result of transfer pricing adjustments made to the taxable income.
In this case, the underlying profits of the members must be adjusted so that the transaction reflects the amount recorded in each member’s respective taxable income.
Transfer pricing adjustment results in permanent difference for high tax counterparty only
An adjustment is required where:
- there is a transaction between two members of a multinational group that are located in different territories,
- in the underlying profits accounts of those members, that transaction is not recorded in the same amount, is not recorded on an arm’s length basis, or is not recorded at all,
- one of the counterparties is a high tax member, and
- a permanent difference arises for the high tax counterparty but not the other counterparty in respect of the transaction, as a result of transfer pricing adjustments made to the taxable income.
In this case, the underlying profits of both members are to be adjusted to reflect the transfer pricing adjustment made to the taxable income of the high tax counterparty.
High tax member
For this purpose, a member is a ‘high tax member’ for an accounting period if either:
- the nominal tax rate that applies to the member exceeds 15% in that period, and
- the effective tax rate of the standard members of the member’s group in the territory where the member is located exceeds 15% in at least one of the two preceding accounting periods, or
- a transitional safe harbour election (see MTT15900+) applies to the member.
Permanent difference
For this purpose, a difference is a ‘permanent difference’ if it is a difference between the treatment of an amount for the purposes of determining the member’s liability to covered taxes and for accounting purposes, and it is not eliminated over time (and so does not give rise to a deferred tax asset or liability).
Post-filing adjustment of covered taxes following transfer pricing adjustment
A transfer pricing adjustment may also result in a post-filing adjustment of covered taxes.