Taxation (International And Other Provisions) Bill - continued          House of Commons

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Chapter 1: Basic transfer-pricing rule

Overview

306.     This Chapter gives the basic transfer-pricing rule and explains the meaning of “participation condition”.

Clause 146: Application of this Part

307.     This clause provides that the Part applies for both corporation tax and income tax purposes. It is based on section 832(3) of ICTA.

Clause 147: Tax calculations to be based on arm’s length, not actual, provision

308.     This clause gives the conditions necessary for the Part to apply (broadly where a transaction take place between two persons who meet the “participation condition” and that transaction differs from one at arm’s length) and the basic transfer pricing rule that the profits and losses should be computed as if the transaction had been at arm’s length. It is based on paragraphs 1(1) and (2), 9(1), 10, and 11(3) of Schedule 28AA to ICTA.

309.     Paragraph 1(2) of Schedule 28AA makes the basic rule subject to paragraph 8 of the Schedule. Subsection (6)(e) and (f) recognise that paragraph 8 is rewritten in Parts 5 (loan relationships) and 7 (derivative contracts) of CTA 2009.

Clause 148: The “participation condition”

310.     This clause explains when the participation condition is met for the purposes of clause 147. It is based on paragraphs 1(1), 4A(6) and 4B(1) and (2) of Schedule 28AA to ICTA.

Chapter 2: Key interpretative provisions

Overview

311.     This Chapter explains terms used in Chapter 1, in particular what is meant by participation by a person in the management, control or capital of another person. The term is used in clause 148 which defines the “participation condition” for clause 147.

Clause 149: “Actual provision” and “affected persons”

312.     This clause gives the meaning for this Part of two terms used in clause 147. It is based on paragraphs 4A(7), 11(3) and 14(1) of Schedule 28AA to ICTA.

Clause 150: “Transaction” and “series of transactions”

313.     This clause gives the meaning of “transaction” and “series of transactions” for this Part and is based on paragraph 3 of Schedule 28AA to ICTA.

Clause 151: “Arm’s length provision”

314.     This clause gives the meaning of “arm’s length provision” by reference to clause 147 and also applies the basic rule where a transaction that has occurred would not in fact have occurred between independent enterprises. It is based on paragraphs 1(3) and 14(1) of Schedule 28AA to ICTA.

Clause 152: Arm’s length provision where actual provision relates to securities

315.     This clause deals with what is generally known as “thin capitalisation”. It provides that, where a security is issued between connected companies, in applying the basic rule in clause 147, account must be taken as to whether the loan concerned would have been made, and would have been made on the same terms, if the parties had been at arm’s length. It is based on paragraph 1A(1) to (5) of Schedule 28AA to ICTA.

Clause 153: Arm’s length provision where security issued and guarantee given

316.     This clause provides that, where a security is issued by one of the affected persons and a guarantee given by the other, in applying the basic rule in clause 147, account must be taken of whether that guarantee would have been given, and would have been given on the same terms, if the parties had been at arm’s length. It is based on paragraph 1B(1) to (5) of Schedule 28AA to ICTA.

Clause 154: Interpretation of sections 152 and 153

317.     This clause explains terms used in the two preceding clauses. It is based on paragraphs 1A(6) to (10) and 1B(6) of Schedule 28AA to ICTA.

Clause 155: “Potential advantage” in relation to United Kingdom taxation

318.     This clause explains what is meant by conferring a potential advantage in relation to United Kingdom taxation in this Part. It is based on paragraph 5(1), (7), (8) and (9) of Schedule 28AA to ICTA.

Clause 156: “Losses” and “profits”

319.     This clause explains the meaning of “losses” and “profits” for this Part and is based on paragraph 14(1) of Schedule 28AA to ICTA, paragraph 5(1) of Schedule 2 to ITTOIA, paragraph 5(1) of Schedule 2 to ITA and paragraph 5(1) of Schedule 2 to CTA 2009.

320.     Paragraph 14(1) of Schedule 28AA to ICTA brings relief in accordance with section 468L(5) of ICTA within the definition of losses for the purposes of that Schedule. Section 468L was repealed by section 17(1) of F(No 2)A 2005 although section 17(3) confers power to make provision by regulations in place of the provisions repealed by section 17(1) (see SI 2006/964 as amended). Although paragraph 14(1) of Schedule 28AA was not amended in consequence of the repeal of section 468L, this clause does not include a reference to relief under section 468L as there is now no such relief.

Clause 157: Direct participation

321.     This clause explains what is meant by direct participation in the management, control or capital of another person. It is based on section 808B(9) of ICTA, paragraph 4(1) of Schedule 28AA to ICTA and section 85(6) of FA 1999.

322.     “Partnership” in paragraph 4(1) is rewritten in subsection (2) as “firm” in accordance with rewrite practice.

Clause 158: Indirect participation: defined by sections 159 to 162

323.     This clause lists the meanings which apply for each reference to indirect participation in clauses 159 to 162. It is based on section 808B(9) of, and paragraphs 4(2), 4A(1) and (2) and 6(4C) of Schedule 28AA to, ICTA and section 85(6) of FA 1999.

324.     Clauses 159 to 162 set out four possible meanings of indirect participation in the management, control or capital of another person. Any particular reference to indirect participation has two or three of those meanings.

Clause 159: Indirect participation: potential direct participant

325.     This clause provides for a person to be indirectly participating in the management, control or capital of another if that person would be a direct participant in the other (see clause 157) were the person to have the rights and powers listed in subsection (3). It is based on section 808B(9) of, and paragraph 4(2) to (6) and (10) of Schedule 28AA to, ICTA and section 85(6) of FA 1999.

326.     Subsection (6), which rewrites paragraph 4(6) of Schedule 28AA, serves to clarify that all connected parties must be considered in applying the rule in subsection (3)(e), which rewrites paragraph 4(3)(d) of Schedule 28AA.

Clause 160: Indirect participation: one of several major participants

327.     This clause provides that a person is indirectly participating in the management, control or capital of another person where a 40% holdings test is met. It is based on section 808B(9) of, and paragraph 4(2) and (7) to (10) of Schedule 28AA to, ICTA and section 85(6) of FA 1999.

328.     For the 40% test to be met two conditions must apply. The first condition is that the person, along with another person, must between them control the body or firm. Then, looking at the holdings, rights and powers that give the pair control of the body or firm, the second condition is that each of the pair must have at least a 40% share of all holdings, rights and powers of the kinds that give them that control. It is possible to read the clause (and the source legislation) as saying that each of the pair must merely have a 40% share of their combined stake. This alternative reading would, however, be less favourable to taxpayers and does not reflect the approach that has been taken in HMRC’s published International Manual at INTM 432070.

329.     “Enterprise” in subsections (2) and (3) is not defined. It is a term used in Article 9 of the OECD Model Taxation Convention and defined in Article 3 as “the carrying on of any business”. Article 3 goes on to say that “business” includes the performance of professional services and of other activities of an independent character. This meaning of enterprise applies here by virtue of clause 164 which requires this Part to be read consistently with Article 9.

Clause 161: Indirect participation: sections 148 and 175: financing cases

330.     Under this clause an affected person acting with others to provide financing arrangements to the other affected person is treated as indirectly participating in that person’s management, control or capital. It is based on paragraphs 4A(1), (3) to (6) and 6(4C) of Schedule 28AA to ICTA.

Clause 162: Indirect participation: sections 148 and 175: further financing cases

331.     This clause provides for someone other than an affected person acting with others to provide financing arrangements to the other affected persons to be treated as indirectly participating in their management, control or capital. It is based on paragraphs 4A(2) to (6) and 6(4C) of Schedule 28AA to ICTA.

Clause 163: Meaning of “connected” in section 159

332.     This clause gives the meaning of “connected” for clause 159. It is based on paragraph 4(11) and (12) of Schedule 28AA to ICTA.

Clause 164: Part to be interpreted in accordance with OECD principles

333.     This clause requires the Part to be read in a way that is consistent with the way in which Article 9 of the OECD model taxation treaty is read when included in a tax treaty entered into by the United Kingdom. It is based on paragraphs 2 and 14(1) of Schedule 28AA to, ICTA.

334.     This requirement is regardless as to whether there is or is not a tax treaty between the United Kingdom and any particular non-UK territory.

335.     This clause imports into the transfer pricing legislation not only the principles of Article 9 of the OECD model taxation treaty but also that organisation’s transfer pricing guidelines. The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration referred to in subsection (4)(a), were first issued in 1979 and extensively updated in 1995 with revisions and additions published periodically.

336.     No Treasury order has been issued under paragraph 2(3)(b) of Schedule 28AA to ICTA, which is the provision rewritten by subsection (4)(b).

337.     Subsection (2) recognises that paragraph 8 is rewritten in Parts 5 (loan relationships) and 7 (derivative contracts) of CTA 2009.

Chapter 3: Exemptions from basic rule

Overview

338.     This Chapter gives the exemptions from the basic transfer-pricing rule in clause 147 for dormant companies and small and medium-sized enterprises.

Clause 165: Exemption for dormant companies

339.     This clause exempts dormant companies from the basic rule in clause 147. It is based on paragraph 5A of Schedule 28AA to ICTA.

Clause 166: Exemption for small and medium-sized enterprises

340.     This clause exempts, with three exceptions, small and medium-sized enterprises (defined in clause 172) from the basic rule in clause 147. It is based on paragraph 5B(1) and (2) of Schedule 28AA to ICTA.

Clause 167: Small and medium-sized enterprises: exceptions from exemption

341.     This clause gives two of the exceptions to clause 166: where there is an election that the exemption should not apply and where the other affected person is a resident of a non-qualifying territory. This clause is based on paragraph 5B of Schedule 28AA to ICTA.

Clause 168: Medium-sized enterprises: exception from exemption: transfer pricing notice

342.     This clause gives the third exception to the exemption in clause 166. This is where the Commissioners for HMRC give a notice (a “transfer pricing notice”) to the potentially advantaged person that clause 147 is to apply. This clause is based on paragraph 5C(1) of Schedule 28AA to ICTA.

343.     “In question” in paragraph 5C(1)(a) of Schedule 28AA was not rewritten on the ground that it was unnecessary.

344.     “The Board” in paragraph 5C(1)(b) (which meant the Commissioners of Inland Revenue) is rewritten as “the Commissioners for Her Majesty’s Revenue and Customs” in accordance with section 50(1) of CRCA.

Clause 169: Giving of transfer pricing notices

345.     This clause gives details of transfer pricing notices given under clause 168. It is based on paragraph 5C(2) to (4) and (12) of Schedule 28AA to ICTA.

346.     “Officer of the Board” in paragraph 5C(4) and (6) is rewritten as “officer of Revenue and Customs” both here and in clause 170 in accordance with section 50(2) of CRCA.

Clause 170: Appeals against transfer pricing notices

347.     This clause enables a person receiving a transfer pricing notice to appeal within 30 days against the decision to give the notice. It is based on paragraph 5C(5) to (7) of Schedule 28AA to ICTA.

Clause 171: Tax returns where transfer pricing notice given

348.     This clause allows the taxpayer to make amendments to his tax return following receipt of a transfer pricing notice under clause 168. It is based on paragraph 5C(8) to (12) of Schedule 28AA to ICTA.

349.     Paragraph 5C(8)(b) refers to the taxpayer appealing “against the notice” although paragraph 5C(5) states that appeals are against the decision to give the notice. In rewriting paragraph 5C(8)(b) subsection (1) has been made consistent with clause 170(1).

Clause 172: Meaning of “small enterprise” and “medium-sized enterprise”

350.     This clause defines “small enterprise” and “medium-sized enterprise” for purposes of Chapter 3. It is based on paragraph 5D of Schedule 28AA to ICTA.

Clause 173: Meaning of “qualifying territory” and “non-qualifying territory”

351.     This clause defines “qualifying territory” and “non-qualifying territory” for the purposes of Chapter 3. It is based on paragraph 5E of Schedule 28AA to ICTA.

Chapter 4: Position, if only one affected person potentially advantaged, of other affected person

Overview

352.     This Chapter provides for claims to be made by the person whose profits have increased or losses decreased (the disadvantaged person) as a result of another person’s profits decreasing (the advantaged person). The claim prevents double taxation and is only relevant where both the advantaged and disadvantaged persons are liable to UK taxation.

353.     Suppose company A sells goods to connected company B for an amount less than an arm’s length price would require. While this reduces A’s profits it increases B’s profits by the same amount. B may therefore make a claim to reduce its profits by the same amount by which A’s are increased to avoid double taxation on the arm’s length differential which would otherwise arise.

Clause 174: Claim by the affected person who is not potentially advantaged

354.     This clause allows the affected person who is not potentially advantaged to make a claim to calculate profits in accordance with the arm’s length provision imposed on the advantaged person. It is based on paragraphs 6(1) and (2) and 6A(1) of Schedule 28AA to ICTA and paragraph 5(1) of Schedule 2 to CTA 2009.

355.     “For the purposes of this paragraph” in paragraph 6(2) of Schedule 28AA has not been rewritten on the grounds that it was unnecessary to do so since the person making the claim can be expected to identify the purpose for which the claim is made. This omission is consistent with the approach taken in paragraph 6C(2) of Schedule 28AA to ICTA.

356.     Paragraph 6(2) of Schedule 28AA makes a claim subject to paragraph 8 of the Schedule. Subsection (4) of this clause recognises that paragraph 8 is rewritten in CTA 2009, Parts 5 (loan relationships) and 7 (derivative contracts).

357.     Subsection (4) provides that subsection (2) is subject to clause 180 (which rewrites the trading stock rules in paragraph 6A of Schedule 28AA). Although paragraph 6A was not listed in the opening words of paragraph 6(2) of Schedule 28AA, the opening words of paragraph 6A achieve the same result as would have been achieved by such listing.

Clause 175: Claims under section 174 where actual provision relates to a security

358.     This clause prevents a claim from being made under clause 174 where the participatory condition is satisfied as a result of indirect participation (of a kind within clauses 161 and 162) and a guarantee has been issued in respect of a security. It is based on paragraphs 1A(7), (9) and (10) and 6(4A) and (4B) of Schedule 28AA to ICTA.

Clause 176: Claims under section 174: advantaged person must have made return

359.     As a result of this clause a claim under clause 174 may not be made by the disadvantaged person unless an arm’s length calculation of the advantaged person’s profits has been made and the claim is in accordance with that calculation. It is based on paragraph 6(3) and (4) of Schedule 28AA to ICTA.

Clause 177: Time for making, or amending, claim under section 174

360.     This clause provides the time limit for making or amending claims under clause 174. It is based on paragraph 6(5) and (6) of Schedule 28AA to ICTA.

Clause 178: Meaning of “return” in sections 176 and 177

361.     This clause provides the interpretation of “return” in clauses 176 and 177. It is based on paragraph 6(7) of Schedule 28AA of ICTA.

Clause 179: Compensating payment if advantaged person is controlled foreign company

362.     This clause provides for a compensating adjustment to be made to the disadvantaged company where the advantaged company is a non-UK resident company whose profits have been apportioned to UK residents under the controlled foreign company (CFC) provisions in Chapter 4 of Part 17 of ICTA. It is based on paragraph 6B of Schedule 28AA to ICTA.

363.     Because the CFC’s profits on which the adjustment is made are not those of a person on whom a potential advantage in relation to United Kingdom taxation is conferred, the “advantaged person” does not fall within clause 174(1). There is no advantage to the CFC in relation to United Kingdom taxation.

364.     Special provision is therefore required to allow a claim under clause 174. This is done by treating the CFC as if it fell within that clause.

365.     “Chargeable profits” in subsection (1)(b) is the term used by the controlled foreign company legislation for the CFC’s taxable profits (section 747(6) of ICTA).

366.     In subsection (3) the amended readings to clauses 174 to 178 are necessary because the return of the chargeable profits of the CFC is not made by the “advantaged person” (the CFC) but by the company which controls that company and on whom the apportionment of chargeable profits will be made. Likewise the relevant notice will be given to the same company.

Clause 180: Application of section 174(2)(a) in relation to transfers of trading stock etc

367.     This clause provides for a broad timing match between the adjustments arising on the advantaged and disadvantaged company where there is a transfer of stock between the two. It is based on paragraph 6A of Schedule 28AA to ICTA.

368.     A mismatch in timing may arise with stock transfers because, while an increase to open market value of the stock transferred will immediately result in an increase to the transferor company’s profits, the compensating adjustment will not arise in the case of the transferee company until that stock has been disposed of.

Clause 181: Section 182 applies to claims where actual provision relates to a security

369.     This and the following three clauses relate to claims under clause 174 where a security has been issued between companies. This clause provides that the claim may be in accordance with clause 182. It is based on paragraphs 1A(9) and (10) and 6C(1) and (2) of Schedule 28AA to ICTA.

Clause 182: Making of section 182 claims

370.     This clause provides the basic requirements for the claim. It is based on paragraph 6C(3) to (5) of Schedule 28AA to ICTA.

371.     Subsection (3) allows the claim to be made before the calculation of profits has been made by the advantaged person. This allows tax to be deducted from the arm’s length sum rather than the actual sum, thus enabling inward investors to obtain certainty on the consequences of loan financing.

Clause 183: Giving effect to section 182 claims

372.     This clause gives rules applicable to a clause 182 claim. It is based on paragraph 6C(6) to (9) of Schedule 28AA to ICTA.

373.     Subsection (1) means that a clause 182 claim is made outside the rules applied by Schedule 18 to FA 1998 to company tax returns and assessments as the claim relates to the deduction of tax.

374.     Because the claim may be made before a clause 176 calculation has been made, subsection (3) allows claims to be treated as if they were consistent with the eventual calculation.

Clause 184: Amending a section 182 claim if it is followed by a relevant notice

375.     This clause allows either the advantaged or disadvantaged person to amend a clause 182 claim where a closure notice or similar has been served on the advantaged person, in the former case the amendment being treated as made on the disadvantaged person’s behalf. It is based on paragraph 6C(10) to (12) of Schedule 28AA to ICTA.

Clause 185: Notice to potential claimants

376.     This clause requires an officer of Revenue and Customs, on giving a closure etc notice, to inform a disadvantaged person who appears to be entitled to make or amend a claim for compensating relief or to be party to proceedings on an appeal relating to a transfer pricing adjustment. It is based on section 111(1), (2), (4) and (5) of FA 1998 and section 87(5) of FA 1999.

Clause 186: Extending claim period if notice under section 185 not given or given late

377.     This clause allows the Commissioners for HMRC to extend the time limit for the making or amendment of claims for compensating relief if they consider any person has been prejudiced as the result of a notice under clause 185 not being given or being given late. It is based on section 111(3) of FA 1998.

Clause 187: Tax treatment if actual interest exceeds arm’s length interest

378.     This clause requires a company not to deduct tax from interest so far as it exceeds interest payable under the arm’s length rule. It is based on paragraph 6E of Schedule 28AA to ICTA.

379.     Without this rule tax would be deductible from the whole of the interest notwithstanding that that interest was not allowed in the calculation.

 
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Prepared: 19 November 2009