Clause 188: Double taxation relief by way of credit for foreign tax

380.     This clause requires a reduction in the amount of DTR given against United Kingdom tax, whether given unilaterally or by treaty, where a disadvantaged person’s profits are reduced as a result of a claim under clause 174. It is based on paragraphs 7 and 14(1) and (3) of Schedule 28AA to ICTA.

381.     Without the reduction required by this paragraph a UK resident would obtain relief for foreign tax which would exceed the actual foreign tax payable on the reduced profits. The foreign tax is therefore restricted to what would have been payable if the adjusted profits were the actual profits.

Clause 189: Double taxation relief by way of deduction for foreign tax

382.     This clause requires a restriction in foreign tax given as a deduction from United Kingdom profits under clause 112 where a disadvantaged person’s profits are reduced as a result of a claim under clause 174. It is based on paragraph 7(3) to (5) of Schedule 28AA to ICTA.

383.     Without the reduction required by this clause a UK resident would obtain relief for foreign tax which would exceed the actual foreign tax payable on the reduced profits. The foreign tax is therefore restricted to what would have been payable if the adjusted profits were the actual profits.

Clause 190: Meaning of “relevant notice”

384.     This clause gives the definition of “relevant notice” for the purposes of this Chapter. It is based on paragraphs 6(7) and 6C(10) of Schedule 28AA to ICTA and section 111(6) of FA 1998.

Chapter 5: Position of guarantor of affected person’s liabilities under a security issued by the person

Overview

385.     This Chapter provides for the guarantor company to obtain a deduction for interest which is disallowed on the advantaged company under clause 147 (basic transfer pricing rule) because clause 153 (guarantees on issue of a security) operates to cause the guarantee given on the issue of the security to be treated as one that would not be given if the parties were at arm’s length.

Clause 191: When sections 192 to 194 apply

386.     This clause explains that clause 192 (as supplemented by clauses 193 and 194) applies when interest paid under a security is disallowed under clause 147 as a result of the operation of clause 153 in the case of a guarantee given for liabilities under the security. It is based on paragraphs 1A(7), (9) and (10) and 6D(1) and (10) of Schedule 28AA to ICTA.

Clause 192: Attribution to guarantor company of things done by issuing company

387.     This clause requires the guarantor company to be treated as the issuing company on the making of a claim but only in order to allow the guarantor company to obtain a deduction for the disallowed interest. It is based on paragraphs 1A(7) and 6D(2), (3), (10) and (11) of Schedule 28AA to ICTA.

388.     The closing words of paragraph 6D(2) have not been rewritten as adding nothing to the preceding provisions of the sub-paragraph.

Clause 193: Interaction between claims under sections 174 and 192(1)

389.     This clause ensures that only one compensating adjustment is given where the guarantor makes a claim under clause 192 and the lender makes a claim under clause 174. This may happen where the lender and borrower are connected for the purposes of this Part. It is based on paragraph 6D(4) to (7) of Schedule 28AA to ICTA.

Clause 194: Claims under section 192(1): general provisions

390.     This clause explains who can make the claim under clause 192 and applies the provisions, as appropriate, in clauses 175 to 177. It is based on paragraph 6D(8) and (9) of Schedule 28AA to ICTA.

Chapter 6: Balancing payments

Overview

391.     Balancing payments may be made following a transfer pricing adjustment and are not taken into account in computing profits and losses. These payments enable the result of a transaction between two connected persons to be adjusted so that the persons end up in a position they would have been in had they been taxed on the basis of their actual transaction.

392.     Balancing payments may also be made in cases where a guarantee is given and there is a transfer pricing adjustment as a result of the operation of clause 153. Here the guarantor makes a payment to the borrower in recognition of the fact that the guarantor has received the benefit of the interest deduction, thus restoring the cash position to its original state.

393.     The disadvantaged person or guarantor may alternatively elect to pay the additional tax incurred by the advantaged person following a transfer pricing adjustment.

Clause 195: Qualifying conditions for purposes of section 196

394.     This clause provides the qualifying conditions for clause 196. It is based on paragraph 7A(1) of Schedule 28AA to ICTA.

Clause 196: Balancing payments between affected persons: no charge to, or relief from, tax

395.     This clause prevents balancing payments from being taken into account for tax purposes up to the level of the available compensating adjustment. It is based on paragraph 7A(1) to (3) of Schedule 28AA to ICTA.

Clause 197: Qualifying conditions for purposes of section 198

396.     This clause provides the qualifying conditions for clause 198. It is based on paragraphs 1A(7), (9) and (10) and 7C(1) of Schedule 28AA to ICTA.

Clause 198: Balancing payments by guarantor to issuer: no charge to, or relief from, tax

397.     This clause prevents balancing payments by the guarantor company from being taken into account for tax purposes. It is based on paragraph 7C(1) and (2) of Schedule 28AA to ICTA.

Clause 199: Pre-conditions for making election under section 200

398.     This clause provides the conditions for clause 200. It is based on paragraphs 1A(9) and (10) and 7B(1) to (3) and (10) of Schedule 28AA to ICTA.

Clause 200: Election to pay tax rather than make balancing payments

399.     This clause allows the disadvantaged person to elect to pay the tax of the advantaged person rather than to make a balancing payment within clause 196. It is based on paragraph 7B(2) and (4) of Schedule 28AA to ICTA.

Clause 201: Pre-conditions for making election under section 202

400.     This clause provides the conditions for clause 202. It is based on paragraphs 1A(7), (9) and (10), 7B(2) and 7D(1) to (3) of Schedule 28AA to ICTA.

Clause 202: Election, in guarantee case, to pay tax rather than make balancing payments

401.     This clause allows the disadvantaged person in a guarantee case to elect to pay the tax of the advantaged person rather than to make a balancing payment within clause 198. It is based on paragraphs 7B(2) and (4) and 7D(2) and (4) of Schedule 28AA to ICTA.

Clause 203: Elections under section 200 or 202

402.     This clause explains how elections under clauses 200 and 202 are to be made and the effect of such elections. It is based on paragraphs 7B(5) to (9) and 7D(2) of Schedule 28AA to ICTA.

Clause 204: Meaning of “capital market condition” in sections 199 and 201

403.     This clause explains the meaning of “capital market condition” and is based on paragraphs 1A(8), 7B(1), (3), (9) and (10) and 7D(2) to Schedule 28AA to ICTA.

404.     Paragraph 7B(9) of Schedule 28AA excludes from the definition of “independent person” a person who has a participatory relationship with either of the affected persons. Paragraph 7B(10) applies the definition of “participatory relationship” given in paragraph 1A of Schedule 28AA. That definition is expressed to be about cases where one company has a participatory relationship with another company. It therefore suggests that a person excluded by paragraph (b) of the definition of “independent person” must necessarily be a company. While there may be an argument that the definition in paragraph 1A should apply with modifications to make it work in the context of paragraph 7B, such an argument is not considered persuasive.

Chapter 7: Oil-related ring-fence trades

Overview

405.     This Chapter has to be read with clause 147(4). Between them they apply the Part to transactions between the ring-fence trade of an oil company and other activities engaged in by that same company as if they were separate enterprises.

Clause 205: Provision made or imposed between ring-fence trade and other activities

406.     If provision is made or imposed as between the ring-fence trade of an oil company and other activities of that company this clause has the effect that this Part applies as if that trade and those other activities were carried on by two separate persons controlled by the same person. It is based on paragraph 11(1), (3) and (4) of Schedule 28AA to ICTA.

407.     In subsection (1)(a) the words “oil-related” have been added to “ring-fence trade” in paragraph 11(1) and (3) of Schedule 28AA to make clear the area of taxation referred to. “Oil-related ring-fence trade” is defined in clause 206.

Clause 206: Meaning of “oil-related ring-fence trade” in sections 205 and 218

408.     This clause gives the meaning of “oil-related ring-fence trade” and is based on paragraph 11(1) of Schedule 28AA to ICTA and section 85(7) of FA 1999.

Chapter 8: Supplementary provisions and interpretation of Part

Overview

409.     This Chapter contains provisions on various matters relating to the Part: application to unit trusts, transfer-pricing determinations requiring the sanction of the Commissioners for HMRC, determination of appeals, effects on capital allowances and chargeable gains, the manner of making adjustments and some definitions.

Clause 207: Application of Part to unit trusts

410.     This clause explains how the transfer pricing rules in this Part are applied to unit trusts and is based on paragraph 14(5) of Schedule 28AA to ICTA.

Clause 208: The determinations which require the Commissioners’ sanction

411.     This clause provides that certain determinations in transfer pricing cases require the sanction of the Commissioners for HMRC and is based on section 110(1), (4) and (9) of FA 1998.

Clause 209: Determinations exempt from requirement for Commissioners’ sanction

412.     This clause sets out the circumstances in which a Commissioners’ sanction under clause 208 is not required and is based on section 110(5) to (7) of FA 1998.

Clause 210: The requirement for the Commissioners’ sanction

413.     This clause applies certain rules where a transfer-pricing determination requires the Commissioners’ sanction and is based on section 110(1) to (3) of FA 1998.

414.     If a transfer-pricing determination requires the Commissioners’ sanction, the determination will be one made for the purposes of a notice or matter mentioned in clause 208(3). This clause applies when the notice, or notice of the matter, is given. If the determination (so far as relating to the notice or matter) has not been approved by the Commissioners or if the determination has been approved but the taxpayer is not informed that approval has been given, the notice or matter has the effect it would have if it had been prepared without taking account of the determination.

Clause 211: Restriction of right to appeal against Commissioners’ approval

415.     This clause provides that the Commissioners’ approval of a determination for the purposes of clause 210(2) or (4) may not be questioned on an appeal. It is based on section 110(8) of FA 1998.

Clause 212: Appeals

416.     This clause provides rules relating to proceedings on appeals against matters relevant to this Part. It is based on paragraph 12 of Schedule 28AA to ICTA.

Clause 213: Capital allowances

417.     This clause prevents the transfer pricing provisions from applying for the purposes of capital allowances and balancing charges. It is based on paragraph 13(1) and (2) of Schedule 28AA to ICTA.

Clause 214: Chargeable gains

418.     This clause prevents the transfer pricing provisions from applying for the purposes of chargeable gains. TCGA has its own arm’s length rule. It is based on paragraph 13(1) and (2) of Schedule 28AA to ICTA.

Clause 215: Manner of making adjustments to give effect to Part

419.     This clause explains how adjustments under this Part are to be made. It is based on paragraphs 6C(8) and 14(4) of Schedule 28AA to ICTA.

Clause 216: Meaning of “the relevant activities”

420.     This clause gives the meaning of “the relevant activities”. It is based on paragraph 14(1) of Schedule 28AA to ICTA.

Clause 217: Meaning of “control” and “firm”

421.     This clause gives the meaning of “control” and “firm” for the purposes of this Part and also applies a special meaning of “control” for applying the transfer pricing rules in relation to company oil sales. It is based on paragraphs 9 and 14(2) of Schedule 28AA to ICTA.

422.     The definition of “control” is by reference to clause 1124 of CTB2 which has rewritten section 840 of ICTA.

423.     Under the definition of control for company oil sales, the oil producer, seller and buyer are connected persons for the purposes of the Part where the control threshold would not otherwise be met because the shareholding is insufficient. This allows the transfer pricing rules to apply where the oil-producing company is owned by a consortium.

Part 5: Advance pricing agreements

Overview

424.     This Part provides the rules on APAs. These are written agreements between an enterprise and the Commissioners for HMRC which determine a method for resolving pricing issues in advance of a return being made. When the terms of the agreement are complied with they provide assurance that the treatment of those pricing issues will be accepted by both HMRC and the enterprise for the period covered by the agreement.

425.     The APA legislation was put in place to enable HMRC to enter into APAs independently of pricing agreements under DTAs.

426.     The Part sets out the matters which can be covered by an APA, what a taxpayer must do to obtain an agreement and how an agreement is applied.

Clause 218: Meaning of “advance pricing agreement”

427.     This clause gives the meaning of an APA and the matters it can cover. It is based on section 85(1) and (2) of FA 1999 and section 153(2) of FA 2003.

428.     Subsection (2)(a) applies only to persons other than companies. It is based on section 85(2)(a) of FA 1999, but without the meaning of “permanent establishment” applied by section 153(2)(c) of FA 2003 in cases where the taxpayer is a company. This subsection allows agreement on income chargeable as arising in the United Kingdom under the territorial provisions of ITTOIA (see in particular section 6(2) of that Act).

429.     Subsection (2)(b) rewrites section 85(2)(a) of FA 1999 with the modification for companies applied by section 153(2)(c) of FA 2003. It allows agreement in the case of income attributed to a permanent establishment in the United Kingdom under Chapter 4 of Part 2 of CTA 2009.

430.     Subsection (2)(c) is based on section 85(2)(b) of FA 1999. For the meaning of permanent establishment see Chapter 2 of Part 24 of CTB2.

431.     Subsection (2)(d) allows agreement on the territorial location of income and subsection (2)(e) covers transfer pricing matters.

432.     Subsection (2)(f) deals with the application of transfer pricing provisions to oil-related ring fence trades.

Clause 219: Meaning of “associate” in section 218(2)(e)

433.     This clause brings in the meaning of direct and indirect participation given by Part 4 (transfer pricing) for the purposes of clause 218(2)(e) (advance pricing agreement). It is based on section 85(6) of FA 1999.

Clause 220: Effect of agreement on party to it

434.     This clause provides that matters covered by an APA are to be determined under the agreement without reference to the usual means of determining such questions. In the case of transfer pricing matters, although reference to Part 4 may be excluded, an APA cannot exclude reference to other statutory provisions. The clause is based on section 85(1), (3), (4) and (8) of FA 1999.

435.     The opening words of section 85(3) of FA 1999 make section 85 subject to the following provisions of the section and to section 86. This is regarded, in fact, as referring to the remainder of section 85(3) and to sections 85(4) and 86(2) only and subsection (3) is drafted accordingly.

436.     Subsection (5) rewrites, in section 85(4)(b), “a question falling within another paragraph of that subsection”. That subsection refers to section 85(2) which is rewritten in clause 218(2). These words are rewritten as “a question that relates to a matter within another paragraph of clause 218(2)” since section 85(2) (and clause 218) lists “matters” rather than “questions”.

Clause 221: Effect of revocation of agreement or breach of its conditions

437.     This clause states the conditions under which an APA does not have effect. It is based on section 86(2) of FA 1999.

Clause 222: Effect of agreement on non-parties

438.     This clause applies if one of the parties to a transfer pricing transaction has entered into an APA in relation to that transaction. The clause provides that the APA also applies in the case of the other party to the transfer pricing transaction for the purpose of determining questions related to the transaction. The clause is based on section 87 of FA 1999.

Clause 223: Application for agreement

439.     This clause specifies the requirements that apply as regards an application for an APA made to HMRC by a taxpayer. It is based on section 85(1) and (5) of FA 1999.

Clause 224: Provision in agreement about years ended or begun before agreement made

440.     This clause allows an APA to cover a period before the APA is made and gives effect to provisions of an APA relating to a period ending or beginning before the APA is made. It is based on sections 85(8) and 86(1) and (7) of FA 1999.

Clause 225: Modification and revocation of agreement

441.     This clause allows an APA to provide for HMRC to determine the time from which any modification or revocation of the APA is to take effect in a case where the APA gives HMRC powers to modify or revoke the agreement. It is based on section 86(6) of FA 1999.

Clause 226: Annulment of agreement for misrepresentation

442.     This clause allows an APA to be nullified if the Commissioners for HMRC have been provided by the other party with fraudulent or negligent information. It is based on section 86(5) of FA 1999.

Clause 227: Penalty for misrepresentation in connection with agreement

443.     This clause provides the maximum penalty for fraudulently or negligently providing false or misleading information in connection with the preparation of an APA. It is based on section 86(8) of FA 1999.

Clause 228: Party to agreement: duty to provide information

444.     This clause places a duty on a party to an APA to provide the Commissioners for HMRC with reports and other information. It is based on section 86(4) of FA 1999.

Clause 229: Modifications of agreement for double taxation purposes

445.     This clause provides that mutual agreements under a DTA take precedence over APAs. It is based on section 86(3) and (10) of FA 1999.

446.     “Mutual agreement” is undefined in the Taxes Acts but considered to have the same meaning as in clause 124 (section 815AA of ICTA) where it refers to agreements between the United Kingdom and an authority in a territory with which the United Kingdom has a DTA. Such agreements are envisaged in Article 25 of the OECD model taxation convention.

Clause 230: Interpretation of Part: meaning of “Commissioners” and “officer”

447.     This clause is based on sections 85(1) and (5) and 86(2) to (6) and (8) of FA 1999.

Part 6: Tax arbitrage

Overview

448.     This Chapter rewrites sections 24 to 28 and 30 of, and Schedule 3 to, F(No 2)A 2005, which were enacted to counteract avoidance involving tax arbitrage (“the tax arbitrage provisions”).

449.     Different jurisdictions have different tax regimes, and different tax regimes often treat the same transaction in different ways. Multinational groups can arrange their affairs to take advantage of such discrepancies: this practice is called “tax arbitrage”. In tax arbitrage, the multinational group benefits at the expense of one or more of the fiscs.

450.     The provisions in this Chapter have to be specifically activated by a notice from HMRC.

451.     In general, the tax arbitrage provisions apply where an arbitrage scheme using a hybrid entity or instrument results in:

• a double deduction for the same expense, or a UK deduction for the payer in circumstances where the recipient is not taxed on the receipt (because, for example, a tax credit has eliminated a liability to tax); or

• amounts being received by a company in a way that would not otherwise be taxable in the UK.

452.     The hybrid entity or instrument will usually have been used deliberately to achieve one of these results.

453.     The tax arbitrage provisions deal separately with deduction cases and receipts cases.

454.     The clauses in this Chapter are laid out in the following order.

• Clause 231 introduces the Chapter.

• Clauses 232 to 235 are about deduction notices.

• Clauses 236 to 242 are about the kinds of schemes which may be counteracted by deduction notices.

• Clauses 243 to 248 are about the consequences of deduction notices.

• Clauses 249 to 254 are about receipt notices.

• Clauses 255 to 257 make general provision about deduction notices and receipt notices.

• Clauses 258 and 259 are interpretative.

Clause 231: Overview

455.     This clause introduces the Chapter and summarises its structure. It is new.