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Transfer Pricing News HMRC's proposed CFC changes incorporate transfer pricing practices Added: 10 February 2012 HMRC is currently carrying out consultations on proposed changes to the UK tax regime for Controlled Foreign Companies (CFCs). The CFC rules operate to tax profits earned by controlled companies in low tax overseas regimes. New draft legislation was issued on 31 January 2012. Within the draft legislation, there are provisions for CFC profits to be taxed in the UK based on the "significant people functions" carried out by UK personnel. The significant people function approach is used in transfer pricing to determine the profits attributable to permanent establishments. Full consultation and draft legislation documents are at http://www.hm-treasury.gov.uk/controlled_foreign_companies.htm Jennifer Paul voted among World's Leading Transfer Pricing Advisers Added: 19 January 2012 Jennifer Paul has been included among Legal Media Group's Leading Transfer Pricing Advisers, a survey based on votes from clients and from other experts. CIOT new Transfer Pricing Certificate Added: 31 March 2011 The
Chartered Institute of Taxation (CIOT) has launched a Transfer Pricing
Option Examination Paper. This is a new option available as either a
stand alone Certificate or as part of the international tax
qualification, ADIT (Advanced Diploma in International Taxation). For further details, see http://www.tax.org.uk/adit/aditnoticeboard/TPpaperIn March 2011, Jennifer Paul was one of the presenters on a training and exam preparation course presented in London by DJH International Tax. Thin capitalisation case landmark judgement Added: 18 November 2009 The High Court in London has ruled on the application of the UK's thin capitalisation rules in the case of a group of large UK corporate tax payers. The UK's thin capitalisation rules operate to restrict the amount of interest that a UK company can deduct in relation to loans from related parties. The rules were held to infringe the EU Treaty's freedom of establishment article because they did not provide for a defence of genuine commercial justfication. Mr Justice Henderson held that the rules should only apply to loans, or parts of loans, that lacked commercial justification. Thin cap rules could not be relied upon, in isolation, to prove that a loan had no commercial purpose. Further, it would be HMRC's responsibility to prove that a loan lacked commercial purpose. The judgement affects only intra-EU loans, ie loans to UK companies from a related company within the EU. Loans from non-EU countries, such as the USA, are oustide the scope of this ruling. Taxpayers who have previously suffered additional tax due to a thin capitalisation adjustment, or who have offset losses against adjustments, may now claim. HMRC is expected to appeal against the decision. Special commissioners publish decision in landmark DSGI case Added: 30 April 2009 The Special Commissioners are the first level of UK courts dealing with taxation issues. This case concerns DSG International, owner of Currys, Dixons and PC World, and their arrangements to provide extended warranty cover. This case is of interest because it is the first major transfer pricing case to come through under Corporation Tax Self Assessment and so provides useful indications of HMRC's approach to litigation. The case provides useful clarification on the use of Comparable Uncontrolled Prices ("CUPs"). CUPs are market prices or external prices, that can be used to benchmark intra-group pricing. Ideally, if you need to find the arm's length price for a transaction between related parties, and you know the price for a similar transaction between two unconnected parties, you have your arm's length price. But is that enough? The standard of proof is high. For example, if you're not a party to the external transaction, can you be absolutely sure what the terms were? If they're different, can you calculate an adjustment to the price to take account of the difference? Last but not least, can you prove the transaction terms (a point raised in DSGI)? In every project we do, we check at an early stage for the existence of CUPs, and test whether they can be relied on. In practice we use CUP methods in a high proportion of our projects, but we also have to reject potential CUPs in quite a number as well, where they don't meet the standards referred to above. The DSGI case confirms this, as the inadequate CUPs were rejected, and a profit split approach applied instead. The full text of the DSGI case is available on the Finance & Tax Tribunals website click here. Budget 2009 update on debt cap Added: 27 April 2009 The 2009 Budget, which was presented on 22 April 2009, included details of changes to the draft proposals set out below. The main changes are: i. The following GAAPs will be acceptable; IAS, UK, US, Canada, Japan, India, China and Korea, also any local GAAP that does not materially differ from IAS. ii. If UK companies cannot get sufficient information from the controlling shareholder, they must make the calculations to the best of their ability using the information available to them. iii. The tested amount is now the total of each UK group company's net financing expense (changed from draft proposals below), i.e. all related party and external finance expense less finance income. Any company with net finance income is ignored. iv. Financial services, such as lending, insurance and dealing, are to be excluded on a group-wide basis. v. The provision for a compensating adjustment on UK/UK transactions is to be extended to intra-EEA transactions where an interest deduction has been denied. The debt cap legislation is to take effect for accounting periods beginning on or after 1 January 2010. The worldwide debt cap & transfer pricing Added: 19 March 2009 The UK Government is in the process of reforming how corporate groups are taxed on foreign profits. Consultation is still in progress and the draft legislation is far from final, yet it is expected that the proposals will be announced in the Budget on April 22nd, and implemented in Finance Bill 2009. Any comments made herein reflect only the draft legislation and discussions to date, and the final legislation may well differ from that seen so far. As currently drafted, the worldwide debt cap rules will only apply to "large" groups, so small and medium sized groups are exempted from the debt cap. See next page UK TP rules for definitions of "small" and "medium" sized groups. Under the current proposals, large groups will be required to calculate the whole group's third party interest expense, excluding third party interest paid by UK companies in the group. This amount is compared with the related party interest paid by the UK companies and any excess is disallowed. The rules are to be applied equally to UK/UK as to cross-border transactions. EU law does not allow for netting off of UK/UK transactions. So how does this interact with transfer pricing? Large groups will need to review their level of interest deduction first under transfer pricing (thin capitalisation) rules, then apply a second test under the debt cap rules. Small and medium-sized groups are outside the debt cap rules as they currently stand and only need apply transfer pricing to intra-group loans if they are dealing with related parties in countries without a qualifying tax treaty with the UK. However for medium sized groups their transfer pricing can be adjusted subsequently by HMRC so application of transfer pricing rules offers some assurance as to a sustainable result. The Guardian turns its attention to Tax Gap, blames transfer pricing Added: 4 February 2009 On 2nd February The Guardian launched a two week series on "The Tax Gap". The articles identify transfer pricing as one of the major causes of the tax gap. What the articles do not set out is the position of many successful groups with genuine international businesses. These groups are required by law to determine what is the right amount of tax to pay in the UK and the right amount in the overseas territories. The rules are complex and many territories enforce them in a draconian manner. Good transfer pricing policies and documentation enable groups to comply with their legal requirements and to get on with growing their businesses. Changes to UK penalty rules impact transfer pricing Added:1 December 2008 Schedule 24 of Finance Act 2007 contains amendments to the application of penalties for errors in tax returns, which could impact UK companies that get transfer pricing adjustments. The changes can be illustrated by the following scenario: Scenario A UK company files a return and, following an enquiry, an adjustment is made for transfer pricing. Taxable profit has increased compared to that shown on the original return by the amount of the transfer pricing adjustment. How is the potential maximum penalty calculated? Current penalty calculation Currently, as in past years, the maximum potential penalty is calculated at 100% of the difference between the company's tax payable before the adjustment, and tax payable after the adjustment. In this situation, UK companies that are able to claim sufficient Group Relief, can use that Relief to reduce the tax payable back to the level before the adjustment. The maximum penalty is therefore £0. Revised penalty calculation Under the revised method of calculation, the maximum potential penalty is specifically calculated before Group Relief. Therefore the onus is on each individual company to apply arm's length pricing. The changes apply to returns (a) in respect of tax periods beginning on or after 1 April 2008 and (b) due for filing on or after 1 April 2009. Figures for HMRC's yield from transfer pricing enquiries Added: 19 November 2008 Rt Hon Stephen Timms, Financial Secretary, HM Treasury, has provided the following figures in response to a Parliamentary question about the amount collected by HM Revenue and Customs through investigations into transfer pricing. Large businesses:
Smaller businesses:
Source: House of Commons Hansard Written Answers, 10 November 2008 Disclaimer The content of this page and this website is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining liability to tax or determining investment strategy in specific circumstances. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without professional advice after a thorough examination of the particular situation. |
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