835C Basic rules on transfer pricing

Summary

This section sets out the main transfer pricing rules and the arrangements to which the rules apply.

Details

(1) An arrangement is within the scope of transfer pricing rules where –

• (1)(a) it involves the supply and acquisition of goods, services, money, assets (including intangible assets) or anything else of commercial value,
• (1)(b) the supplier and acquirer are associated at the time of the supply and acquisition, and
• (1)(c) either or both the supplier and acquirer are within the charge to tax in respect of the relevant activities.

Main transfer pricing rules

(2) If the actual amount of consideration payable under an arrangement is above the arm’s length amount, or the amount of consideration receivable under the arrangement is below the arm’s length amount, profits or gains or losses chargeable to tax are computed as if an arm’s length amount of consideration were payable or receivable.

(3) The ‘arm’s length amount’ of consideration for a supply or acquisition refers to the amount that would have been agreed between independent parties dealing at arm’s length. This is determined by -

• (4)(a) identifying the actual commercial or financial relations between the supplier and acquirer and the economically relevant circumstances attaching to those relations (the “identified arrangement”), and
• (4)(b) applying the most appropriate transfer pricing method set out in the 2017 OECD Guidelines.

(5)(a) Where the substance of the commercial or financial relations between a supplier and an acquirer is inconsistent with the form of the arrangement then, for the purposes of determining the arm’s length amount of consideration, the identified arrangement will be based on the substance of the arrangement rather than its form.

(5)(b) Where independent parties acting in a commercially rational manner in comparable circumstances would not have entered into the identified arrangement then, in line with the principles in Chapter I, D.2 of the 2017 OECD Guidelines, the identified arrangement will be disregarded (and the profits, gains or losses that are chargeable to tax computed as if no consideration were payable under that arrangement) or substituted with another arrangement that achieves a commercially rational expected result (and the arm’s length amount of consideration will be determined by reference to that alternative arrangement).

Construction of ‘supply’ and ‘disposal’

(6) The reference to a supply and acquisition of an asset in subsection (1)(a) also includes the disposal and acquisition of a chargeable asset and references to the disposal of a chargeable asset in section 835HB are, for the purposes of this Part, construed as being a supply of that asset.

Interaction with provisions treating certain amounts as a distribution

(7) Where the actual amount of consideration payable under an arrangement exceeds the arm’s length amount and any part of that excess is treated as a distribution under any other provision of the TCA 1997 then, in applying the transfer pricing rule in subsection (2)(a) in relation to profits or gains or losses chargeable to tax under Schedule D, the actual amount of consideration payable will be taken as that amount net of the amount treated as a distribution. Any amount of an expense that is treated as a distribution will already not be deductible in computing taxable profits.

Transfers of trading stock on a discontinuance of a trade

(8) The transfer pricing rules do not apply to a sale or transfer of trading stock on a discontinuance of a trade in circumstances where an election referred to in section 89(4) is made.

Relevant Date: Finance Act 2021