Transfer pricing rules are no longer automatic for tax havens

The issue

Generally transfer pricing rules only apply to UK companies which are in small or medium groups by reference to the following measures of staff numbers and annual turnover:

Size Max no. of staff, and annual turnover less than: And/or: balance sheet total less than:
Small 50 EUR 10 million EUR 10 million
Medium 250 EUR 50 million EUR 43 million

 

This means that for tax purposes these companies have to use arm’s length prices when transacting with connected parties.

Up to now transactions with (connected) so-called tax haven companies have automatically been within the scope of transfer pricing rules because the treaties which the UK has with them do not have a non-discrimination clause. However on 2 July 2018 new treaties were signed with the Crown Dependencies (Guernsey, Jersey and the Isle of Man) which included non-discrimination clauses. These treaties are expected to come into effect in 2019 once the UK and the respective jurisdictions have concluded their parliamentary procedures.

 

What does this mean?

In simple terms this means that UK companies are no longer required to show that they are charging arm’s length prices to Crown Dependencies if they are in a small or medium group. Certain groups may therefore want to review their transfer pricing strategy when the new treaties come into force.

 

Word of caution

Although this may mean that some UK companies will no longer face taxable profits being imputed on them (due to under charging connected companies), it does not mean that they can simply ‘wash’ out their profits by paying excessive fees to their Jersey parent (for example). This is because expenses still need to be incurred wholly and exclusively for the purposes of the trade and HMRC could seek to restrict the allowability of excessive expenses. Similar principles also apply to investment companies. Also, although seldom used, HMRC do have technical scope to apply transfer pricing legislation in respect of a company in a medium sized group.

 

Final word

In certain circumstances the new treaties offer small and medium groups an opportunity to decrease their tax burden and this is something that should be considered on a case by case basis when the new treaties come into force.

 

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