Derivative contracts—anti-avoidance: transactions not at arm's length and foreign exchange gains and losses
Derivative contracts—anti-avoidance: transactions not at arm's length and foreign exchange gains and losses

The following Tax guidance note provides comprehensive and up to date legal information covering:

  • Derivative contracts—anti-avoidance: transactions not at arm's length and foreign exchange gains and losses
  • The G20/OECD Base Erosion and Profit Shifting (BEPS) project
  • Derivative contracts—transactions not at arm's length: application of transfer pricing rules
  • Derivative contracts—exchange gains and losses (FOREX): accounting and tax basics
  • Derivative contracts—transactions not at arm's length: FOREX rules
  • Options—transfers of value to connected companies

The general rule is that:

  1. the credits (broadly, but not necessarily, profits), and

  2. debits (broadly, but not necessarily, losses)

arising to a company from its derivative contracts and related transactions (including those relating to FOREX movements), that are to be brought into account for tax purposes under the derivative contracts regime, are computed in accordance with those recognised in determining a company's profit or loss (as disclosed in the company's relevant accounts) for an accounting period in accordance with generally accepted accounting practice (GAAP)—ie the tax will generally follow the accounts.

For more on the basic computational rules that permeate the derivative contracts regime, and its general, close, reliance on GAAP, see Practice Note: Derivative contracts—computation of debits and credits.

There are, however, a number of specific circumstances where the tax rules will necessarily depart from their reliance on a company's accounts—ie the derivative contracts regime incorporates specific statutory rules that will override the accounting treatment in particular situations.

Special tax driven rules are included in the derivative contracts regime to ensure that a company's derivative investments and transactions are taxed appropriately and in accordance with the economic reality. They are also needed to ensure that companies are unable to avoid tax by artificially manipulating the circumstances in order to obtain a specific type of accounting treatment and, from that, some form of tax advantage.