Produced by Tolley
  • 27 Oct 2021 07:40

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Transfer pricing and financing arrangements
  • Transfer pricing and the amount of loan
  • Transfer pricing and interest rate
  • Transfer pricing and guarantees
  • Compensating adjustments for interest
  • Advance thin capitalisation agreements (ATCAs)

Transfer pricing and financing arrangements

Transfer pricing rules also apply to financing arrangements. Loans between connected companies where one of those companies controls the other, or where both are under common control, are subject to the regime.

The transfer pricing legislation takes precedence over the loan relationships legislation and the rules on the corporate interest restriction. See the Corporate interest restriction ― overview guidance note.

The same principles of transfer pricing as set out in the UK transfer pricing in practice guidance note apply to financing transactions. Additional details and examples are provided in the OECD’s Transfer Pricing Guidance on Financial Transactions which will become part of the main OECD Transfer Pricing Guidelines in due course.

One important aspect of transfer pricing for loans is thin capitalisation, ie a company does not have enough capital to support the debt. A company will be considered to be thinly capitalised where:

  1. a loan exceeds the amount which the borrower would or could have borrowed from an independent lender, or

  2. the terms of the loan differ from those that would have been agreed with such a lender, eg a higher interest rate

TIOPA 2010, s 152; INTM413200

Where thin capitalisation occurs, the interest on the excessive part of the loan will be disallowed as a deduction in arriving at the assessable profits or allowable losses of the borrower. This is on the basis that the borrower would not have had a deduction for that amount if the loan had been arranged with a third party. See Example 1.

Transfer pricing can also apply to loans from the position of the lender; for example, a UK parent company lending to a UK or an overseas subsidiary should charge a market rate of interest. Where the rate is below market rate, a transfer pricing adjustment is made to increase the amount of interest income for the purposes of the tax computation of the UK parent. This is known as an ‘interest imputation’.

Caution should be

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