View the related Tax Guidance about Tax haven
Identifying transfer pricing risk
Identifying transfer pricing riskOverview of approach to transfer pricing riskThere is an agreed framework in relation to transfer pricing that sets out the process for handling enquiries, with each case passing through a series of steps or ‘stage gates’. This methodology aims to provide a structured, consistent approach with an expected time frame for resolution of 18 months. Please refer to the HMRC approach to transfer pricing enquiries guidance note for further details.HMRC will undertake a full risk assessment prior to opening a transfer pricing enquiry, a procedure that emulates their general interactions with large businesses. If the result of this risk assessment process suggests that there is a low risk of a transfer pricing issue arising, the transfer pricing enquiry will not be pursued. HMRC states that a number of factors taken together, rather than individual indicators alone, will signal the existence of a transfer pricing risk. The results of the risk assessment will be used to compile a business case that is required to open a transfer pricing enquiry. For this reason, HMRC’s own guidance states that the risk assessment should be as detailed as is feasible in the circumstances, and should include the following:•an overview of the business•a review of the group structure•details of the main competitors•a summary of any previous transfer pricing enquiriesA more detailed list is set out in INTM482130.HMRC has introduced a team of specialists who are responsible for undertaking the risk assessment process and who will actively work
A–Z of international tax terminology
A–Z of international tax terminologyList of commonly used phrases in international taxThe table below lists some of the terminology commonly used in the context of corporate international tax and transfer pricing, together with links to additional sources of information including other guidance notes, Simon’s Taxes and HMRC’s manuals.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.TerminologyDefinitionFurther detailsAAmount A and Amount BPart of the OECD’s package of measures to be introduced under Pillar 1 ― see ‘Pillar 1’ belowAnti-conduitCertain double tax treaty provisions contain anti-conduit conditions, which deny treaty benefits where the amounts received are paid on to another company. This ensures that treaty benefits are only obtained by the contracting states, rather than residents of third countries who have deliberately arranged their transactions to obtain treaty benefits to which they would not otherwise be entitledDT19850PPArm’s length arrangementAn arm’s length arrangement reflects the price that would be payable and the terms which would be agreed for a transaction between unconnected parties. This is important for the purposes of the transfer pricing legislation (see ‘Transfer pricing’ below)Transfer pricing rules ― overview guidance note Simon’s Taxes B4.147INTM412040ATAD (anti-tax avoidance directive)ATAD is an EU directive which provides for a series of anti-abuse rules relating to interest expense deductions, controlled foreign companies and hybrid mismatches, and requires the introduction of a corporate GAAR and an exit tax (these two measures not being part of the BEPS
HMRC approach to transfer pricing enquiries
HMRC approach to transfer pricing enquiriesUK connected parties are required to self-assess their transfer pricing position when filing their tax returns by using what is known as the ‘arm's length principle’. Transfer pricing rules in the UK require that transactions between connected parties should be recognised for tax purposes by applying the amount of profit that would have arisen if the same transaction had been carried out by unconnected third parties. Where lower taxable profits or greater allowable losses would result from an actual transaction as compared to a calculation based on a theoretical arm’s length relationship, each entity will be regarded as an ‘advantaged person’. These advantaged persons are required to identify the relevant transactions and make transfer pricing adjustments when submitting their tax returns to HMRC.Please refer to the Transfer pricing rules ― overview guidance note for further background on the UK transfer pricing regime and the types of transactions which may be caught by these rules.In common with the general way HMRC approaches their relationships with large businesses, a risk assessment will be carried out to identify the potential transfer pricing exposure. HMRC will only seek to query the self assessment return where it is considered that there may be a risk of underpaid tax or overstated losses. It is not uncommon for HMRC to make initial transfer pricing queries outside of the formal enquiry framework, expressing their intention to raise more detailed queries at a later date. Subsequently, HMRC will open a formal enquiry within
Withholding tax on payments of interest
Withholding tax on payments of interestThis guidance note explains the main scenarios where UK companies (other than financial institutions, etc) must withhold tax at source on payments of interest and how this is dealt with in practice. For more general information on the obligation to withhold tax in the UK from interest, royalties, etc, see the Withholding tax guidance note. Obligation to withhold income tax from certain paymentsWhen UK companies, or partnerships of which a company is a member, make certain types of payment, they are required to deduct income tax (at the basic rate) at source and pay it over to HMRC. In doing so they act as a collector of the UK tax that may be due from the recipient of the related income. The recipient will usually be able to claim relief against its UK or overseas tax liability for the tax suffered at source, as long as they are not based in a tax haven.Income tax is only deductible from payments of yearly interest with a UK source when paid.Yearly interest has no statutory definition but is accepted to be interest on loans capable of lasting more than 12 months. Short interest payable on loans in place for a period of less than 12 months is generally outside the scope of the rules, as is a discount. What constitutes a UK source is determined by case law and depends on the facts of the particular case and how the transactions are carried out. HMRC consider
Taxation of loan relationships
Taxation of loan relationshipsThe vast majority of companies will have loan relationships and so will need to consider how they are taxed under the loan relationship rules. There are also specific provisions dealing with relevant non-lending relationships and other deemed loan relationships. Companies are generally taxable on the debits and credits that are recognised in their statutory accounts in respect of their loan relationships and related transactions. The legislation is specific about the debits and credits that are taxable, and the basis of the accounts that they are drawn from.Debits and credits arising from a company’s loan relationships are subject to tax either as part of the company’s trading profits (or losses) or as non-trading profits (or losses). In order to determine the tax treatment of its loan relationships, it is first necessary for a company to establish the purpose of the loan. It will then go on to calculate the relevant debits and credits for the loan relationships. This guidance note deals mainly with the computational and charging provisions in CTA 2009, ss 306–334 (Part 5, Chapter 3). For information on which items fall within the loan relationships regime, see the What is a loan relationship? guidance note. It also covers the specific rules governing connected parties, certain anti-avoidance provisions and disguised interest.There are also other rules relating to the taxation of corporate debt which must also be considered. For an overview of these rules and links to further guidance, see the Corporate debt ― overview guidance note.
Holding companies
Holding companiesIntroductionThere are a number of occasions when it is necessary to consider the location for a holding company, including:•migration or redomiciliation of an existing holding company to another country•establishing an intermediate holding company through which to make an acquisition or through which to expand•establishing a new holding company to act as a listing vehicleAn attractive location for a holding company from a tax perspective will be one which minimises the tax on income and gains generated by the group. This will depend in part on the location of the group’s subsidiaries and the location of its shareholders.Tax issues when choosing a holding company locationThere are several tax issues to consider when deciding where to establish the holding company of the group. These tax issues will vary depending on the group’s particular circumstances and will often have to be considered in the round. The most common considerations are discussed in turn below.Withholding taxOne of the most important tax issues when choosing the location of a holding company is the possibility of withholding taxes being levied on dividends. This is relevant both to dividends paid up to the holding company from the group’s subsidiaries, and also to dividends paid out by the holding company to the ultimate shareholders of the group.The first of these issues can often be mitigated by establishing the holding company in a jurisdiction that has an extensive double tax treaty network. The issue of double tax agreements is discussed in more detail below.
Financing the company ― overview
Financing the company ― overviewHow to raise sufficient finance to commence and continue operating is one of the most important considerations for most types of business.There are some fairly obvious sources of financing, such as bank finance, however there are also several types of tax efficient financing available, such as the enterprise investment scheme (EIS) and venture capital trusts (VCT). Obtaining tax advice at an early stage to ensure that these reliefs are available can help attract and retain suitable investors. This guidance note explores some of the options available and the relevant tax considerations for each one.LoansMost businesses will have to take out a loan of some sort and the tax implications will differ depending on the terms of the loan and the identity of the lender. Generally, the loan relationships regime applies. See the Corporate debt ― overview guidance note and associated notes for information on the tax implications of corporate debt.Bank loans and overdraftsInterest arising on bank loans and overdrafts is usually allowable when it is accrued in the accounts. Certain costs of arranging loan finance are also allowable under the loan relationships rules. For further information, see the Taxation of loan relationships guidance note.Shareholder loansLate interest rulesIf a company enters into a loan arrangement with an entity other than a bank, there may be additional tax implications. For example, loans between certain connected parties are subject to anti-avoidance provisions known as the ‘late interest’ rules. The relevant legislation is set out in CTA 2009, Part
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