217C Conditions for being assessed under this Part at the UTPP rate
(1) Unassessed transfer pricing profits of a company may be assessed under this Part at the UTPP rate only to the extent that—
(a) the provision to which the profits relate has an effective tax mismatch outcome for the accounting period to which the profits relate,
(b) the tax design condition is met, and
(c) the unassessed transfer pricing profits do not arise wholly from excepted loan relationship arrangements.
(2) In this section “excepted loan relationship arrangements” means—
(a) any arrangements that would produce debits or credits under Part 5 of CTA 2009 (loan relationships and deemed loan relationships) (“a loan relationship”), or
(b) a loan relationship and a relevant contract (within the meaning of Part 7 of that Act (derivative contracts)) taken together, where the relevant contract is entered into entirely as a hedge of risk in connection with the loan relationship.
(1) Provision between the company and the other party has an effective tax mismatch outcome for an accounting period if the corresponding amount is less than 80% of the underlying corporation tax amount.
(2) “The underlying corporation tax amount” is the amount determined by multiplying the amount of the unassessed transfer pricing profits by the underlying corporation tax rate (within the meaning of section 217A(4)).
(3) “The corresponding amount” means the amount (which may be nil) of relevant tax—
(a) that is due and payable by the other party and that—
(i) where it has been paid, has not been refunded and would not be refunded if all reasonable steps were taken to secure that it was refunded;
(ii) otherwise, would remain due and payable if all reasonable steps were taken to minimise the amount, and
(b) charged (in any period) on profits that correspond to the unassessed transfer pricing profits.
(4) The steps mentioned in subsection (3)(a) include—
(a) claiming, or otherwise securing the benefit of, reliefs, deductions, reductions or allowances, and
(b) making elections for the purposes of the relevant tax.
(5) For the purposes of subsection (3)—
(a) an amount of relevant tax is refunded if and to the extent that—
(i) any repayment of tax, or any payment in respect of a credit for tax, is made to any person, and
(ii) that repayment or payment is directly or indirectly in respect of the whole or part of the amount of relevant tax paid by the other party;
(b) any withholding tax which is due and payable on payments made to the other party is (unless it is refunded within the meaning of paragraph (a)) to be treated as tax which is due and payable by the other party (and not the person making the payment).
(6) Where the other party is a transparent entity, the provision is to be treated as having an effective tax mismatch outcome for an accounting period unless HMRC is satisfied that it does not have such an outcome for the accounting period.
(7) For the purposes of this section, the other party is a “transparent entity” if, for the purposes of relevant tax charged under the law of the territory in which the other party is legally constituted, profits that correspond to the unassessed transfer pricing profits are treated as the income or profits of a person or persons other than the other party.
(8) Where the other party is a transparent entity—
(a) references in this section to relevant tax that is due and payable or paid by the other party include a reference to relevant tax that is due and payable or paid by any person as a result of profits which correspond to the unassessed transfer pricing profits being treated for the purposes of relevant tax charged under the law of any territory as the income or profits of that person;
(b) subsection (5)(b) applies to any such persons as it applies to the other party.
(9) In this section “relevant tax” means—
(a) income tax,
(b) corporation tax on income,
(c) any amount chargeable as if it were corporation tax or treated as if it were corporation tax (other than the CFC charge within the meaning of Part 9A of this Act), or
(d) any foreign tax.
(1) The tax design condition is met if it is reasonable to assume that the structure of—
(a) the transaction or series of transactions by which the provision to which the unassessed transfer pricing profits relate is imposed, or
(b) any arrangements to which the transaction or series of transactions relate,
is designed to have the effect of reducing, eliminating or delaying the liability of any person to pay UK tax.
(2) In subsection (1)—
(a) “arrangements” means any scheme or arrangement of any kind (whether or not it is, or is intended to be, legally enforceable);
(b) “UK tax” means income tax, corporation tax or capital gains tax.
(1) A designated officer may issue a preliminary notice to a company if they consider that the company has unassessed transfer pricing profits by virtue of section 217B.
(2) A preliminary notice issued under this section must —
(a) state the accounting period to which the unassessed transfer pricing profits relate;
(b) set out the officer’s best judgement of the amount of unassessed transfer pricing profits;
(c) set out the basis on which the officer considers that the conditions mentioned in section 217C(1) are met.
(3) A preliminary notice under this section may not be issued in respect of an accounting period more than 4 years after the end of that period.
(1) Where a preliminary notice is issued to a company, the company may make representations to a designated officer in accordance with this section
(2) Representations are only made in accordance with this section if—
(a) they are made in writing,
(b) they are made within the period of 30 days beginning with the day on which the officer issued the preliminary notice, and
(c) they are made solely on the grounds specified in subsection (3).
(3) Those grounds are—
(a) that there is an arithmetical error in the calculation of any profits stated in the preliminary notice or an error in a figure on which an assumption in the notice is based;
(b) that one or both of the conditions in section 217C(1)(a) and (c) are not met.
(4) But where the preliminary notice sets out that the basis on which the officer considers the condition mentioned in section 217C(1)(a) is met is because the other party is a transparent entity, representations are also made in accordance with this section if they are—
(a) made within the period of 60 days beginning with the day on which the officer issued the preliminary notice, and
(b) made solely on the grounds that the condition in section 217C(1)(a) is not met.
(1) This section applies where—
(a) a designated officer has issued a preliminary notice to a company under section 217F in relation to the company’s unassessed transfer pricing profits for an accounting period, and
(b) a designated officer has considered any representations made by the company in accordance with section 217G.
(2) A designated officer may assess the company to corporation tax at the UTPP rate on the unassessed transfer pricing profits that the company has for the period by virtue of section 217B.
(3) But where an officer of HMRC is required by a direction under paragraph 33 of Schedule 18 to FA 1998 to give a relevant closure notice, an assessment under this section may not be made before the relevant closure notice is given.
(4) An assessment under this section must be made before—
(a) the end of the period of—
(i) in a case where the preliminary notice to which the assessment relates sets out that the basis on which the officer considers the condition mentioned in section 217C(1)(a) is met is because the other party is a transparent entity, 90 days beginning with the day on which the preliminary notice was issued, or
(ii) otherwise, 60 days beginning with the day on which the preliminary notice to which the assessment relates was issued,
(but nothing in this subsection prevents a further preliminary notice being issued), or
(b) if later, in a case where a relevant closure notice required to be given by a direction under paragraph 33 of Schedule 18 to FA 1998 has been given before the end of the period mentioned in paragraph (a), the end of the period of 30 days beginning with the day on which the closure notice was given.
(5) In this section a “relevant closure notice” means a partial or final closure notice in relation to an enquiry into the company tax return for the accounting period mentioned in subsection (1)(a).
(1) This section applies where a designated officer assesses a company’s unassessed transfer pricing profits for an accounting period under section 217H.
(2) At any time before the end of the period for amendments, the company may amend its company tax return for the accounting period so that its self-assessment more fully reflects the transfer pricing requirement to which the unassessed transfer pricing profits relate.
(3) In this Chapter “the period for amendments” means the period of 15 months beginning with the day after the day on which the designated officer assesses the company’s unassessed transfer pricing profits under section 217H.
(4) If, before the end of the period of 15 months referred to in subsection (3), a designated officer and the company agree (in writing) that the period for amendments is to terminate, the period ends when that agreement is made.
(5) An amendment under subsection (2) may not be made in the last 21 days of the period for amendments, unless the period for amendments ends by agreement in accordance with subsection (4).
(6) Paragraph 31(3) of Schedule 18 to FA 1998 (amendment not to take effect during enquiry) does not apply in relation to an amendment made under subsection (2).
(1) This section applies where a designated officer assesses a company’s unassessed transfer pricing profits for an accounting period under section 217H.
(2) If at any time before the end of the period for amendments a designated officer is satisfied that the total corporation tax charged at the UTPP rate on the company’s unassessed transfer pricing profits for the period is excessive, the designated officer must amend or withdraw the assessment accordingly.
(3) If at any time (whether or not before the end of the period for amendments) a designated officer is satisfied that one or more of the conditions mentioned in section 217C(1) do not apply in respect of unassessed transfer pricing profits so assessed, the designated officer must—
(a) withdraw the assessment, or
(b) amend the assessment to assess the unassessed transfer pricing profits to corporation tax not at the UTPP rate.
(4) Where an assessment is amended under subsection (2) or (3) any tax overpaid must be repaid.
(5) If a designated officer is satisfied at any time before the end of the period for amendments that the total corporation tax charged at the UTPP rate on the company’s unassessed transfer pricing profits for the period is insufficient, the designated officer may amend the assessment accordingly.
(6) An amendment under subsection (5) may not be made in the last 30 days of the period for amendments, unless the period for amendments ends by agreement in accordance with section 217I(4).
217K No postponement except before assessment is finalised for tax on same profits
(1) This section applies where—
(a) a designated officer has assessed a company’s unassessed transfer pricing profits for an accounting period under section 217H or section 217J(5), and
(b) the amount of paid relevant tax is greater than nil.
(2) The company may—
(a) first apply by notice in writing to HMRC for a determination of the amount of the corporation tax charged on the unassessed transfer pricing profits the payment of which is to be postponed until the assessment is finalised (see subsection (3));
(b) where such a determination is not agreed, refer the application for a determination to the tribunal within the period of 30 days beginning with the date of the document notifying the company of HMRC’s determination.
(3) For the purposes of this section—
(a) the amount of corporation tax charged on the unassessed transfer pricing profits the payment of which is to be postponed until the assessment is finalised is an amount equal to the amount of paid relevant tax, and
(b) the assessment is finalised when—
(i) the period of 30 days mentioned in section 217M(2) ends without notice of an appeal to the tribunal against the assessment being given,
(ii) an appeal against the assessment is finally determined otherwise than by the assessment being cancelled, or
(iii) an appeal against the assessment is withdrawn.
(4) An application under subsection (2)(a)—
(a) must be made within the period of 30 days beginning with the day after—
(i) the day on which the unassessed transfer pricing profits are assessed under section 217H or section 217J(5), or
(ii) if later, any day on which the amount of paid relevant tax ceases to be nil, and
(b) must state the amount of paid relevant tax and include documentary evidence of that amount.
(5) If, after any determination of the amount of corporation tax the payment of which should be so postponed—
(a) the company or HMRC has grounds for believing that the amount so determined has become excessive or insufficient, and
(b) the parties cannot agree on a revised determination,
the party mentioned in paragraph (a) may, at any time before the assessment is finalised, apply to the tribunal for a revised determination of that amount.
(6) Any application to the tribunal under subsection (2)(b) or subsection (5) is subject to the relevant provisions of Part 5 of TMA 1970 (see, in particular, section 48(2)(b) of that Act).
(7) If the company and HMRC reach an agreement as to the amount of corporation tax the payment of which should be postponed until the assessment is finalised, the agreement shall not have effect unless—
(a) the agreement is in writing, or
(b) the fact that the agreement has been reached, and the terms of the agreement, are confirmed by notice in writing given—
(i) by the company to HMRC, or
(ii) by HMRC to the company.
(8) The payment of corporation tax charged on the unassessed transfer pricing profits—
(a) may not be postponed other than in accordance with this section, and
(b) accordingly, any amount of the corporation tax that is not postponed in accordance with this section or ceases to be postponed in accordance with this section is due and payable in accordance with section 59D of TMA 1970 or regulations made under section 59E of that Act.
(9) In this section—
(a) “appeal” means any appeal under the Taxes Acts;
(b) “paid relevant tax” means relevant tax within the meaning of section 217D(9)—
(i) charged (in any period) on profits that correspond to the unassessed transfer pricing profits, and
(ii) that has been paid by the other party and not refunded within the meaning of section 217D(5);
(c) “tribunal” means the First-tier Tribunal or, where determined by or under Tribunal Procedure Rules, the Upper Tribunal;
(d) references to agreements between a company and HMRC, and to the giving of notices between the parties, include references to agreements, and the giving of notices, between a person acting on behalf of the company and HMRC.
(10) For the purposes of subsection (9)(b)—
(a) any withholding tax which has been paid on payments made to the other party is (unless it is refunded within the meaning of section 217D(5)) to be treated as tax which has been paid by the other party (and not by the person making the payment);
(b) where the other party is a transparent entity within the meaning of section 217D(7)—
(i) the reference to relevant tax that has been paid by the other party includes a reference to relevant tax that has been paid by any person as a result of profits that correspond to the unassessed transfer pricing profits being treated for the purposes of relevant tax charged under the law of any territory as the income or profits of that person;
(ii) paragraph (a) applies to any such persons as it applies to the other party.
217L Closure notices: rules relating to period for amendments
(1) This section applies where a designated officer assesses a company’s unassessed transfer pricing profits for an accounting period under section 217H.
(2) A relevant closure notice may not be issued under paragraph 32 of Schedule 18 to FA 1998 at any time before the end of the period for amendments.
(3) Accordingly, a tribunal direction given under paragraph 33 of Schedule 18 to FA 1998 in relation to a relevant closure notice has no effect until the period for amendments has ended.
(4) A relevant closure notice issued after the end of the period for amendments may not make any amendments to the company tax return which have the effect that its self-assessment more fully reflects the transfer pricing requirement to which the unassessed transfer pricing profits relate.
(5) In this section a “relevant closure notice” means a partial or final closure notice in relation to an enquiry into the company tax return for the accounting period mentioned in subsection (1).
(1) A company may only appeal against an assessment of its unassessed transfer pricing profits under section 217H or section 217J(5) where—
(a) the company has paid (in full) the corporation tax charged on the profits assessed other than any amount the payment of which has been postponed in accordance with section 217K, and
(b) the period for amendments has ended.
(2) Notice of an appeal must be given before the end of the period of 30 days beginning with—
(a) the end of the period for amendments, or
(b) in a case where section 217I(4) applies, the day after the day on which the period for amendments ends,
(and accordingly paragraph 48(2)(b) of Schedule 18 to FA 1998 does not apply).
(3) Subsection (4) applies where, on an appeal against an assessment of a company’s unassessed transfer pricing profits, the tribunal decides that the company is overcharged by the assessment as a result of one or more of the conditions mentioned in section 217C(1) not applying in respect of unassessed transfer pricing profits so assessed.
(4) The tribunal may, in addition to any other powers exercisable by the tribunal in those circumstances, reduce the tax charged on the amount assessed to assess the unassessed transfer pricing profits to corporation tax not at the UTPP rate.
(1) This section applies if—
(a) HMRC are required by section 49B or 49C of TMA 1970 to review the assessment of a company’s unassessed transfer pricing profits, and
(b) the review finds that one or more of the conditions mentioned in section 217C(1) do not apply in respect of unassessed transfer pricing profits so assessed.
(2) The reference in section 49E(5) of TMA 1970 (nature of review etc) to the review concluding that HMRC’s view of the matter in question is to be varied is to be read as including a reference to the review concluding that the assessment is to be amended to assess the unassessed transfer pricing profits to corporation tax not at the UTPP rate.
Where a company gives notice of appeal against an assessment of its unassessed transfer pricing profits, references in section 54 of TMA 1970 to the assessment being varied are to be read as including a reference to the assessment being amended to assess the unassessed transfer pricing profits to corporation tax not at the UTPP rate.
No claim may be made under section 59DA of TMA 1970 (repayment in advance of liability being established) or regulations under section 59E of that Act for the repayment of any amount of corporation tax charged on unassessed transfer pricing profits assessed under this Part at the UTPP rate.
217R Exclusion of reliefs, deductions and set-offs
No relief, deduction or set-off of any description is allowed against—
(a) a company’s unassessed transfer pricing profits assessed under this Part at the UTPP rate, or
(b) corporation tax charged at the UTPP rate on unassessed transfer pricing profits assessed under this Part.
217S Assessment otherwise than at UTPP rate: no deduction for excess losses
(1) Where an assessment under this Part is amended to assess the unassessed transfer pricing profits to corporation tax otherwise than at the UTPP rate, no deduction from the unassessed transfer pricing profits is allowed for excess losses.
(2) “Excess losses” means any losses—
(a) that are reflected in the company’s self assessment, and
(b) that the transfer pricing requirement to which the unassessed transfer pricing profits relate requires to not be brought into account in calculating the company’s profits or loss for the period for corporation tax purposes.
(1) In this Part—
“designated officer” means an officer of Revenue and Customs who has been designated by the Commissioners for His Majesty's Revenue and Customs for the purposes of this Part;
“foreign tax” means a tax falling within subsection (2) of section 259B (see also subsections (3) and (3ZA) of that section);
“HMRC” means His Majesty’s Revenue and Customs.
(2) References in this Part to a power to assess include any power to otherwise determine amounts of tax that are chargeable or payable by a company (and references to assessment and any other cognate expressions are to be construed accordingly).
(1) In this Part “advance pricing agreement” means a written agreement that—
(a) is made by the Commissioners with any person (“A”) as a consequence of an application by A under section 223,
(b) relates to one or more of the matters mentioned in subsection (2), and
(c) declares that it is an agreement made for the purposes of this section.
(2) Those matters are—
(a) if A is not a company, the attribution of income to a branch or agency through which A has been carrying on a trade in the United Kingdom or is proposing to carry on a trade in the United Kingdom,
(b) if A is a company, the attribution of income to a permanent establishment through which A has been carrying on a trade in the United Kingdom or is proposing to carry on a trade in the United Kingdom,
(c) the attribution of income to any permanent establishment of A's, wherever situated, through which A has been carrying on, or is proposing to carry on, any business,
(d) the extent to which income that has arisen or may arise to A is to be taken for any purpose to be income arising in a country or territory outside the United Kingdom,
(e) the treatment for tax purposes of any provision made or imposed, whether before or after the date of the agreement, as between A and any associate (see section 219) of A's, and
(f) the treatment for tax purposes of any provision made or imposed, whether before or after the date of the agreement, as between an oil-related ring-fence trade carried on by A (see section 206) and any other activities carried on by A.
(1) This section applies for the purposes of section 218(2)(e).
(2) Two persons are associates in relation to provision made or imposed as between them if at the time of the making or imposition of the provision—
(a) one of them is directly or indirectly participating in the management, control or capital of the other, or
(b) the same person or persons is or are directly or indirectly participating in the management, control or capital of each of the two persons.
(3) Two persons are also associates in relation to any provision if section 217(4) (which applies to provision made or imposed in connection with sales of oil) requires the persons to be treated as controlled by the same person at the time of the making or imposition of that provision.
(4) For the interpretation of subsection (2), see sections 157(1), 158(4), 159(1) , 160(1) and 161(1) (which have the effect that references in subsection (2) to direct or indirect participation are to be read in accordance with provisions of Chapter 2 of Part 4).
(1) Subsection (2) applies if a chargeable period is one to which an advance pricing agreement relates.
(2) The Tax Acts have effect in relation to the chargeable period as if, in the case of the person with whom the Commissioners made the agreement, questions relating to the matters mentioned in section 218(2) are to be determined—
(a) in accordance with the agreement, and
(b) without reference to the provisions in accordance with which they would otherwise be determined.
(3) Subsection (2) is subject to—
subsections (4) and (5), and
section 221.
(4) A question is to be determined as mentioned in subsection (2) only so far as the agreement provides for the question to be determined in that way.
(5) In the case of so much of a question as—
(a) relates to any matter mentioned in paragraph (e) or (f) of section 218(2), and
(b) is not comprised in a question that relates to a matter within another paragraph of section 218(2),
reference to a provision is capable of being excluded under subsection (2) by an advance pricing agreement only if the provision is in Part 4.
221 Effect of revocation of agreement or breach of its conditions
(1) An advance pricing agreement does not have effect in accordance with section 220(2) in relation to any determination of a question if any of conditions A, B and C is met.
(2) Condition A is that a time to which the question relates is after a time as from which an officer has revoked the agreement in accordance with the agreement's terms.
(3) Condition B is that the question relates to a time after, or in relation to which, there has been a failure by a party to the agreement to comply with a significant provision of the agreement.
(4) Condition C is that the question relates to a matter as respects which a key condition has not been met or is no longer met.
(5) A provision of the agreement is “significant” for the purposes of subsection (3) if compliance with that provision is, under the terms of the agreement, to be a condition of the agreement's having effect.
(6) Any other condition that, under the terms of the agreement, is to be a condition of the agreement's having effect is a “key condition” for the purposes of subsection (4).
(1) Subsections (2), (5) and (6) apply if—
(a) an advance pricing agreement has effect in relation to any provision (“the actual provision”) made or imposed as between any person (“A”) and another (“B”), and
(b) section 220(2) has the effect in A's case of requiring a question relating to the actual provision to be determined in accordance with the agreement rather than by reference to rules which would otherwise be applicable because of Part 4.
(2) The provisions mentioned in subsection (3) have effect in B's case on the assumption that any question within subsection (4) is to be determined, to the same extent as in A's case, by reference to the agreement.
(3) The provisions are—
sections 174 to 178 (transfer pricing: claim by disadvantaged person), and
sections 188 and 189 (transfer pricing: adjustment of double taxation relief if claim made).
(4) The questions are—
(a) whether A is a person on whom a potential advantage in relation to United Kingdom taxation is conferred by the actual provision, and
(b) what constitutes the arm's length provision in relation to the actual provision.
(5) Subsection (2) has effect subject to any advance pricing agreement made between the Commissioners and B.
(6) Any assumptions to be made because of the agreement are “advance-pricing-agreement assumptions” for the purposes of paragraph (b) of the definition in section 185(5) of “transfer-pricing determination”.
(1) For the purposes of section 218(1)(a), an application by a person (“A”) is an application under this section if it complies with subsections (2) to (5).
(2) It must be an application to the Commissioners for the clarification by agreement of the effect in A's case of provisions by reference to which questions relating to any one or more of the matters mentioned in section 218(2) are to be, or might be, determined.
(3) It must set out A's understanding of what would in A's case be the effect, in the absence of any agreement, of the provisions in relation to which clarification is sought.
(4) It must set out the respects in which it appears to A that clarification is required in relation to those provisions.
(5) It must set out how A proposes that matters should be clarified in a manner consistent with the understanding mentioned in subsection (3).
224 Provision in agreement about years ended or begun before agreement made
(1) An advance pricing agreement may contain provision relating to chargeable periods ending before the agreement is made, subject to subsection (2).
(2) An advance pricing agreement may not contain provision relating to chargeable periods ending before 27 July 1999.
(3) If an advance pricing agreement—
(a) relates to a chargeable period beginning or ending before the agreement is made, and
(b) provides for the manner in which adjustments are to be made for tax purposes in consequence of the agreement,
the adjustments are to be made for those purposes in the manner provided for in the agreement.
(1) Subsection (2) applies if an advance pricing agreement provides for the modification, or revocation, of the agreement—
(a) by the Commissioners, or
(b) by an officer.
(2) The agreement may provide for the modification or revocation to take effect as from such time as the Commissioners or officer may determine.
(3) A time determined under subsection (2) may be (but need not be) a time before the modification is made or the agreement is revoked.
(1) Subsection (6) applies if each of conditions A to D is met.
(2) Condition A is that the Commissioners and any person (“A”) have at any time purported to enter into an advance pricing agreement.
(3) Condition B is that, before that time, A fraudulently or negligently provided the Commissioners with information which was false or misleading.
(4) Condition C is that the information was so provided—
(a) for or in connection with the application to the Commissioners for the making of the agreement, or
(b) otherwise in connection with the preparation of the agreement.
(5) Condition D is that the Commissioners have notified A that the agreement is nullified by reason of the misrepresentation.
(6) The agreement is to be treated as never made.
227 Penalty for misrepresentation in connection with agreement
A person is liable to a penalty of not more than £10,000 if the person fraudulently or negligently makes a false or misleading statement to the Commissioners or an officer—
(a) for or in connection with any application to the Commissioners for them to enter into an advance pricing agreement, or
(b) otherwise in connection with the preparation of an advance pricing agreement.
228 Party to agreement: duty to provide information
A party to an advance pricing agreement must provide the Commissioners from time to time with all reports and other information that the party may be required to provide—
(a) under the agreement, or
(b) as a result of a request made by an officer in accordance with the agreement.
229 Modifications of agreement for double taxation purposes
(1) Subsection (2) applies if a mutual agreement made under and for the purposes of any double taxation arrangements is not consistent with the terms of an advance pricing agreement.
(2) The Commissioners must ensure that the advance pricing agreement is modified so far as may be necessary for enabling effect to be given to the mutual agreement in relation to the subject-matter of the advance pricing agreement.
(3) The Commissioners may comply with subsection (2) by exercising powers conferred on them by the advance pricing agreement or otherwise.
(4) In this section “double taxation arrangements” means arrangements that have effect under section 2(1) (double taxation relief by agreement with territories outside the United Kingdom).
230 Interpretation of Part: meaning of “Commissioners” and “officer”
In this Part—
“the Commissioners” means the Commissioners for Her Majesty's Revenue and Customs, and
“officer” means an officer of Revenue and Customs.
(1) This Part has effect for the purposes of counteracting certain cases that it is reasonable to suppose would otherwise give rise to—
(a) a deduction/non-inclusion mismatch, or
(b) a double deduction mismatch.
(2) A deduction/non-inclusion mismatch arises where an amount is deductible from a person's income—
(a) without a corresponding amount of ordinary income arising to another person, or
(b) where an amount of ordinary income does arise to a person but is under taxed.
(3) A double deduction mismatch arises where—
(a) an amount is deductible from more than one person's income, or
(b) an amount is deductible from a person's income for the purposes of more than one tax.
(4) The cases with which this Part is concerned involve—
(a) payments or quasi-payments under or in connection with financial instruments or repos, stock lending arrangements or other transfers of financial instruments,
(b) hybrid entities,
(c) companies with permanent establishments, or
(d) dual resident companies.
(5) This Part counteracts mismatches that would otherwise arise by making certain adjustments to a person's treatment for corporation tax purposes.
(6) Chapter 2 contains some key definitions for the purposes of this Part, see in particular—
(a) section 259B which provides that “tax” means income tax, corporation tax on income, the diverted profits tax, the CFC charge, foreign tax or a foreign CFC charge,
(b) section 259BB which defines “payment”, “quasi-payment”, “payment period”, “relevant deduction”, “payer”, “payee”, and “payee jurisdiction”,
(c) section 259BC which defines “ordinary income” and “taxable profits”, in relation to taxes other than the CFC charge and foreign CFC charges,
(d) section 259BD which contains corresponding provision for the CFC charge and foreign CFC charges,
(e) section 259BE which defines “hybrid entity” and other related terms, and
(f) section 259BF which defines “permanent establishment”.
(7) Chapter 3 contains provision for the counteraction of certain deduction/non-inclusion mismatches arising from payments or quasi-payments under, or in connection with, financial instruments.
(8) Chapter 4 contains provision for the counteraction of certain deduction/non-inclusion mismatches arising from payments or quasi-payments and involving certain repos, stock lending arrangements or other arrangements for, or relating to, transfers of financial instruments.
(9) Chapter 5 contains provision for the counteraction of certain deduction/non-inclusion mismatches arising from payments or quasi-payments in relation to which the payer is a hybrid entity.
(10) Chapter 6 contains provision for the counteraction of certain deduction/non-inclusion mismatches arising in relation to internal transfers of money or money's worth made, or treated as made, by a multinational company's permanent establishment in the United Kingdom to the territory in which the company is resident for tax purposes.
(11) Chapter 7 contains provision for the counteraction of certain deduction/non-inclusion mismatches arising from payments or quasi-payments in relation to which a payee is a hybrid entity.
(12) Chapter 8 contains provision for the counteraction of certain deduction/non-inclusion mismatches arising from payments or quasi-payments in relation to which a payee is a multinational company.
(13) Chapter 9 contains provision for the counteraction of certain double deduction mismatches arising from a company being a hybrid entity.
(14) Chapter 10 contains provision for the counteraction of certain double deduction mismatches involving dual resident companies or relevant multinational companies.
(15) Chapter 11 contains provision about imported mismatches.
(16) Chapter 12 contains provision—
(a) for adjustments to be made where a reasonable supposition made for the purposes of this Part turns out to be mistaken or otherwise ceases to be reasonable, and
(b) for deductions from taxable total profits to be made where a relevant deduction has been denied under certain provisions of this Part and amounts of ordinary income arise later than is permitted.
(16A) Chapter 12A contains provision allowing surplus dual inclusion income to be allocated within a group of companies.
(17) Chapter 13 contains anti-avoidance provision.
(17A) Chapter 13A makes provision about the application of Chapters 3, 4, 5, 7, 9 and 11 in cases involving transparent funds (within the meaning of that Chapter).
(18) Chapter 14 contains definitions and other provision about the interpretation of this Part.
(19) Each of Chapters 3 to 10 contains provision specifying that some or all of this Part (and any corresponding provision under the law of a territory outside the United Kingdom) is to be disregarded when determining whether a mismatch arises for the purposes of that Chapter and, if so, in what amount, see—
(a) section 259CA(4) and (5),
(b) section 259DA(5),
(c) section 259EA(5) and (6),
(d) section 259FA(4), (5) and (6),
(e) section 259GA(5) and (6),
(f) section 259HA(6) and (7),
(g) section 259IA(2) and (3), and
(h) section 259JA(5).
(20) The effect of the provisions mentioned in subsection (19) is that Chapters 3 to 10 (or any corresponding provision under the law of a territory outside the United Kingdom) have effect in the following sequence—
(a) Chapter 4,
(b) Chapter 3,
(c) Chapter 5,
(d) Chapter 6,
(e) Chapter 7,
(f) Chapter 8,
(g) Chapter 9, and
(h) Chapter 10.
259B “Tax” means certain taxes on income and includes foreign tax etc
(1) In this Part “tax” means—
(a) income tax,
(b) the charge to corporation tax on income,
(c) diverted profits tax,
(d) the CFC charge,
(e) foreign tax, or
(f) a foreign CFC charge.
(2) In subsection (1) “foreign tax” means a tax chargeable under the law of a territory outside the United Kingdom so far as it—
(a) is charged on income and corresponds to United Kingdom income tax, or
(b) is charged on income and corresponds to the United Kingdom charge to corporation tax on income.
(3) A tax is outside the scope of subsection (2) if it—
(a) is chargeable under the law of a province, state or other part of a country, or
(b) is levied by or on behalf of a municipality or other local body.
(3ZA) A tax is not within paragraph (a) or (b) of subsection (2) so far as it is charged on income that—
(a) has arisen to an entity that—
(i) is not subject to the tax (as regards that income), and
(ii) is, under the law of the territory referred to in that subsection, regarded as being a person for the purposes of the tax, but
(b) is to be brought into account for the purposes of that tax by a different entity.
(3A) The payment of any withholding tax in respect of any amount is to be ignored for the purposes of this Part.
(4) In this Part—
“CFC” and “the CFC charge” have the same meaning as in Part 9A (see section 371VA);
“foreign CFC charge” means a charge (by whatever name known) under the law of a territory outside the United Kingdom which is similar to the CFC charge (and reference to a “foreign CFC” is to be read accordingly).
(5) In any case where—
(a) a person is resident in a territory outside the United Kingdom generally for the purposes of the law of the territory or for particular purposes under that law, and
(b) the law of the territory has no provision for a person to be resident for tax purposes under its law,
any reference in Chapter 8 or 11 to a person's residence for tax purposes in the territory is to be read as a reference to the person's residence as mentioned in paragraph (a).
259BA References to equivalent provision to this Part under the law of a territory outside the United Kingdom
(1) A reference in this Part to provision under the law of a territory outside the United Kingdom that is equivalent to—
(a) this Part, or
(b) a provision of this Part,
is to be read in accordance with subsection (2).
(2) The reference is to provision under the law of a territory outside the United Kingdom that it is reasonable to suppose—
(a) is based on the Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements published by the Organisation for Economic Cooperation and Development (“OECD”) on 5 October 2015 or any replacement or supplementary publication, and
(b) has effect for the same, or similar, purposes to this Part or (as the case may be) the provision of this Part.
(3) In paragraph (a) of subsection (2) “replacement or supplementary publication” means any document that is approved and published by the OECD in place of, or to update or supplement, the report mentioned in that paragraph (or any replacement of, or supplement to, it).
259BB Meaning of “payment”, “quasi-payment”, “payer”, “payee” etc
(1) In this Part “payment” means any transfer—
(a) of money or money's worth directly or indirectly from one person (“the payer”) to one or more other persons, and
(b) in relation to which (disregarding this Part and any equivalent provision under the law of a territory outside the United Kingdom) an amount (a “relevant deduction”) may be deducted from the payer's income for a taxable period (the “payment period”) for the purposes of calculating the payer's taxable profits.
(2) For the purposes of this Part, there is a “quasi-payment”, in relation to a taxable period (the “payment period”) of a person (“the payer”), if (disregarding this Part and any equivalent provision under the law of a territory outside the United Kingdom)—
(a) an amount (a “relevant deduction”) may be deducted from the payer's income for that period for the purposes of calculating the payer's taxable profits, and
(b) making the assumptions in subsection (4), it would be reasonable to expect an amount of ordinary income to arise to one or more other persons as a result of the circumstances giving rise to the relevant deduction.
(3) But a quasi-payment does not arise under subsection (2) if—
(a) the relevant deduction is an amount that is deemed, under the law of the payer jurisdiction, to arise for tax purposes, and
(b) the circumstances giving rise to the relevant deduction do not include any economic rights, in substance, existing between the payer and a person mentioned in subsection (2)(b).
(4) The assumptions are that (so far as would not otherwise be the case)—
(a) any question as to whether an entity is a distinct and separate person from the payer is determined in accordance with the law of the payer jurisdiction,
(b) any persons to whom amounts arise, or potentially arise, as a result of the circumstances giving rise to the relevant deduction adopt the same approach to accounting for those circumstances as the payer, and
(c) any persons to whom amounts arise, or potentially arise, as a result of those circumstances—
(i) are, under the law of the payer jurisdiction, resident in that jurisdiction for tax purposes, and
(ii) carry on a business, in connection with which those circumstances arise, in the payer jurisdiction.
(5) In this Part—
(a) references to a quasi-payment include all the circumstances giving rise to the relevant deduction mentioned in subsection (2)(a), and
(b) references to a quasi-payment being made are to those circumstances arising.
(6) In this Part “payee” means—
(a) in the case of a payment, any person—
(i) to whom the transfer is made as mentioned in subsection (1)(a), or
(ii) to whom an amount of ordinary income arises as a result of the payment, and
(b) in the case of a quasi-payment, any person—
(i) to whom it would be reasonable to expect an amount of ordinary income to arise as mentioned in subsection (2)(b), or
(ii) to whom an amount of ordinary income arises as a result of the quasi-payment.
(7) For the purposes of this Part, in the case of a quasi-payment, the payer is “also a payee” if—
(a) an entity is not a distinct and separate person from the payer for the purposes of a tax charged under the law of the United Kingdom,
(b) that entity is a distinct and separate person from the payer for the purposes of a tax charged under the law of the payer jurisdiction, and
(c) it would be reasonable to expect an amount of ordinary income to arise to that entity as mentioned in subsection (2)(b).
(8) In this section “payer jurisdiction” means the jurisdiction under the law of which the relevant deduction may (disregarding this Part and any equivalent provision under the law of a territory outside the United Kingdom) be deducted.
(9) In this Part “payee jurisdiction”, in relation to a payee, means a territory in which—
(a) the payee is resident for tax purposes under the law of that territory, or
(b) the payee has a permanent establishment.
(1) This section has effect for the purposes of this Part.
(2) “Ordinary income” means income that is brought into account, before any deductions, for the purposes of calculating the income or profits on which a relevant tax is charged (“taxable profits”).
(3) But an amount of income is not brought into account for those purposes to the extent that —
(a) it is charged to the relevant tax at a nil rate, or
(b) it is excluded, reduced or offset by any exemption, exclusion, relief, or credit—
(i) that applies specifically to all or part of the amount of income (as opposed to ordinary income generally), or
(ii) that arises as a result of, or otherwise in connection with, a payment or quasi-payment that gives rise to the amount of income.
(4) If all the relevant tax charged on taxable profits is, or falls to be, refunded, none of the income brought into account in calculating those taxable profits is “ordinary income”.
(5) If a proportion of the relevant tax charged on taxable profits is, or falls to be, refunded, the amount of any income brought into account in calculating those taxable profits that is “ordinary income” is proportionally reduced.
(6) For the purposes of subsections (4) and (5) an amount of relevant tax is refunded if and to the extent that—
(a) any repayment of relevant tax, or any payment in respect of a credit for relevant tax, is made to any person, and
(b) that repayment or payment is directly or indirectly in respect of the whole or part of the amount of relevant tax,
but an amount refunded is to be ignored if and to the extent that it results from qualifying loss relief.
(7) In subsection (6) “qualifying loss relief” means—
(a) any means by which a loss might be used for corporation tax or income tax purposes to reduce the amount in respect of which a person is liable to tax, or
(b) any corresponding means by which a loss corresponding to a relevant tax loss might be used for the purposes of a relevant tax other than corporation tax or income tax to reduce the amount in respect of which a person is liable to tax,
(and in paragraph (b) “relevant tax loss” means a loss that might be used as mentioned in paragraph (a)).
(8) References to an amount of ordinary income being “included in” taxable profits are to that amount being brought into account for the purposes of calculating those profits.
(8A) Income is to be treated as “ordinary income” if it would fall to be brought into account for the purpose of calculating taxable profits of a person but for the fact that the person is a qualifying institutional investor (and, if the person is based in a territory under the law of which there is no relevant tax on income of the kind in question, if the territory had such a tax).
For the meaning of “qualifying institutional investor” see section 259NDA.
(9) In this section “relevant tax” means a tax other than the CFC charge or a foreign CFC charge.
(10) Section 259BD contains provision for ordinary income to arise to chargeable companies by virtue of the CFC charge or a foreign CFC charge.
259BD Chargeable companies in respect of CFCs and foreign CFCs
(1) This section has effect for the purposes of this Part.
(2) Subsections (3) to (7) apply where an amount of income arises to an entity (“C”) that is a CFC, a foreign CFC or both and all or part of that amount (the “relevant income”)—
(a) is not ordinary income of C under section 259BC, or
(b) arises as a result of a payment or quasi-payment under, or in connection with, a financial instrument or hybrid transfer arrangement and—
(i) is (disregarding subsection (4)) ordinary income of C under section 259BC for a taxable period, but
(ii) under taxed.
(3) The following steps determine whether, and to what extent, the relevant income is “ordinary income” of a chargeable company in relation to the CFC charge or a foreign CFC charge.
Step 1 Determine—
whether any of the relevant income is brought into account in calculating C's chargeable profits for the purposes of the CFC charge or a foreign CFC charge, and
if so, the amount of the relevant income that is so brought into account for the purposes of each relevant charge.
If none of the relevant income is so brought into account, then none of it is “ordinary income” of a chargeable company and no further steps are to be taken.
See subsections (10) to (12) for further provision about how this step is to be taken.
For the purposes of this section—
“relevant chargeable profits” are chargeable profits in relation to the calculation of which, for the purposes of the CFC charge or a foreign CFC charge, any of the relevant income is brought into account;
“relevant charge” means a charge in relation to which any of the relevant income is brought into account in calculating chargeable profits.
Step 2 In relation to each relevant charge, determine the proportion of C's relevant chargeable profits, for the purposes of that charge, that is apportioned to each chargeable company.
For the purposes of this section, each chargeable company to which 25% or more of C's relevant chargeable profits for the purposes of a relevant charge are apportioned is a “relevant chargeable company”.
If there are no relevant chargeable companies in relation to any relevant charges, then none of the relevant income is “ordinary income” of a chargeable company and no further steps are to be taken.
Step 3 In relation to each relevant chargeable company, determine what is the appropriate proportion of the relevant income brought into account in calculating relevant chargeable profits, for the purposes of the relevant charge concerned.
That proportion of that income is “ordinary income” of that company for the taxable period for which that charge is charged on it by reference to those profits.
For the purposes of this step, the “appropriate proportion”, in relation to a relevant chargeable company, is the same as the proportion of the relevant chargeable profits that is apportioned to it for the purposes of the relevant charge.
(4) An amount of relevant income that is ordinary income of a relevant chargeable company in accordance with subsection (3) is not ordinary income of C (so far as it otherwise would be).
(5) Relevant chargeable profits apportioned to a relevant chargeable company for the purposes of a relevant charge are “taxable profits” of that company for the taxable period for which the charge is charged on it by reference to those profits.
(6) The amount of the relevant income that is ordinary income of that relevant chargeable company under subsection (3), by virtue of being brought into account in calculating those relevant chargeable profits, is “included in” those taxable profits.
(7) References to tax charged on taxable profits include a relevant charge charged by reference to relevant chargeable profits that are taxable profits under subsection (5).
(8) For the purposes of subsection (2)(b), an amount of ordinary income is “under taxed” if the highest rate at which tax is charged, for C's taxable period, on the taxable profits in which the amount is included, taking into account on a just and reasonable basis any credit for underlying tax, is less than C's full marginal rate for that period.
(9) In subsection (8)—
(a) C's “full marginal rate” means the highest rate at which the tax that is chargeable on those taxable profits could be charged on taxable profits, of C for the taxable period, which include ordinary income that arises from, or in connection with, a financial instrument, and
(b) “credit for underlying tax” means a credit or relief given to reflect tax charged on profits that are wholly or partly used to fund (directly or indirectly) the payment or quasi-payment mentioned in subsection (2)(b).
(10) For the purposes of step 1 in subsection (3), section 259BC(3) applies for the purposes of determining the extent to which an amount of relevant income is brought into account in calculating chargeable profits as it applies for the purposes of determining the extent to which an amount of income is brought into account for the purposes of calculating taxable profits.
(11) Subsection (12) applies for the purposes of step 1 in subsection (3), if—
(a) the amount of income arising to C mentioned in subsection (2)—
(i) is not all relevant income, and
(ii) is only partly brought into account in calculating chargeable profits for the purposes of the CFC charge or a foreign CFC charge, and
(b) accordingly, it falls to be determined whether, and to what extent, the relevant income is brought into account in calculating those profits for the purposes of the charge concerned.
(12) The relevant income is to be taken to be brought into account (if at all) only to the extent that the total amount of income mentioned in subsection (2) that is brought into account exceeds the amount of income mentioned in that subsection that is not relevant income.
(12A) For the purposes of subsection (2)—
(a) a qualifying CFC amount arising to C is treated as an amount of relevant income,
(b) a qualifying CFC amount arising to C, for a permitted taxable period, is “under taxed” if the highest rate at which tax is charged on the amount, taking into account on a just and reasonable basis the effect of any credit for underlying tax, is less than C’s full marginal rate for that period,
(c) in determining C’s “full marginal rate”, the reference to the taxable profits mentioned in subsection (9) includes any qualifying CFC amount, and
(d) in determining a “credit for underlying tax”, the reference to profits includes any qualifying CFC amount.
(12B) For the purposes of subsection (12A) a “qualifying CFC amount” means an amount arising to C which is brought into account in calculating chargeable profits for the purposes of a foreign CFC charge.
(12C) But an amount is not regarded for this purpose as brought into account so far as—
(a) the amount is excluded, reduced or offset for the purposes of the foreign CFC charge by any exemption, exclusion, relief or credit that—
(i) applies specifically to all or part of the amount (as opposed to amounts brought into account for those purposes generally), or
(ii) arises as a result of, or otherwise in connection with, a payment or quasi-payment that gives rise to the amount, or
(b) the sum charged for the purposes of the foreign CFC charge is, or falls to be, refunded (and section 259BC(6) and (7) apply for the purposes of this paragraph with the necessary modifications).
(13) In this section—
“chargeable company”—
in relation to the CFC charge, has the same meaning as in Part 9A (see section 371VA), and
in relation to a foreign CFC charge, means an entity (by whatever name known) corresponding to a chargeable company within the meaning of that Part;
“chargeable profits”—
in relation to the CFC charge, has the same meaning as in that Part (see that section), and
in relation to a foreign CFC charge, means the concept (by whatever name known) corresponding to chargeable profits within the meaning of that Part (including any qualifying CFC amount within the meaning given by subsection (12B));
“hybrid transfer arrangement” has the meaning given by section 259DB.
259BE Meaning of “hybrid entity”, “investor” and “investor jurisdiction”
(1) For the purposes of this Part, an entity is “hybrid” if it meets conditions A and B.
(2) Condition A is that the entity is regarded as being a person for tax purposes under the law of any territory.
(3) Condition B is that—
(a) some or all of the entity's income or profits are treated (or would be if there were any) for the purposes of a tax charged under the law of any territory, as the income or profits of a person or persons other than the person mentioned in subsection (2), or
(b) under the law of a territory other than the one mentioned in subsection (2), the entity is not regarded as a distinct and separate person to an entity or entities that are distinct and separate persons under the law of the territory mentioned in that subsection.
(4) For the purposes of this Part—
(a) where subsection (3)(a) applies, a person who is treated as having the income or profits of the hybrid entity is an “investor” in it,
(b) where subsection (3)(b) applies, an entity that—
(i) is regarded as a distinct and separate person to the hybrid entity under the law of the territory mentioned in subsection (2), but
(ii) is not regarded as a distinct and separate person to the hybrid entity under the law of another territory,
is an “investor” in the hybrid entity, and
(c) any territory under the law of which an investor is within the charge to a tax is an “investor jurisdiction” in relation to that investor.
(1) In this Part “permanent establishment” means anything that is—
(a) a permanent establishment of a company within the meaning of the Corporation Tax Acts (see section 1119 of CTA 2010), or
(b) within any similar concept under the law of a territory outside the United Kingdom.
(2) A concept is not outside the scope of subsection (1)(b) by reason only that it is not based on Article 5 of a Model Tax Convention on Income and Capital published by the Organisation for Economic Cooperation and Development.
(1) This Chapter contains provision that counteracts hybrid or otherwise impermissible deduction/non-inclusion mismatches that it is reasonable to suppose would otherwise arise from payments or quasi-payments under, or in connection with, financial instruments.
(2) The Chapter counteracts mismatches where the payer or a payee is within the charge to corporation tax and does so by altering the corporation tax treatment of the payer or a payee.
(3) Section 259CA contains the conditions that must be met for this Chapter to apply.
(4) Section 259CB defines “hybrid or otherwise impermissible deduction/non-inclusion mismatch” and provides how the amount of the mismatch is to be calculated.
(5) Section 259CC contains definitions of certain terms used in section 259CB.
(6) Section 259CD contains provision that counteracts the mismatch where the payer is within the charge to corporation tax for the payment period.
(7) Section 259CE contains provision that counteracts the mismatch where a payee is within the charge to corporation tax and neither section 259CD nor any equivalent provision under the law of a territory outside the United Kingdom fully counteracts the mismatch.
(8) See also—
(a) section 259BB for the meaning of “payment”, “quasi-payment”, “payment period”, “relevant deduction”, “payer” and “payee”, and
(b) section 259N for the meaning of “financial instrument”.
(1) This Chapter applies if conditions A to D are met.
(2) Condition A is that a payment or quasi-payment is made under, or in connection with, a financial instrument.
(3) Condition B is that—
(a) the payer is within the charge to corporation tax for the payment period, or
(b) a payee is within the charge to corporation tax for an accounting period some or all of which falls within the payment period.
(4) Condition C is that it is reasonable to suppose that, disregarding the provisions mentioned in subsection (5), there would be a hybrid or otherwise impermissible deduction/non-inclusion mismatch in relation to the payment or quasi-payment (see section 259CB).
(5) The provisions are—
(a) this Chapter and Chapters 5 to 10, and
(b) any equivalent provision under the law of a territory outside the United Kingdom.
(6) Condition D is that—
(a) it is a quasi-payment that is made as mentioned in subsection (2) and the payer is also a payee (see section 259BB(7)),
(b) the payer and a payee are related (see section 259NC) at any time in the period—
(i) beginning with the day on which any arrangement is made by the payer or a payee in connection with the financial instrument, and
(ii) ending with the last day of the payment period, or
(c) the financial instrument, or any arrangement connected with it, is a structured arrangement.
(7) The financial instrument, or an arrangement connected with it, is a “structured arrangement” if it is reasonable to suppose that—
(a) the financial instrument, or arrangement, is designed to secure a hybrid or otherwise impermissible deduction/non-inclusion mismatch, or
(b) the terms of the financial instrument or arrangement share the economic benefit of the mismatch between the parties to the instrument or arrangement or otherwise reflect the fact that the mismatch is expected to arise.
(8) The financial instrument or arrangement may be designed to secure a hybrid or otherwise impermissible deduction/non-inclusion mismatch despite also being designed to secure any commercial or other objective.
(9) Sections 259CD (cases where the payer is within the charge to corporation tax for the payment period) and 259CE (cases where a payee is within the charge to corporation tax) contain provision for the counteraction of the hybrid or otherwise impermissible deduction/non-inclusion mismatch.