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Budget
17 March 1998
Following extensive consultations with business, the transfer
pricing rules are being modernised to bring them within self
assessment (SA), to ensure that they will operate more fairly
and effectively; and closer into line with the principles of
the Organisation for Economic Co-operation and Development
(OECD) and best international practice.
The new rules will be based on those set out in the Inland
Revenue consultative document issued on 9 October 1997; there
was a wide welcome for the Government's commitment to consult
on this important change, with many of those responding also
in favour of closer alignment with OECD principles. In the
light of the helpful responses received from taxpayers and
representative bodies, and to keep compliance costs to the
minimum necessary, the Government has decided to introduce a
number of refinements to the legislation, and to issue
additional guidance about its application in certain areas.
The new legislation will apply from the same time as the
introduction of Self Assessment for Companies; that is, for
chargeable periods ending on or after 1 July 1999.
The Inland Revenue are publishing a report on the
consultations, incorporating a factual analysis of the
responses received and a regulatory appraisal.
DETAILS
1. The majority of those responding to the Inland Revenue
Consultative Document issued last October accepted the key
propositions that the UK rules for transfer pricing should be
brought within SA and more closely into line with OECD and
best international practice. Many also welcomed the
opportunity to comment.
2. A number of respondents to the Consultative Document
made suggestions about ways in which the legislation could be
made clearer, and potential compliance costs reduced. The
Government is grateful for these helpful suggestions and
proposes to make a number of changes to the original
proposals to give effect to some of the representations
received. The main changes to the legislation are to:
revert to a narrower definition of the "control" relationship
between taxpayers potentially caught by the legislation, as
opposed to the wider definition proposed in the Consultative
Document ; and
include transitional provisions which would allow existing
joint venture arrangements affected by the proposals to
remain outside the scope of the new legislation for a maximum
of 3 years from Budget Day.
3. The Government also proposes to address concerns further
by:
- issuing new Inland Revenue guidance on the application of
the record-keeping rules and penalty provisions in
transfer pricing cases once the new rules have been
brought within SA.
- consulting with interested parties with a view to
introducing new legislation in the 1999 Budget to
provide for "Advance Pricing Arrangements" (see press
release "Transfer Pricing and Advance Pricing
Arrangements" [Inland Revenue]).
4. The Government has also decided to proceed with the
statutory mechanism for central monitoring of enquiries
proposed in the Consultative Document , which was widely
welcomed.
5. Many respondents also welcomed the proposal to remove the
vast majority of transactions between two UK taxpayers from
the scope of the legislation. However the Government has
decided that this exemption should not apply where a tax
advantage arises out of the special rules that apply to life
insurers.
6. The Government believes that the consultation exercise
has been very worthwhile, and that the new legislation,
amended as described and supplemented by additional Inland
Revenue guidance and central monitoring, will provide a fair
balance between taxpayers and the Exchequer.
NOTES FOR EDITORS
1. "Transfer prices" are the prices at which associated
enterprises transfer goods, services and other assets between
one another. Under the present legislation, taxpayers are
not obliged to apply the arm's length standard when
submitting their tax returns. Instead, the system depends
upon the Inland Revenue detecting inappropriate transfer
pricing and intervening to set it right. This creates
unacceptable risks to the UK Exchequer and potential
unfairness as between those taxpayers who take care to apply
the arm's length principle and those who do not.
2. The Chancellor announced in his Budget in July last year
that he intended to change and modernise the tax rules for
multinationals to make them more effective, to allow them to
be applied more fairly and to protect UK tax revenue; and
that he proposed to publish the relevant draft legislation
during 1997 and consult on the details. An Inland Revenue
Consultative Document was published last October (see Inland
Revenue press release: "Modernisation of the Transfer Pricing
Legislation: Publication of Inland Revenue Consultative
Document" of 9 October 1997).
3. A wide range of taxpayers, companies, tax professionals
and business and professional representative bodies submitted
responses to the Consultative Document. The Inland Revenue
also gave a series of presentations to, and held a number of
meetings with, interested parties about the operation of the
proposed new regime. The majority of respondents accepted
the key principles of bringing transfer pricing within self
assessment and more closely into line with OECD principles.
Many also welcomed these opportunities to comment. A number
of suggestions were made about ways in which the legislation
could be made clearer and fairer, and the changes announced
in this press release are designed to meet those concerns.
4. A summary of the replies to the consultative document,
and a regulatory appraisal, are on the Internet at:
Inland Revenue
5. The revenue yield arising from these changes is estimated
at 20 million pounds for 1999-2000 and 50 million pounds for
2000-01.
INLAND REVENUE PRESS OFFICE
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