The Budget did not signal any changes to the Transfer Pricing rules which is most welcome at this time as there is a packed schedule of initiatives over the next 12 months for transfer pricing at the OECD level, chief of which is the review and likely re-write of Chapter VI (Special Considerations for Intangible Property) and Chapter VIII (Cost Contribution Arrangements) of the OECD Transfer Pricing Guidelines.
However the Budget suggests an increasing reliance on the part of the Government on using transfer pricing principles to assist in tackling thorny corporate tax issues. A key example in this Budget is the forthcoming CFC legislation which makes use of transfer pricing principles in determining the relevant profits attributable to UK ‘significant people functions’ in the context of CFCs. It is also quite possible that transfer pricing principles will be relied upon in fashioning an effective GAAR although we will of course have to await the outcome of the consultation process. (see Graham’s blog here).
As regards CFCs, whilst there may well be further changes to the latest February 2012 draft that may be contained in the Finance Bill when it becomes law, the current draft aims to use transfer pricing principles set out in Articles 7 and 9 of the OECD Model Tax Convention to ensure that only companies that have a majority of their economic ownership of an asset attributable to the UK or bear an economic risk attributable to the UK are caught by the CFC legislation. Click here for previous Finance Bill 2012 update.
Perhaps this is a statement of faith in the arm’s length principle on the part of the UK government – in which case did we actually require additional CFC legislation or would a more definitive application of the arm’s length principle have sufficed? Supporters of the move will point to the effectiveness of relying on already established transfer pricing while sceptics may fear an increasing array of armour at the disposal of HMRC.