Adoption of BEPS 8-10 into UK Statute with immediate & retrospective effect

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The UK’s March 2016 Budget is an ideal opportunity for the adoption of the OECD Report on BEPS 8-10 actions into UK statute, with immediate effect. As the Report focuses on and clarifies specific factors that already fall within the transfer pricing arm’s length principle it can be applied retrospectively.

BEPS Actions 8-10 aim to align transfer pricing outcomes with value creation. They cover the arm’s length principle, transfer pricing methods, intangibles, intra-group services and cost contribution arrangements.

The arm’s length principle is the cornerstone of transfer pricing rules.

It’s embedded in treaties, appears as Article 9(1) of the OECD and UN Model Tax Conventions and an agreed interpretation of the principle is set out in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “Guidelines), the latest consolidated version being issued in 2010.

Unfortunately, the arm’s length principle has proven vulnerable to manipulation by multinational enterprises and their advisors, which can lead to transfer pricing outcomes that do not align with value creation.

The BEPS 8-10 Action Plan Report clarifies and strengthens the Guidelines on the arm’s length principle and is aimed at addressing such manipulation.

The UK’s domestic transfer pricing legislation is in Part 4 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA10”).

Section 164 TIOPA10 requires that Part 4 is to be interpreted in accordance with OECD principles as set out in the Guidelines, but the next consolidated version of the Guidelines may not be published until 2017.

However, section 164(4) TIOPA10 effectively defines the “Guidelines” as the 2010 version, any later revised version or any update or supplement approved and published by the OECD and designated as the “Guidelines” by Treasury Order.

In other words, the BEPS 8-10 amendments can be incorporated into the UK’s transfer pricing legislation at Part 4 TIOPA10 by Treasury Order without the need for any changes to primary legislation.

The March Budget is an ideal opportunity for this change, which is likely to have immediate effect.

The original BEPS Action Plan required the guidance on the arm’s length principle to be clarified and strengthened and the BEPS 8-10 Report makes it very clear that it provides such clarification.

It focuses on specific factors that already fall within the arm’s length principle.

Therefore, the correct application of either the 2010 Guidelines or the 2015 BEPS 8-10 final report will give the same outcome, and so the 2015 clarifications can be applied retrospectively.

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