INTM440210 | Transfer pricing: Types of transactions: share options: general

Scope of guidance

This guidance explains how transfer-pricing rules apply to the intra-group provision of employee share plans. It also considers the implications of Part 12 of Corporation Tax Act 2009 (exclusion of other deductions), and Section 249of TIOPA 2010 (the arbitrage receipts rule) and their interaction with the accounting standards.

Entities to which the transfer pricing rules apply may report under different accounting standards, IFRS 2 (for entities reporting under IFRS or FRS 101)or FRS 102 Section 26 (see BIM31015 to BIM31027 for more detail).

A typical scenario

An employee share incentive plan can take a number of different forms, including shares, share options, and “phantoms” (cash payments based on the rise in share prices over a period). The term “share-based payment” is used here to cover the range.

In a group situation the employing company (“Employer”) is commonly a subsidiary and the shares that are used are usually those of the group holding company or parent - or sometimes of an intermediate holding company. In most group cases the plan will be provided by the holding company or parent to its subsidiaries, enabling share-based payments to pass to its employees (if any) and to employees of group members. In this guidance the group member providing the plan is called the “Provider”.

Why transfer pricing issues arise

However the arrangements for administering and delivering an employee share plan within a group are set up, a facility is being provided, and transfer pricing rules will apply. Case law (the Special Commissioners’ decision in the case of Waterloo plc (1) Euston Ltd (2) Paddington Ltd (3) v Commissioners of the Inland Revenue, 2001)(SpC 301) establishes that the facility should be priced accordingly for the purposes of applying transfer pricing rules, with the Provider receiving or imputing receipts that reflect the full value of the facility it is providing.