INTM550086D | Hybrids: introduction: examples of interaction with transfer pricing: double deduction scenario

Example analysis

In a scenario where:

• United States (US) investor sees the United Kingdom (UK) payer as a transparent entity

• UK payer is opaque in the UK

• UK payment is an allowable deduction

• US investor also has an allowable deduction

• under arm’s length terms, the value of the payment made by UK payer would be £60

Applying transfer pricing with Part 6A factored in

Step 1: Test outcome of actual provision, disregarding transfer pricing rules

Payer makes payment of £100. This is the double deduction amount for part 6A purposes. Counteraction under chapter 9 would therefore be to restrict use of deduction of £100 to being set against dual inclusion income.

Step 2: Test outcome of arm’s length provision

Payer makes payment of £60. For the purposes of part 6A, the deduction in the US would also be computed on the basis that a payment of £60 was made and is assumed in the example to be £60. This is the double deduction amount for part 6A purposes. Counteraction under chapter 9 would therefore be to restrict use of deduction of £60 to being set against dual inclusion income.

Step 3: Test if payer is a potentially advantaged person for transfer pricing purposes

Payer’s tax relief under the actual provision would be £100. Under the arm’s length provision, it would be £60. In each case that relief could only be set against dual inclusion income. Payer is therefore potentially advantaged.

Step 4: Recompute payer’s tax position as if the arm’s length provision was imposed

Payer is taxed as if it has made a payment of £60, which may only be set against dual inclusion income.

To the extent relevant, corresponding adjustments would be available under section.174 as if the arm’s length payment of £60 had been made.

Applying Part 6A (Chapter 9) to consider whether a further counteraction is required

Step 1: Identify double deduction amount

Payer makes payment of £100. However, this exceeds the arm’s length amount so transfer pricing would require recomputation of payer’s tax position as if it was paying £60. In identifying the double deduction amount, a payment of £60 would be assumed to be made for US purposes as well as for the UK and, as above, that is assumed in this example to give rise to a deduction in the US of £60. The double deduction amount is therefore £60.

Step 2: Apply counteraction

The double deduction amount of £60 is restricted to use against dual inclusion income. This is the same outcome as delivered by part 4 and so the separate application of part 6A has no consequence.