MTT21230 | Calculating the effective tax rate: Adjusted profits: Transactions requiring arm's length treatment

In general, transactions between members located in the same territory are not required to be adjusted when calculating underlying profits. This is because the movement of income from one member to another within the same territory generally does not impact on the overall amount of income subject to tax in that territory.

However, in some cases, an adjustment is required in respect of certain transactions between members of the same group located in the same territory. Where the conditions are met, these transactions must be reflected in the adjusted profits on an arm’s length basis, in accordance with section 149 of Finance (No.2) Act 2023.

These adjustments concern transactions between members located in the same territory. Transactions between members located in different territories may also be subject to adjustments to ensure that they are recorded on an arm’s length basis. See MTT21240 for further guidance.

Conditions

An adjustment will be required to a member’s underlying profits accounts where one of the following four conditions are met. The transaction must be reflected in the adjusted profits on an arm’s length basis for both members involved in the transaction.

Condition A will be met where:

• a debit is recorded in the underlying profits accounts of the member

• that debit arises from a transaction comprising of a transfer of an asset between the member and another member of the same group located in the same territory, and

• the transaction is not recorded on an arm’s length basis.

Condition B will be met where:

• the member is party to a transaction with another member of the same group located in the same territory

• one of the members is a minority owned member and the other is not, and

• the transaction is not recorded on an arm’s length basis in the underlying profits accounts.

Condition C will be met where:

• the member is party to a transaction with another member of the same group located in the same territory,

• one of the members is an investment entity and the other is not, and

• the transaction is not recorded on an arm’s length basis in the underlying profits accounts.

Condition D will be met where:

• the member is party to a transaction with another member of the same group located in the same territory, and

• the transaction is recorded at a different value in each member’s underlying profits accounts.

Arm’s length basis

For MTT purposes, 'arm’s length basis' is a basis for a transaction which reflects the conditions of the transaction as those conditions would have been, had the transaction been conducted between independent enterprises in a comparable transaction under comparable circumstances.

Transfer of assets or liabilities between group members

Some transfers of assets or liabilities between members of a group require the use of the arm’s length basis for both the transferor and transferee. See MTT44040 for further guidance.