IFM40650 - Other tax issues: transfer pricing: introduction and legislative changes

FA22/SCH2/PARAS 40 and 41

Background

While the surrounding structure of a QAHC and its purpose may differ depending on its relevant interest holders and the type of assets in which it seeks to invest, this transfer pricing guidance focuses on arrangements where the QAHC is established as an intermediary company between a collective investment vehicle and the company to which that vehicle is seeking to lend funds or acquire an interest in. Consideration should also be given to the OECD Transfer Pricing Guidelines and in particular Chapter X.

The QAHC regime restricts the main activities of the QAHC to carrying on an investment business. The investment activities of QAHCs will often be carried out in tandem with investment management activities conducted by the investment manager of, or investment advisor to, the collective investment scheme. While QAHCs must at least make board level decisions around the investments by the QAHC, in many cases they will be reliant on the skills and expertise provided by an investment manager or advisor acting for the owners of the QAHC. A key consideration when looking at the transfer pricing analysis is the recognition that certain individuals may have multiple employments, for example, a director of the QAHC may also be employed by the investment manager or investment advisor. In such cases, it is important to recognise and define the role they perform in each of these duties, so both entities do not receive a duplicate reward for the same functions being performed by the same individual.

Documentation

HMRC does not want businesses to suffer disproportionate compliance costs so QAHCs should prepare and retain such documentation as is reasonable given the nature, size, and complexity (or otherwise) of their activities and the relevant transaction (or series of transactions) but which adequately demonstrates that their transfer pricing meets the arm’s length standard (see INTM483030). Consideration should also be given to the following:

  • The functions being performed by the QAHC. Whether any employees or Directors of the QAHC are also employed by the investment manager and what roles they perform in respect of each duty.
  • The risks being assumed by the QAHC in relation to the transactions it is party to and the risks assumed by other parties. Consideration should be given to the risk framework outlined in the OECD’s Transfer Pricing Guidelines and whether any QAHC functions could be considered controlling risks relating to the transactions.
Legislative changes

FA22/SCH2/PT6 introduced two modifications to TIOPA10/Part4 in respect of QAHCs; these are to switch off the transfer pricing exemption for small and medium-sized enterprises and to make adjustments to the participation condition. The aim of these modifications is to ensure the transfer pricing rules apply to transactions between the QAHC and its interest holders or parties controlled by those interest holders, thereby ensuring the QAHC retains an appropriate reward to reflect its activities. The intention is not to extend the transfer pricing provisions in relation to investments made by the QAHC where they would not otherwise apply because the participation condition is not met, and where the investments have no other connection to the interest holders.

Participation condition

FA22/SCH2/PARA40 ensures that any transactions between the QAHC and its interest holders, or any person with a sufficient connection to those interest holders, will meet the participation condition. Although the acting together rules in TIOPA10/S161 and TIOPA10/S162 (see INTM413180 and INTM519040) have a wide meaning and would likely apply to any transactions between the QAHC and its interest holders in relation to financing arrangements, the modifications in PARA 40 will ensure the participation condition is also met in relation to any non-financing arrangements. An example which will now be caught which previously might not have been, is where the QAHC receives services from or provides services to an investment manager, itself controlled by a minority investor. The acting together rules would not apply to this provision given it is not a financial transaction. Under the extended participation condition, however, this provision will come within the requirement to apply transfer pricing, thereby ensuring the QAHC is appropriately rewarded.

The modification to the participation condition does not apply to transactions between the QAHC and a person in which it makes an investment or any other transaction made by the QAHC with a person without a sufficient connection to the QAHC. However, such transactions would continue to be subject to the transfer pricing rules where the participation condition in Part 4 TIOPA 2010 is met.

Small and medium sized enterprises

FA22/SCH2/PARA41 disapplies the exemption in the transfer pricing rules for small and medium enterprises (SME) at TIOPA10/S166(1). This ensures that a QAHC or the other affected person to the provision cannot escape the obligation to apply the transfer pricing rules by virtue of being a small or medium enterprise. This exemption only applies in relation to the provisions between the other affected person and the QAHC and not transactions between the other affected person and a third person.

An example where this would apply is in relation to a SME investor in the QAHC. In such a scenario, the investor would be obliged to apply TIOPA10/S147 to any provision between it and the QAHC but would not need to do so in relation to other provisions with other persons, assuming it otherwise meets the criteria for the exemption to apply and is not caught by any of the exceptions.