Transfer Pricing Reform in The U.K.

From April 1, 2004, the U.K. transfer pricing rules applying to U.K. companies and permanent establishments (hereafter known as a "U.K. business") will be extended to apply to domestic transactions within the U.K. (i.e., between U.K. businesses), as well as to cross-border transactions.

From that date, the existing thin capitalisation rules will be abolished and will be incorporated within the new transfer pricing rules. The new rules apply in relation to the calculation of profits of U.K. businesses that arise on or after April 1, 2004.

The old legislation (section 770A and Schedule 28AA of the Income and Corporation Taxes Act 1988 ("ICTA")) required a U.K. business to calculate its taxable income by reference to an arm’s-length basis only for transactions with connected businesses outside the scope of U.K. tax where this would increase the amount of income subject to U.K. tax.