835C Basic rules on transfer pricing.

(1) Subject to this Part, this section applies to any arrangement—

(a) involving the supply and acquisition of goods, services, money, assets (including intangible assets) or anything else of commercial value,

(b) where, at the time of the supply and acquisition, the person making the supply (in this Part referred to as the “supplier” ) and the person making the acquisition (in this Part referred to as the “acquirer” ) are associated, and

(c) the profits or gains or losses arising from the relevant activities are within the charge to tax in the case of either the supplier or the acquirer or both.

(2) (a) If the amount of the consideration payable (in this Part referred to as the “actual consideration payable” ) for an acquisition under any

arrangement to which this section applies exceeds the arm’s length amount, then the profits or gains or losses of the acquirer that are chargeable to tax shall be computed as if the arm’s length amount were payable instead of the actual consideration payable.

(b) If the amount of the consideration receivable (in this Part referred to as the “actual consideration receivable” ) for a supply under any arrangement to which this section applies is less than the arm’s length amount, then the profits or gains or losses of the supplier that are chargeable to tax shall be computed as if the arm’s length amount were receivable instead of the actual consideration receivable.

(3) In this section the “arm’s length amount” of consideration for a supply and acquisition under an arrangement refers to the amount of consideration that independent parties dealing at arm’s length would have agreed in relation to the supply and acquisition and subsections

(4) and (5) shall apply for the purposes of determining the amount of that consideration.

(4) The arm’s length amount of consideration for a supply and acquisition under an arrangement shall be determined by—

(a) identifying the actual commercial or financial relations between the supplier and the acquirer and the conditions and economically relevant circumstances attaching to those relations (the “identified arrangement” ), and

(b) applying the transfer pricing method set out in the transfer pricing guidelines (as defined in section 835D) that is, in the circumstances, the most appropriate so as to determine the arm’s length amount of consideration for the identified arrangement.

(5) For the purposes of subsection (4)(a)—

(a) the identified arrangement shall be based on the substance of the commercial or financial relations between the supplier and the acquirer where the form of the arrangement is inconsistent with the substance of those relations,

(b) if the identified arrangement, viewed in its totality, differs from that which would have been adopted by independent parties behaving in a commercially rational manner in comparable circumstances then, pursuant to the principles set out in Chapter I, D.2 of the transfer pricing guidelines, the identified arrangement shall be—

(i) disregarded (and, for the purposes of subsection (2)(a), the profits or gains or losses that are chargeable to tax of a relevant person who is an acquirer in relation to that disregarded arrangement, shall be computed as if, instead of the actual consideration payable under the arrangement, no consideration were payable), or

(ii) replaced by an alternative arrangement that achieves a

commercially rational expected result (and such replacement alternative arrangement shall be regarded as the identified arrangement accordingly).

(6) The reference to a supply or acquisition of an asset in subsection (1)(a) shall, in relation to a chargeable asset, include a disposal or acquisition, as the case may be, of the chargeable asset and, without prejudice to the generality of the foregoing, any reference in section 835HB to a disposal of a chargeable asset shall for the purposes of this Part be construed as being a reference to a supply of the asset.

(7) Where the actual consideration payable under an arrangement exceeds the arm’s length amount and any amount of that excess is treated as a distribution under any provision of the Tax Acts, then for the purposes of computing the amount of profits or gains or losses of the acquirer that are chargeable to tax under Schedule D, subsection (2)(a) shall apply as if the reference in that subsection to the actual consideration payable were a reference to an amount equal to the actual consideration payable less the amount treated as a distribution and the references to the actual consideration payable by the first-mentioned person in subsections (1)(a) and (3) of section 835H shall be construed accordingly.

(8) This section shall not apply to an arrangement involving a sale or transfer of trading stock to which section 89(4) applies.