Consultative document on modernisation of the transfer pricing legislation.

• Position: Tax Executives Institute, December 19, 1997 - United Kingdom

On December 19, 1997, Tax Executives Institute submitted the following comments on the United Kingdom's transfer pricing policy to Inland Revenue. The submission, which took the form of a letter from TEI President Paul Cherecwich, Jr. to Kevin Hamer of Inland Revenue's International Division, was prepared under the aegis of the Institute's Task Force on US. Members Overseas whose chair is Lisa Poschcke-Koedt of Hewlett-Packard Company. (Ms. Peschcke-Koedt is currently on assignment in Geneva, Switzerland.) Preparation of the comments was coordinated by the International Tax Committee, whom chair is Joseph S. Tann, Jr of Ameritech Corporation. Among the individuals contributing to the submission were Michael Bacon of Griffin House (England), Joseph K. Chen of Levi Strauss Europe (Belgium), Guy Kersch of Monsanto Services International SA (Belgium), Iain Maclean of Digital Equipment Corporation International (Europe) (Switzerland), Susan G. Norton of Unilever (Netherlands), Nancy Perks of Microsoft Ltd. (England), and Peter Randall of Citibank House (England).

This letter responds to the 9 October 1997 Consultative Document entitled Modernisation of the Transfer Pricing Legislation. Tax Executives Institute thank the Government of the United Kingdom for affording us this opportunity to comment on the Consultative Document and commends the Inland Revenue for its work in this area.

Background

Tax Executives Institute (TEI) is the principal organisation of corporate tax professionals in North America. Our approximately 5,000 members represent nearly 3,000 of the leading corporations in the United States and Canada. TEI is a nonprofit organization that represents a cross-section of the business community; it is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and tax administrations alike. As a professional association, TEI is firmly committed to maintaining tax systems that work, systems that are administrable and with winch tax payers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the various tax laws relating to the operation of business enterprises. U.S. and Canadian companies have long been substantial investors in the United Kingdom. Many TEI members work for multinational companies that engage in international trade with the U.K. and through it with other European countries. Some members have substantial UK-based commercial operations. Thus, our member companies engage in significant levels of crossborder transactions involving the U.K.

TEI welcomes the opportunity to provide comments on the Consultative Document which seeks to clarify an area of tax law that has historically depended on relatively dated legislation and unpublished conventions. In an era where international trade and capital flows are growing every year, it is important for governments and taxpayers to ensure that the governing rules are well thought out and fairly applied, and that they strike the right balance between meeting the government's need to raise taxes and its responsibility not to impose too heavy a compliance burden on taxpayers.

The U.K. Government clearly strives for such a balance in the Consultative Document. In particular, TEI commends the Government for the proposed adoption of the arm's-length approach, as embodied in Article 9 of the OECD Model Tax Convention on Income and on Capital.(1) We believe, however, that the proposal could be improved with little risk to tax yield and still remain consistent with the overall approach taken by the Organisation for Economic Cooperation and Development in the final transfer pricing guidelines.(2)

Proposed Legislation

On 2 July 1997, the U.K Government announced its intention to amend the UK's transfer pricing legislation in the Finance Bill following the next Budget. New rules will be introduced requiring taxpayers to apply the arm's-length method in respect of transfer prices for purposes of calculating their taxable income. At the same time, the Government seeks to modernise the legislation.

Measures to improve predictability in the taxation of cross-border intra-group transactions should always be encouraged. No approach -- no matter how comprehensive -- however, can deal with all situations, so the new measures must be flexible. The proposed legislation should be applied reasonably, tempering external benchmarking by reference to an enterprise's own overall profitability. The Consultative Document rightly acknowledges that tax is only one of a multitude of business costs -- indeed, it is a major cost -- and that decisions on transfer pricing are not necessarily tax motivated.

While the legislation's thrust is unassailable, the proposal is unduly complex. We urge that, in drafting the Finance Bill (which will formally propose the legislation required), the writers adopt the simplified approach being used elsewhere in respect of the U.K. tax code. In particular, the legislation should explicitly incorporate Article 9 of the OECD model treaty rather than simply include a cross-reference to it. TEI would be...