Company taxation. Fresh straw on the camel’s back

Date: 27/03/04

New rules on transfer prices and debt, new compliance costs. Blame the EU

BUSINESS already has plenty of grumbles about the EU, but there's another one on its way. On April 1st, new rules on transfer pricing within companies come into force which are likely to prove costly, in both money and administrative pain.

The Inland Revenue, like any rich country's tax-collector, has long-standing rules to stop multinationals manipulating cross-border transactions within a group in such a way that its profits turn up in some tax haven abroad. The tricks are simple. Worldbouquet plc, let's call it, imports flowers to sell in Britain from a Colombian associate - and pays a “transfer price” that is double the real price. Or maybe Worldbouquet (Antilles) raises $500m and lends it on to the British company - at an excessive rate of interest. In either case, the result is fat profits abroad, none in London.

These ploys are of little use inside Britain: profits in Lincolnshire are as taxable as profits at New Covent Garden. Yet now the rules on transfer prices and intra-group debt are to apply even to purely British transactions by any business above medium size (ie, with 250-plus employees, and turnover of more than £35m or assets above £30m). And in “exceptional” cases, the threshhold may be lower still: only small businesses (up to 50 employees and £7m turnover) can feel safe.

This is happening because of a series of rulings by the EU court in favour of EU multinationals claiming to have suffered discrimination. In the days of advance corporation tax, a British subsidiary paying dividends to a British parent could escape that tax, but not if the parent was foreign. Hoechst, a German chemical company, challenged this. The case went up to the EU court, and in 2000 Hoechst won. In 2002 a Dutch parent won a case about interest payments from a German subsidiary. Last year in Britain, Marks & Spencer claimed it should be allowed to set losses at its now defunct subsidiary in France against its British profits. That case is now at the EU court - and already some 55 other multinationals are challenging the Inland Revenue on much the same grounds as M&S.

The issues vary, but the EU court has one firm principle: within the EU, borders don't count. Till now, Britain's rules on transfer pricing have cut across that principle: the Paris parent of a Kent company has had to obey them, a London parent has not. So either Gordon Brown could tighten the rules to hit purely British dealings too; or he could extend freedom from them to the entire EU, and see transfer prices fiddled to show profits in, for instance, Ireland (corporation tax 12.5%, against Britain's 30%) or one of the several about-to-join EU countries with low rates.

For companies that have barely bothered their heads about intra-group prices or interest rates, keeping track, and being able to prove it, will be a real hassle. The initial cost, says PricewaterhousCooper, could be up to £200,000, with yearly running costs up to half that. Companies have had to hurry: as the CBI laments, it is not four months since Mr Brown announced his plans, let alone the details. And it will be rash to go slow or skimp: an Inland Revenue inquiry might cost £500,000. No vast sums in turnover terms, but on profits of, say, £2m- £3m not peanuts.

New rules on transfer prices and debt, new compliance costs. Blame the EU

• Primary Source

http://ec.europa.eu/taxation_customs/taxation/company_tax/index_en.htm http://ec.europa.eu/taxation_customs/taxation/company_tax/index_en.htm

http://ec.europa.eu/comm/taxation_customs/taxation/company_tax/transfer_pricing.htm http://ec.europa.eu/comm/taxation_customs/taxation/company_tax/transfer_pricing.htm

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