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What is meant by “provision�?

»Ê¹ÚÌåÓýapp basic precondition in TIOPA10/S147(1)(d) permits an adjustment where the actual provision differs from the arm’s length provision. TIOPA10/S147 (7) defines provision as being a transaction or series of transactions. »Ê¹ÚÌåÓýappse terms are defined in TIOPA10/S150 (previously SCH28AA/PARA3).

S150(1) says that, for this Part of TIOPA10, ’transaction�

includes arrangements, understandings and mutual practices (whether or not they are, or are intended to be, legally enforceable),

and a series of transactions is defined at S150(2) as

a number of transactions each entered into (whether or not one after the other) in pursuance of, or in relation to, the same arrangement

Transactions within a series do not have to occur in a recognisable sequence. »Ê¹ÚÌåÓýappy may be simultaneous or removed in time from one another, but they have to be part of an overall arrangement or scheme.

»Ê¹ÚÌåÓýapp meaning of series of transactions is further widened by TIOPA10/S150 (4), which sets out a number of situations that do not prevent a series of transactions being recognised as such. »Ê¹ÚÌåÓýappre may be a series of transactions, even if, in relation to the “affected personsâ€� (INTM412030):

• there is no transaction in the series to which both those persons are parties,
• the parties to any arrangement in pursuance of which the transactions in the series are entered into do not include one or both of those persons, and
• there is one or more transactions in the series to which neither of those persons is a party

By recognising a series of transactions, the transfer pricing legislation can apply to more complex and indirect financial structures in the same way that it does to the most straightforward borrower / lender situation. However, irrespective of the complexity or number of transactions which make up the “series�, it should always be borne in mind that this legislation is still about a provision within TIOPA10/S147 between two persons that results in a tax advantage; see INTM412020 and INTM413050.

Examples of “series of transactions�

A simple example of indirect finance which would fall within the definition of a series of transactions is a UK borrower being lent money by an entirely unconnected third party bank, with a party connected to the borrower guaranteeing the loan.

A more complex example is where a company in the same group as the UK borrower has provided a guarantee to one bank, which then provides a guarantee to a second bank, and the second bank then lends money to the UK borrower. Here there is a step - between the first and second banks - which does not involve either the parent or the borrower. This is still a series of transactions, and one which, though difficult to detect, would fall within the scope of the thin capitalisation legislation. Apart from the provision of a guarantee, the most likely situations where the provision might consist of a series of transactions would be where an intermediary is acting in a nominee or agency capacity in providing finance cross border between group companies.

In guarantee cases of this nature, the questions to ask in considering the provision are:

• Without the guarantee(s) would the borrower have been able and willing to borrow on these terms?
• Had the borrower and the guarantor been at arm’s length from one another, would they have entered into the guarantee?

»Ê¹ÚÌåÓýapp specific sections concerning the factors to be considered when evaluating a loan between companies where the loan is guaranteed are TIOPA10/S152 and TIOPA10/S153 (INTM413110).