Taxation (International and Other Provisions) Act 2010 section 147

Tax calculations to be based on arm's length, not actual, provision

Section 147 establishes the core transfer pricing rule: where a transaction between two connected persons differs from what independent parties would have agreed, tax calculations must be adjusted to reflect the arm's length amount.

• The rule applies when two persons meet the "participation condition" (broadly, one controls the other or both are under common control), and their actual transaction terms differ from what independent enterprises would have agreed
• Where the non-arm's length terms confer a potential UK tax advantage on one or both parties, the advantaged person's profits and losses must be recalculated as though the arm's length terms had applied instead
• The rule does not apply to certain oil transactions where the price is already determined at market value under specific oil activity provisions
• Several exemptions and limitations apply, including for dormant companies, small and medium-sized enterprises, and generally the rule does not affect capital allowances, chargeable gains, or exchange gains and losses from loan relationships and derivative contracts