13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Paul Lawes Tax Manager Virgin Management Limited UK-UK Transfer Pricing OECD Model

1313thth October 2004 October 2004Paul Lawes, Tax ManagerPaul Lawes, Tax Manager

Virgin Management LimitedVirgin Management Limited

Paul LawesPaul LawesTax Manager Tax Manager

Virgin Management LimitedVirgin Management LimitedUK-UK Transfer PricingUK-UK Transfer PricingOECD Model – Article 8OECD Model – Article 8Tax Aspects of Aircraft LeasingTax Aspects of Aircraft Leasing



A Little Bit About Me!A Little Bit About Me!

Over 5 years at Virgin Management LtdOver 5 years at Virgin Management LtdTeam of 8 in direct tax, 2 in VATTeam of 8 in direct tax, 2 in VATCorporation tax compliance & adviceCorporation tax compliance & adviceEmployment tax advice Employment tax advice Planes, trains & automobiles……soon to Planes, trains & automobiles……soon to

be spaceships!!be spaceships!!

A little bit about meA little bit about me



UK-UK Transfer Pricing - BasicsUK-UK Transfer Pricing - Basics

New regulations contained in Finance Act New regulations contained in Finance Act 2004.2004.

EU law challenges under Article 43 of EU EU law challenges under Article 43 of EU Treaty.Treaty.

Arm’s length principle for all connected Arm’s length principle for all connected UK-UK transactions.UK-UK transactions.



UK-UK Transfer Pricing UK-UK Transfer Pricing Key IssuesKey Issues

Inland Revenue to adopt a risk based Inland Revenue to adopt a risk based approachapproach

Areas of concernAreas of concern Transport issuesTransport issues Interest free loans.Interest free loans. Intercompany loan guaranteesIntercompany loan guarantees.. Intragroup royaltiesIntragroup royalties In-house group services.In-house group services. Contracted-out services passed on to group.Contracted-out services passed on to group. Low marginal tax rate vs standard tax rate businessesLow marginal tax rate vs standard tax rate businesses..



UK-UK Transfer PricingUK-UK Transfer PricingKey IssuesKey Issues

Compensating adjustments Compensating adjustments Balancing payments Balancing payments Dormant CompaniesDormant CompaniesDocumentationDocumentation



UK-UK Transfer PricingUK-UK Transfer Pricing

The way forward?The way forward?



Interpretation of Article 8 Interpretation of Article 8 OECD Treaty ModelOECD Treaty Model

Purpose Purpose Article 8 states that; Article 8 states that; ““Profits from the Profits from the

operation of ships or aircraft in international operation of ships or aircraft in international traffic shall be taxable only in the contracting traffic shall be taxable only in the contracting state in which the effective management of state in which the effective management of the enterprise is situatedthe enterprise is situated””

Competition & DeregulationCompetition & Deregulation




International TrafficInternational TrafficNew concept, “Ancillary Services”New concept, “Ancillary Services”




Ancillary servicesAncillary services Scope for the inclusion of a tourist business providing other travel Scope for the inclusion of a tourist business providing other travel

services such as accommodation and trips? services such as accommodation and trips?

Where is the cut off point? Where is the cut off point? Card Protection Plan Ltd v Commissioners ECJ Case C –349/96Card Protection Plan Ltd v Commissioners ECJ Case C –349/96 ““A service must be regarded as ancillary to a principal service if it does A service must be regarded as ancillary to a principal service if it does

not constitute an aim in itself, but a better means of enjoying the not constitute an aim in itself, but a better means of enjoying the principal service supplied.”principal service supplied.”

ConclusionConclusion More clarityMore clarity Consider Article 7 Business ProfitsConsider Article 7 Business Profits



Tax Aspects of Aircraft Tax Aspects of Aircraft LeasingLeasing

FA 2004 changes to the taxation of FA 2004 changes to the taxation of leasesleases No overhaul yet!No overhaul yet! Double benefit leasingDouble benefit leasing Trend in anti avoidance lawsTrend in anti avoidance laws



Double Benefit LeasingDouble Benefit LeasingPre - FA 2004Pre - FA 2004

UK Lessee

(Airline)

UK Lessor

(UK bank)

Leaseback

Sale £30m

Lease rentals (£30m plus finance charge)

Cost £40m

TWDV £25.5m

OMV £30m

Sale Proceeds

Tax effect:

Sale proceeds are capped at £25.5m with a deduction for the £30m rental payments.



Double Benefit LeasingDouble Benefit LeasingPost FA 2004Post FA 2004

UK Lessee

(Airline)

UK Lessor

(UK bank)

Leaseback

Sale £30m

Lease rentals (restricted to £25.5m plus finance charge)

Cost £40m

TWDV £25.5m

OMV £30m

Sale Proceeds

Tax effect:

Sale proceeds are capped at £25.5m with a deduction for the £25.5m rental payments.



Tax Aspects of Aircraft Tax Aspects of Aircraft LeasingLeasing

ConclusionsConclusions Operating leases are becoming Operating leases are becoming

more attractive. more attractive. Airlines looking for cash benefits. Airlines looking for cash benefits. Budget 2005 – EU law challenge?Budget 2005 – EU law challenge?



Thank youThank you

The EndThe End

Documents

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Paul Lawes Tax Manager Virgin Management Limited UK-UK Transfer Pricing OECD Model