According to sources, the Upper Tribunal's decision against BlackRock regarding interest deductions it claimed on $4 billion in inter-company loans requires UK businesses to reset.
Other companies may also be affected by transfer pricing issues as a result of the UK Upper Tribunal's decision in favor of HM Revenue and Customs regarding BlackRock's loans issued as part of the acquisition of Barclays Global Investors.
After the July 19 decision, according to Jonathan Schwarz, a tax lawyer at Temple Chambers in London, businesses must "go back to basics."
The main takeaway from the UT, according to Schwarz, is to "reinforce that comparability is at the heart of the proper application of the arm’s-length principle. If uncontrolled transactions are reasonably comparable with the controlled transactions that taxpayers enter into, the arm’s-length standard with not be met."
tHe continues, "there are some mixed messages from the tribunal on the difficult question of group synergy and implicit support. In my view, the identification and valuation of these elements are objective and not, as the tribunal seemed to suggest, a one-way street in favour of the tax authority. "
BlackRock's arrangements, according to HMRC, did not follow the ALP. A First-tier Tribunal decision from November 2020 was overturned by the UT decision. BlackRock could file a counter-appeal with the Court of Appeal even though HMRC may have prevailed on appeal.
The large business team director at HMRC, Brian Redford, applauds the UT decision.
tAccording to Redford, "the Upper Tribunal agreed with HMRC’s position that there should be no tax deductions for interest payments on these inter-group loans,” says Redford, adding: “HMRC will take action against those who seek to avoid tax."
BlackRock says it is keeping its options open in the interim and that its UK tax history is clean.
"BlackRock has paid all of its UK corporation tax, including the payment some time ago of all tax due in relation to this matter. The purpose of this hearing related to the operation of a specific point of tax law ," according to a company spokesperson.
"Although the First-tier Tribunal agreed with BlackRock’s approach, the Upper Tribunal overturned that ruling. Following the Upper Tribunal’s judgment, we are closely evaluating our next steps," she adds.
The main point of contention between HMRC and BlackRock concerned whether or not the company's inter-company loans were made at arm's length.
This is why the case has ramifications for other businesses, according to a tax policy officer at a US bank with operations in the UK.
According to him, the question of whether the loans were made at arm's length has wider implications for transfer pricing than just the asset management sector.
The incident started when BlackRock bought BGI in 2010. As part of the agreement, BlackRock issued four $4 billion intercompany loans with staggered interest rates from its US affiliate to a UK holding company.
BlackRock first issued a short-term loan for $420 million at a rate of 2.2 percent. This was followed by loans for $1.6 billion at a rate of 4.6 percent, $1.4 billion at a rate of 5.2 percent, and $500 million at a rate of 6.6 percent. The 10-year maturity date was the longest. But in 2012, HMRC took action to change the interest rates for three of these loans.
The UK Revenue Service contested the initial interest rates, claiming that the loans were motivated by taxes and that independent companies would not have conducted these transactions. The interest rates were changed by HMRC from 4.6 to 3 percent, 5.2 to 3.5 percent, and 6.6 to 4.4 percent.
These new rates matched a BBB credit rating by having lower credit spreads. The appropriateness of the rating for the inter-company loans was questioned as a result. These loans were allegedly not made at arm's length, according to BlackRock.
The ALP serves as the industry benchmark for how to conduct transfer pricing for all multinational corporations. However, given the OECD's plans to reform the international tax system, which will greatly reduce the significance of the principle in favor of a more formulaic approach, this may soon change.
The ALP might be losing its relevance, but this might not be the worst outcome, according to a tax compliance officer at a European bank with operations in the UK.
"The arm’s-length principle works in theory, but you need to police it properly to make it work in practice. It’s predicated on the assumption that the rules work," he says.
"In theory, the arm’s-length principle means that the right price is the one that independent parties would choose. Years ago, everyone was manipulating the prices and they thought governments couldn’t catch up with them," he continues.
The majority of taxpayers' willingness to take risks has changed with the times. A tax director at a software company in London claims that his company has zero tolerance for taking tax risks, including tax evasion and avoidance.
Public perception of tax planning has changed as a result of scandals like the Panama Papers. As a result, businesses are under more scrutiny than ever before regarding their TP arrangements. The conflict between HMRC and BlackRock is just one of many.
BlackRock might decide to file an appeal given that the First-tier Tribunal's decision in its favor from November 2020 was favorable to the business. This decision allowed the company to contest changes made by HMRC that prevented it from deducting the full interest on its inter-company loans.
The lower tribunal, however, rejected HMRC's claim that it ought to take the company into account as a whole rather than using the separate entity approach. The tribunal discovered that, despite different outcomes for the larger corporate group, the questioned holding company could borrow at arm's length.
The tribunal determined that the business would have made the loans and racked up the same loan relationship debits at the same time. The First-tier Tribunal found that even without the tax benefit, this would have been the case.
The tribunal determined that the loans were issued for both a commercial and tax purpose, and it was reasonable to allocate all loan relationship debits to the commercial purpose. This made it possible for the business to deduct all of the interest.
Following the appeals court's ruling, multinational corporations doing business in the UK may need to reevaluate whether significant transactions comply with the ALP and whether long-standing TP arrangements are likely to be scrutinized by the tax authorities.
By fLEXI tEAM