Clause 33 - Provision not at arm's length:
Finance Bill
4:00 pm
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
The clause introduces a temporary waiver of penalties for inadequate documentation of transfer pricing for the tax years 2004–05 and 2005–06. As we have discussed, the transfer pricing rules were the most straightforward way to address current uncertainty for business. However, we recognise that it will take some businesses some time to adapt their record keeping fully to the new rules. I think that the hon. Gentleman would agree that the penalty waiver is a pragmatic measure to ensure that businesses have the time that they need to change their systems, and to minimise compliance costs.
The relaxation of the penalty regime for a transitional period of two years will give businesses time to adjust to the new rules. It will apply to all businesses, large and small, and to all transactions, cross-border and domestic. During this period, businesses will not be exposed to the risk of penalties for failing to keep records that demonstrate that results are arm's-length results for transfer pricing purposes.
Of course, businesses still need to make a reasonable attempt to establish an arm's-length result for transactions with connected businesses. Businesses can use the information currently available to them to meet the requirement from the start. However, as I have said, we recognise that it will take time to adapt the record-keeping systems to the new rules, which is why we are making provisions in this area. In effect, the penalty rules will not apply automatically; the Inland Revenue will investigate and use its discretion. In applying that discretion, the Inland Revenue will take account of the circumstances, including any mitigating circumstances. That is the point that the hon. Gentleman was pressing me on earlier.
We want to be reasonable. At the end of the two years—at the end of the 2005–06 period—we want the transition to be made in the best way and the transfer pricing rules to run smoothly. That is our aim. In getting there, the Revenue will take mitigating circumstances into account. The records to be included are those that demonstrate that a price is arm's length. The Inland Revenue will not be prescriptive about the precise nature of the records. They are simply to establish the arm's-length price.
I hope that the hon. Gentleman can see that there is a generous relaxation across the board with regard to the penalty regime. In the transition period, businesses will not be exposed to the risk of penalty for failing to keep records that demonstrate that the results are at arm's length for the transfer pricing. That is an important point, and I hope that my response satisfies the Committee.