Chapter 6: Balancing payments
Overview
395.Balancing payments may be made following a transfer pricing adjustment and are not taken into account in computing profits and losses. These payments enable the result of a transaction between two connected persons to be adjusted so that the persons end up in a position they would have been in had they been taxed on the basis of their actual transaction.
396.Balancing payments may also be made in cases where a guarantee is given and there is a transfer pricing adjustment as a result of the operation of section 153. Here the guarantor makes a payment to the borrower in recognition of the fact that the guarantor has received the benefit of the interest deduction, thus restoring the cash position to its original state.
397.The disadvantaged person or guarantor may alternatively elect to pay the additional tax incurred by the advantaged person following a transfer pricing adjustment.
Section 195: Qualifying conditions for purposes of section 196
398.This section provides the qualifying conditions for section 196. It is based on paragraph 7A(1) of Schedule 28AA to ICTA.
Section 196: Balancing payments between affected persons: no charge to, or relief from, tax
399.This section prevents balancing payments from being taken into account for tax purposes up to the level of the available compensating adjustment. It is based on paragraph 7A(1) to (3) of Schedule 28AA to ICTA.
Section 197: Qualifying conditions for purposes of section 198
400.This section provides the qualifying conditions for section 198. It is based on paragraphs 1A(7), (9) and (10) and 7C(1) of Schedule 28AA to ICTA.
Section 198: Balancing payments by guarantor to issuer: no charge to, or relief from, tax
401.This section prevents balancing payments by the guarantor company from being taken into account for tax purposes. It is based on paragraph 7C(1) and (2) of Schedule 28AA to ICTA.
Section 199: Pre-conditions for making election under section 200
402.This section provides the conditions for section 200. It is based on paragraphs 1A(9) and (10) and 7B(1) to (3) and (10) of Schedule 28AA to ICTA.
Section 200: Election to pay tax rather than make balancing payments
403.This section allows the disadvantaged person to elect to pay the tax of the advantaged person rather than to make a balancing payment within section 196. It is based on paragraph 7B(2) and (4) of Schedule 28AA to ICTA.
Section 201: Pre-conditions for making election under section 202
404.This section provides the conditions for section 202. It is based on paragraphs 1A(7), (9) and (10), 7B(2) and 7D(1) to (3) of Schedule 28AA to ICTA.
Section 202: Election, in guarantee case, to pay tax rather than make balancing payments
405.This section allows the disadvantaged person in a guarantee case to elect to pay the tax of the advantaged person rather than to make a balancing payment within section 198. It is based on paragraphs 7B(2) and (4) and 7D(2) and (4) of Schedule 28AA to ICTA.
Section 203: Elections under section 200 or 202
406.This section explains how elections under sections 200 and 202 are to be made and the effect of such elections. It is based on paragraphs 7B(5) to (9) and 7D(2) of Schedule 28AA to ICTA.
Section 204: Meaning of “capital market condition” in sections 199 and 201
407.This section explains the meaning of “capital market condition” and is based on paragraphs 1A(8), 7B(1), (3), (9) and (10) and 7D(2) to Schedule 28AA to ICTA.
408.Paragraph 7B(9) of Schedule 28AA excludes from the definition of “independent person” a person who has a participatory relationship with either of the affected persons. Paragraph 7B(10) applies the definition of “participatory relationship” given in paragraph 1A of Schedule 28AA. That definition is expressed to be about cases where one company has a participatory relationship with another company. It therefore suggests that a person excluded by paragraph (b) of the definition of “independent person” must necessarily be a company. While there may be an argument that the definition in paragraph 1A should apply with modifications to make it work in the context of paragraph 7B, such an argument is not considered persuasive.
