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BlackRock: no imputation of covenants for transfer pricing purposes

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In HMRC v BlackRock Holdco 5 LLC the Upper Tribunal allowed HMRC’s appeal and inter alia disallowed the company’s non-trading loan relationship debits under the transfer pricing rules. It was held that the FTT had erred in law in allowing covenants to be taken into account in considering whether an independent lender would have made the loans. In the view of the Upper Tribunal third-party covenants that were not part of the actual transaction could not be considered to be part of the hypothetical arm’s length transaction because to do so would be materially to change the ‘surrounding circumstances and ... economically relevant characteristics of the transactions’. As an independent arm’s length lender would not have lent without covenants from parties in addition to the borrower no interest deduction was allowed. The Upper Tribunal’s view that TIOPA 2010 s 147(1)(a) precluded the imputation of covenants...

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