13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Paul Lawes Tax Manager Virgin Management Limited  UK-UK Transfer Pricing  OECD Model – Article 8  Tax Aspects of Aircraft Leasing

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited A Little Bit About Me!  Over 5 years at Virgin Management Ltd  Team of 8 in direct tax, 2 in VAT  Corporation tax compliance & advice  Employment tax advice  Planes, trains & automobiles……soon to be spaceships!! A little bit about me

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited UK-UK Transfer Pricing - Basics  New regulations contained in Finance Act  EU law challenges under Article 43 of EU Treaty.  Arm’s length principle for all connected UK-UK transactions.

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited UK-UK Transfer Pricing Key Issues  Inland Revenue to adopt a risk based approach  Areas of concern  Transport issues  Interest free loans.  Intercompany loan guarantees.  Intragroup royalties In-house group services.  Contracted-out services passed on to group.  Low marginal tax rate vs standard tax rate businesses.

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited UK-UK Transfer Pricing Key Issues  Compensating adjustments  Balancing payments  Dormant Companies  Documentation

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited UK-UK Transfer Pricing  The way forward?

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Interpretation of Article 8 OECD Treaty Model  Purpose  Article 8 states that; “Profits from the operation of ships or aircraft in international traffic shall be taxable only in the contracting state in which the effective management of the enterprise is situated”  Competition & Deregulation

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Interpretation of Article 8 OECD Treaty Model  International Traffic  New concept, “Ancillary Services”

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Interpretation of Article 8 OECD Treaty Model  Ancillary services  Scope for the inclusion of a tourist business providing other travel services such as accommodation and trips?  Where is the cut off point?  Card Protection Plan Ltd v Commissioners ECJ Case C –349/96  “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 principal service supplied.”  Conclusion  More clarity  Consider Article 7 Business Profits

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Tax Aspects of Aircraft Leasing  FA 2004 changes to the taxation of leases  No overhaul yet!  Double benefit leasing  Trend in anti avoidance laws

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Double Benefit Leasing Pre - 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.

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Double Benefit Leasing Post 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.

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Tax Aspects of Aircraft Leasing  Conclusions  Operating leases are becoming more attractive.  Airlines looking for cash benefits.  Budget 2005 – EU law challenge?

13 th October 2004 Paul Lawes, Tax Manager Virgin Management Limited Thank you The End