UK: Implications for UK Tax Rules on Transfer Pricing of The National Westminster Case

Last Updated: 8 October 1999

The US tax case of National Westminster Bank plc -v- United States was the summer's most discussed victory for a taxpayer. It concerned the question of whether or not the terms of the US/UK double tax treaty should override domestic US tax regulations. The case involved the taxation of NatWest's US branch. The US branch was not a separate legal entity from the UK headquarters. In order to carry out its business in the US it obtained funds from its UK headquarters, which were shown as a loan in its branch accounts. The branch accounts in turn also showed interest deductions on this loan, which were used in order to reduce the branch's profits for US tax purposes. The IRS argued that the amount of interest expense that could be allocatable to the branch should be limited by their own regulation 1.882-5. NatWest argued that this regulation contravened the terms of the US/UK double tax treaty, which provided that such a branch should be treated on a stand alone basis.

In order to support this argument NatWest relied upon the commentary to the OECD model treaty. This commentary stated that although loans from a headquarters to a branch should generally be disregarded when preparing the branch's accounts for tax purposes, a different treatment should apply in the case of the branch of a bank, as the payment of interest and the making of loans would be fundamental to that branch's business.

Although the judge found in favour of NatWest, many US commentators have argued that the commentary to the OECD model treaty should not have been conclusive, as the wording of the US/UK double tax treaty did not perfectly coincide with the relevant wording in the OECD model treaty. Specifically, the US/UK double tax treaty has wording which provides that a reasonable allocation of interest should be made to such a branch. This wording is absent from the OECD model treaty. It could be argued that regulation 1.882-5 provides a coherent methodology as to how such a reasonable allocation of interest expense could be made.

For UK tax purposes the point which is of particular interest is that the judge accepted the OECD commentary despite the fact that the language of the model treaty was not the same as the language of the US/UK double taxation convention. It has already been established in a UK tax case (Sun Life Assurance Company of Canada -v- Pearson [1984] STC 461 at 511B) that the commentaries to the OECD model "can and indeed must be referred to as a guide to the interpretation of the treaty". What is less clear, however, is the extent to which the following is true:

  1. Can model treaty commentary only be used in order to aid the construction of terminology contained in specific treaties which exactly mirrors the relevant words of the model treaty?
  2. Even if the relevant language of the treaty exactly mirrors the relevant language in the model convention, can the language of the model convention only be used as guidance if it can be shown that the intention behind the use of that language in the treaty concerned exactly mirrored the intention behind the use of that language in the model convention?
  3. Where the language of the relevant treaty does not exactly mirror the language in the model convention, can one infer a common intention behind the model convention and the model treaty that will allow the commentary to the model convention to be used in order to construe the language of the relevant treaty?
  4. Is it only possible to use the commentary of the model convention when the treaty concerned postdated the model convention, and therefore the commentary itself? Is it actually possible to use commentary which postdates the signing of the relevant treaty, as it could not in those circumstances be inferred that those that signed the treaty could possibly have had the intention that went behind a commentary that was only published on a later date?
  5. Given the general development by the UK courts in cases such as McGuckian of an increasingly purposive approach to the construction of UK tax statutes, should one similarly apply such a purposive approach to the construction of treaty language? Would such purposive approach be particularly difficult to apply when the commentary language was published at a time later than the signing of the treaty concerned?

Under the new UK transfer pricing rules the OECD guidelines can be used in order to construe UK rules, even where the OECD rules postdate the UK rules. However, the new OECD guidelines will first have to be designated as transfer pricing guidelines by the Treasury before they can be used by the courts as an aid to construction. It may be doubted, however, to what extent such a designation will actually follow a considered review of such guidelines, as this may well be merely a matter of formal designation in order to avoid any ambiguity on the question of their identification, rather than a question that a serious decision will have to be taken as to whether or not to allow such guidelines to be utilised for this purpose. The degree of elasticity that may be allowed, therefore, in the act of interpretation of the UK statutes is entirely open to argument before the UK courts. Furthermore, as it is ultimately a question of interpretation of existing UK law, rather than a formal delegation of the power to legislate in transfer pricing questions to some other international body - an act which would be contrary to the UK constitution, other than to the extent which it has already been achieved by the UK's accession to the European Community - it follows that there must come an awkward point at which this elasticity can be stretched to the point of snapping. UK legislation can be construed in a flexible manner, perhaps, but it will not be possible to make UK rules say something directly contrary to what they actually say, if there is a direct contradiction between the UK rules and the OECD rules, and the OECD commentary based upon those rules.

In this respect, the position is not entirely dissimilar to the manner in which the European Convention of Human Rights has now been assimilated into UK law. Under the Human Rights Act 1998 UK legislation must be construed to the extent to which it is possible to do so in a manner that is consistent with the European Convention on Human Rights. If it is not possible to construe the UK legislation in this manner, however, then the UK legislation must be applied in any immediate case in its current form. The court will in such a case make an order to the effect that UK legislation must be amended at the first opportunity in order to make it consistent with the European Convention on Human Rights, but this will not alter the decision in the case that is actually before the court in such an instance.

Were the UK courts to have to decide a case which was identical in its facts to that of the National Westminster case, only with regard to the UK branch of a US bank, they would seek to apply a transfer pricing methodology based upon the fiction of the separate entity, at an arms length price. The general tax problems presented by this area have been discussed by the OECD, notably in their 1998 publication "The Taxation of Global Trading of Financial Instruments". In their Tax Bulletin for December 1998 the Inland Revenue published a short article on this subject, in which they gave a brief summary of the difficulties attaching to the preparation of branch accounts for tax purposes when the activities concerned are not easily allocatable to any particular branch in any particular jurisdiction. Broadly speaking, of course, the issues concerned relate to capital adequacy, exposure to risk, and the value of the time of the personnel involved in the transactions that give rise to the taxable events, but having described the general issues it remains the case that the application for these principles to the particular circumstances will be debated on a case by case basis. Such cases therefore tend never to come before the courts, but instead to be settled by a lengthy process of negotiation between the Inland Revenue and the taxpayer concerned. For these purposes the OECD guidelines become useful rules which can be employed by either party in order to give some shape to the negotiations that take place. It is precisely because of the uncertainty attached to these negotiations that the Inland Revenue have introduced their new rules regarding advance pricing agreements, guidelines for which have recently been published. It remains to be seen to what extent such agreements will actually be entered into. It would appear that the guidelines were published in a form that was virtually unchanged from their initial draft version, because few people were prepared or interested in commenting on the draft form that was published for the purposes of consultation. From a taxpayer's point of view, the entering into of such an agreement would clearly be a risky matter, given the possibility that large amounts of material would have to be supplied to the Inland Revenue before any binding agreement had been reached. Having provided this information, the taxpayer may feel at a disadvantage to the Inland Revenue in subsequent negotiations, as it will have shown its hand in its entirety from the outset.

Through the use of guidelines and model conventions drafted by international bodies as aids to construction of domestic legislation, there has evolved a consequential flexibility of approach that in turn has led to the concept of any form of legislative certainty in this area becoming very weak indeed. Instead, an essentially commercial negotiation is now entered into in an uncertain context regarding the guidelines that provide the parameters within which such negotiation must be take place.

For further information please contact George Hardy, 2 Park Lane, Leeds LS3 1ES, Tel: +44 113 284 7000

This article was first published in the Autumn 1999 issue of Hammond Suddards' Tax Insight Newsletter.

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.