Achiote Ltd:
– Owns 100% of the ordinary shares in Borage Ltd and 80% of the ordinary shares in Caraway Inc.
– Achiote Ltd and Borage Ltd are resident in the UK. Caraway Inc is resident in the country of Nuxabar.
– All three companies are trading companies and prepare accounts to 31 March annually.

Achiote Ltd – loan to Caraway Inc:
– Achiote Ltd made a loan of £100,000 to Caraway Inc on 1 April 2016.
– The rate of interest on the loan is 6% per annum, which is 2% below the rate applicable to an equivalent loan from an unrelated party.
– There is no double tax treaty between the UK and Nuxabar.

Required:
(b) Explain the implications of the rate of interest charged by Achiote Ltd on the loan to Caraway Inc by reference to the transfer pricing legislation, and any action which should be taken by Achiote Ltd. (5 marks)