INTM554070 - Hybrids: transfers by UK permanent establishments of multinational companies (Chapter 6): counteraction
Action to counter the excessive permanent establishment (PE) deduction is set out at s259FB. There is only one counteraction and it applies where the PE is in the UK. The excessive PE deduction may not be deducted from the company’s income for the relevant PE period, unless it is deducted from dual inclusion income of the company.
Dual inclusion income is the amount arising during an accounting period that is ordinary income (see INTM550560) of the company for both
- that accounting period for UK corporation tax, and
- a permitted taxable period for the purposes of any tax charged under the law of the parent jurisdiction
The dual inclusion income does not have to be connected to the circumstances giving rise to the deduction but includes all income that is included in both jurisdictions.
To the extent that the company has dual inclusion income in the accounting period, all or part of the excessive PE deduction may be deducted from that income.
Any proportion of the excessive PE deduction that has been denied is carried forward and may be allowed as a deduction from any dual inclusion income of the company arising in future accounting periods.
The company may not benefit from an exclusion such as branch (PE) exemption. Where profits attributed to the PE are taxed in the parent jurisdiction, then the parent jurisdiction may therefore not recognise any dealings between the head office and the PE. In this case, such dealings may fall within the scope of Chapter 6.
Where the PE is profitable it is unlikely that there will be a counteraction as the relevant dual inclusion income should exceed the PE deduction. However, if either the PE is loss-making, or the deduction exceeds the dual inclusion income (for example, if some of the income of the PE is not taxable in the parent jurisdiction), then the excess deduction will be denied to the UK PE.
Excessive PE Inclusion Income
Finance Act 2021 introduced the concept of Excessive PE Inclusion Income in section 259FB TIOPA 2010. Companies had until 31 December 2021 to elect to deem that the rules in 259FB had retrospective effect and so would be deemed to have always been in place in relation to them since the hybrid’s rules came into effect on 1 January 2017. If no such election was made by a company, the new rules apply to it from Royal Assent of the Finance Act 2021 on 10 June 2021.
The rules operate such that the second limb of the test (above) for dual inclusion income (income that is ordinary income for the purposes of any tax charged under the law of the parent jurisdiction) can also be treated as satisfied in respect of an amount if that is excessive PE inclusion income. Excessive PE inclusion income is broadly a mirror image of excessive PE deductions, which have been subject to counteraction under Chapter 6 from its first introduction.
To be excessive PE inclusion income, the income must first meet the conditions for being ‘PE Inclusion Income’. Those conditions are
- Condition A: the amount is in respect of a transfer of money or money’s worth from a company in the parent jurisdiction to the UK PE that is actually made or treated as being made for CT purposes
- Condition B: it is reasonable to suppose that the circumstances giving rise to the amount will not result in a reduction in taxable profits or an increase in a loss, for the purposes of tax charged under the laws of the parent jurisdiction
Condition B can alternatively be fulfilled if there is a reduction in profits or an increase in losses, but the amount (that is brought into account for UK CT purposes) exceeds the aggregate effect on taxable profits. The aggregate effect on the taxable profits is the sum of any reduction in profits charged to tax in the parent jurisdiction (that has been caused by the circumstances that give rise to the amount of the transfer of money/money’s worth) and any increase in the company’s losses to tax in the parent jurisdiction.
When calculating the reduction in taxable profits, or the increase in taxable losses, the amount (of reduction in profit or increase in loss) is to be ignored if tax is charged at a nil rate in the parent jurisdiction,
The determination of whether an amount of PE inclusion income is excessive PE inclusion income depends on how the conditions for PE inclusion income were met.
If Condition B is met above simply by the amount not resulting in reduction in taxable profits or an increase in losses in the parent jurisdiction, the whole amount of that PE inclusion income will be excessive PE inclusion income.
If Condition B is met where there is a reduction in profits, or an increase in losses charged to tax in the parent jurisdiction, but the amount that is brought into account for UK CT purposes exceeds the aggregate effect on taxable profits in the parent jurisdiction, the excessive PE inclusion income is the amount that it is reasonable to assume is the excess of the amount that is brought into account for CT purposes over the sum of the reduction in profit/increase in losses in the parent jurisdiction.
Assume there is a multinational company with a headquarters in Jurisdiction A, and a permanent establishment in the UK. If there is a transfer of 100 from the company in the parent jurisdiction to the UK PE that is not deductible for tax in the parent jurisdiction but is brought into account for corporation tax purposes by the UK PE, then the amount of that payment would be treated as excessive PE income, and so would meet the criteria for being regarded as dual inclusion income. It would then be available to be sheltered by any deduction counteracted under 259FB TIOPA 2010.
If that payment was deductible for tax purposes in the parent jurisdiction, the amount would only qualify as excessive PE income to the extent that the amount brought into account for CT purposes exceeded the deduction (the reduction in profit/increase in loss) in the parent jurisdiction.