Statement of Practice 1 (2012): Annex 2
Published 5 April 2012
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SP01/12 - Advance Thin Capitalisation Agreements under the APA Legislation:
Annex 2 - Model ATCA: Commentary
Commentary on Model ATCA
Section 1
1. This section establishes that this is an agreement under section 218 TIOPA 2010. In many cases the purpose of the agreement will be simply to determine the transfer pricing treatment of a particular loan, subject to modification under any mutual agreement procedure.
2. Where the situation is more complex it may be more appropriate to refer to an appendix containing the relevant factual information.
Section 2
3. For illustrative purposes the model ATCA assumes that the applicant is a group of companies. The parties to the agreement will typically include the UK holding company and those of its subsidiaries which may be claiming a deduction for the interest arising on the financial provisions covered by the agreement.
4. In some situations the applicants may not be regarded as a group for the purposes of other parts of the Taxes Acts.
Section 3
5. The financial provisions covered by the agreement will need to be identified, but again this might be by reference to a factual appendix.
Section 4
6. The ATCA must specify the period it covers. This will typically be between three and five years.
Section 5
7. The definitions included here are intended to cover the majority of situations. The intention is that the applicant should choose the relevant financial conditions and use the standard definitions provided. However these may need to be amended, for example to specify the treatment of payments made to make good a pension deficit.
8. In some cases it may be appropriate to define the reference enterprise using a list of businesses in an appendix.
Section 6
9. HMRC’s view is that ATCAs should include financial conditions monitoring both the level of debt and the capacity of the enterprise to service its debt obligations.
Section 7
10. It may be appropriate to include specific conditions for monitoring the agreement. For example section 7 could commit the applicant to providing details of any adjustments made to arrive at the defined terms following the adoption of International Financial Reporting Standard similar to the ‘Frozen GAAP’ approach in lending agreements.
Section 8
11. Where both the financial conditions are satisfied the UK group has certainty that Total Interest costs will not be subject to Part 4 TIOPA 2010.
Section 9
12. Although the UK legislation designed to deal with thin capitalisation is based upon the position of an independent, third-party lender, it is impossible for HM Revenue & Customs to put itself precisely in the position of such a lender when a breach takes place. In accordance with INTM583010, an ATCA is therefore designed to give both HMRC and the other party to the agreement a degree of certainty.
Section 10
13. It is impossible to give an exhaustive list of circumstances that should be ignored, but in general they include the sort of things that might be expected to invoke some sympathy in a third-party lender, such as a catastrophic or unusual event.