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HMRC internal manual

Bank Levy Manual

Chargeable equity and liabilities: relevant foreign banks: attribution of chargeable equity and liabilities to a branch: determining 'B' the assets of the UK branch (step 2): intra-enterprise dealings

Whilst, for corporation tax sections 21 - 28 CTA 2009 treat the UK branch as being an entirely separate and distinct enterprise ‘the separate enterprise principle’, in reality and for legal purposes the UK branch is simply a part of the overseas company.

This reality is reflected in the approach to intra-enterprise dealings where it should be noted that an enterprise cannot create an asset by dealing with itself.

For example, a financial branch may raise funds in one jurisdiction for use by a financial branch in another jurisdiction. The transfer of funds within the one enterprise will not create an asset (though the branch which raises them would be attributed an arm’s length reward for its services in obtaining the funding for the enterprise).

The OECD Report on the Attribution of Profits to Permanent Establishments at part 1 paragraph 19 states that:

‘Attributing economic ownership of financial assets … attributes the income and expenses associated with holding those assets or lending them out or selling them to third parties.’

This reflects the fact that dealings between a branch and the rest of the enterprise of which it is a part have no legal consequences for the enterprise as a whole.

It is often the case that a balance sheet and profit and loss account are prepared for a branch and that an intra-enterprise transfer of funds from branch to head office will be shown as an asset. But in order to apply the separate enterprise principle following a KERT (key entrepreneurial risk taking) analysis they will often need modification. Para 19 of Part 2 of the OECD Report notes that:

‘Preparation of a balance sheet is generally done in accordance with accounting standards and to satisfy corporate or other regulatory requirements. The authorised OECD approach (to attribution of profits to permanent establishments) by way of contrast is not restricted to an analysis based on accounting standards or other regulatory requirements.’

This applies not only at the enterprise level; but at also where accounts are prepared for its permanent establishments.