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HMRC internal manual

International Exchange of Information Manual

HM Revenue & Customs
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Action 5 rulings: Types of rulings to exchange: Other rulings

IEIM541400: Action 5 rulings: Types of rulings to exchange: Other rulings

In addition to the first three types of rulings there are two types of rulings which the UK does not provide.  These are:

  1. Conduit rulings
  2. Downward adjustment rulings

These concepts do not apply in UK tax, so HMRC will not make rulings relating to these indicators.  It is relevant to know what the terms mean, because HMRC may receive inbound information relating to these.


Conduit rulings

In broad terms, a conduit ruling would be given by a jurisdiction with respect to funds or income that flow through that jurisdiction – for example the transaction or transactions concerned in the ruling involve the funds moving both into and out of the jurisdiction giving the ruling.

The flow through may be direct (via only one entity in the conduit jurisdiction) or indirect (so via several entities).

The tax treatment of the funds or income whilst in the conduit jurisdiction and/or the outcome for the receiving jurisdiction will be the matters that cause base erosion and profit shifting concerns.  Typically this might be done in a way that means the funds are not taxable in the conduit jurisdiction (because of structure of the arrangement and entities involved, or the tax treatment in that jurisdiction of the transaction or entities in question).  The tax is also likely to be mitigated in the hands of the receiving party in another jurisdiction, but it would not have been had it been paid directly.  HMRC are likely to view such transactions as avoidance, and does not provide clearances where transactions involve avoidance.

The closest thing to this that HMRC may provide is an APA on certain of the transactions involved, but this comes into its own listing if it is unilateral (IEIM541200), and is not within Action 5 if bilateral (but see IEIM550010 and linked pages with regard to the DAC).

See paragraphs 118 and 119 of the OECD Final Report on Action 5 for more details.


Downward adjustment rulings

Downwards adjustments refer to those adjustments that are made in the computation of the customer’s taxable profits, and that are not directly reflected in the customer’s financial or commercial accounts.

Excess profits rulings, informal capital rulings and other similar rulings recognise the contribution of capital or of an asset by a related company.  An example relating to a downward adjustment is a deemed interest deduction on an interest-free loan from an affiliate.  The accounts of the recipient company would reflect the interest-free loan, but the tax computation is adjusted by the arm’s length price of the interest that would have been payable on the loan.  Without exchange of the information, there would be no corresponding taxable receipt in the company making the loan.

Since downward adjustments are normally reflected only in the tax computation and not the publicly available financial accounts there is a potential base erosion and profit shifting risk if a ruling related to a downward adjustment is not shared with other affected jurisdictions.

The UK transfer pricing rules do not provide for downward adjustments.  A compensating adjustment may be claimed where there has been a transfer pricing adjustment to an advantaged party (see INTM412130), but this is not the same as a downward adjustment, and is subject to strict rules and conditions to ensure that there is no double-deduction.