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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway Chapter 5 - Non-trading finance profits: UK Activities: Identification of Significant People Functions (SPFs)

TIOPA10/S371DB(1) Step 3

The functions that need to be identified at step 3 in the case of an intra-group loan are those involved in creating the loan and those involved in managing it, with the relevant significant people functions (SPFs) being those which require active decision-making with regard to the acceptance of risk and its ongoing management. In many cases an intra-group loan may actually require relatively little in the way of ongoing management, in which case it would be expected that the SPFs relevant to the initial assumption of risk are given greater importance in the attribution of economic ownership.

It should be remembered that:

  • Only certain of the functions involved in the creation and management of a loan will be identified as SPFs on the basis of the principles set out in the Report;
  • SPFs will often be performed by more than one person and subject to governance procedures that will not themselves be considered SPFs;
  • In some cases SPFs relevant to the attribution of particular assets or risks will be carried out in different locations. Where this is the case proper consideration must be given to the relevant resources (including both in terms of time and value) employed in those locations;
  • Not all SPFs will be of equal value and proper consideration must be given as to their relative weightings.

The Organisation for Economic Co-operation and Development (OECD) authorised approach (the AOA) looks at the substance of what is done by staff in different locations. It is the detail of what functions people carry out in the relevant locations that is important, not their job title or broad description of their duties. Furthermore the AOA does not lend itself to manipulation, for example by the contrived presence of people in a particular location at the time a particular decision is approved.

The relative importance of matters relating to the creditworthiness of the borrower will vary from case to case, for example between a long term loan to fund an acquisition and a routine short term advance on standard terms. Similarly the relative importance of the assessment and pricing of currency and market risk need to be considered. It may be that in intra-group situations these risks are given less attention in determining the terms of the lending than they would be at arm’s length, despite the potential impact on the results of the companies involved. However where a CFC making an intra-group loan has not properly evaluated them or lacks the capability to do so, it will be reasonable to conclude that the relevant SPFs are those in relation to the group’s wider interests, carried out higher up in the group.

Similarly on the ongoing management of the loan it will be necessary to consider the relative importance of functions of the type mentioned at Paragraph 7(c) of Part II of the Report. As suggested above, those relating to the management and / or transfer of credit risk may in many cases be relatively unimportant while those related to hedging market or currency risk may have greater relative importance in terms of the results of the group companies involved.