Non-residents trading in the UK: profits of the PE: Attribution - method of calculation of chargeable profits
Before you can quantify the profits that arise through the UK activities you will need to gain a detailed understanding of what the non-resident’s trading activities in the UK comprise. Information about how the UK activities fit in with any other trading activities outside of the UK could be highly relevant if they can be obtained. If you were not provided with that detailed understanding then you would have to investigate the facts. The normal transfer pricing risk assessment guidance at INTM482000+ applies equally to permanent establishment / branch or agency cases. Fundamental to the separate entity principle (INTM267040) is that the UK chargeable profits are calculated as though the UK operations were conducted on arm’s length terms with any connected parties and the remainder of the entity of which the permanent establishment / branch or agency is part. The guidance at INTM484040 explains how to set about a functional analysis from information in a TP report. INTM485000+ provides guidance as to how to establish comparable uncontrolled prices after making any adjustments that are necessary to account for conditions that may not have been the same or similar to those in the independent comparables selected. That guidance applies equally to the functional analysis between a permanent establishment / branch or agency and the rest of the entity outside the UK.
|Starting point - accounts for UK activities|
|Adjustments under Taxes Acts|
|Attribution using transfer pricing principles|
Starting point - accounts for UK activities
Non-residents liable to UK tax are required to make annual returns and self-assessments under the same primary legislation as applies to UK resident taxpayers. For guidance on CT returns see CTM93240 and CTM93250, and on IT returns see SALF203+. The return should include information that is relevant to the UK tax liability or application of the Taxes Acts. The notes to the non-resident companies corporation tax return require the non-resident company to include a balance sheet and profit and loss account for both the company as a whole and for the UK operations. The accounts for the UK operations should be the usual starting point in calculating the UK chargeable profits. Often the foreign entity will have these separate financial statements for the UK activities anyway for personnel management purposes and for normal commercial reasons. If the accounts are not compiled under UK accountancy standards then adjustments are required in the tax computations to bring the accounts in line with UK standards. Judgement should be used, with advice from an HMRC Accountant if necessary, regarding whether it is material to seek the application of UK standards to accounts prepared under any other methodology.
Adjustments under Taxes Acts
In the same way as any other taxpayer, the foreign taxpayer should submit tax computations making any adjustments to the accounts figure of profit that are necessary under the Taxes Acts. For example, depreciation should be added back and capital allowances claimed where appropriate under the normal capital allowances rules.
Attribution using transfer pricing principles
For both corporate and individual non-residents profits attributable to the UK operations are calculated on the basis of the arms length principle using transfer pricing principles and methodology. More detail on the reasons for this is included at INTM267040. More detail on the permanent establishment rules for attribution of expenses can be found at INTM267100.
Some examples follow at:
INTM267060 - Comparable Uncontrolled Price method
INTM267070 - Resale method
INTM267080 - Cost Plus method
INTM267090 - Profit Split method