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HMRC internal manual

International Manual

The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - overview of the five steps

It should be noted that a required adjustment to funding costs is purely a computational one for tax purposes and has no effect on the way in which a UK permanent establishment (PE) conducts or funds its actual business - see INTM267705.

It may be helpful to consider the approach in terms of five distinct steps

Step 1

Determine the assets attributable to the PE

  Step 2

Risk weight those assets

  Step 3

Determine the equity capital that the PE would require if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions

  Step 4

Determine the loan capital that such an enterprise would have had if it had the equity capital determined under step 3

  Step 5

Determine the capital attribution tax adjustment to be made, based on the difference between the PE’s actual funding costs on the combined amount representing the equity and loan capital determined under steps 3 and 4 and the notional funding costs (which will include a rate of nil in respect of the equity capital) to be taken into account under CTA09/Part 2/Chapter 4