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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 - STEP 2: Risk weighting the assets: intra-company transactions and assets

Transactions entered into between different parts of the same company will not be taken into account for the purposes of attributing capital to a permanent establishment (PE). However, intra-company transactions will still be relevant for the purposes of attributing profits and income to the PE.

As well as dealing with the attribution of capital to a PE the legislation at CTA09/Part 2/Chapter 4 incorporates into UK domestic legislation the relevant principles from the Commentary on Article 7 in the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital and in the publication ’Transfer Pricing and Multinational Enterprises: Three Taxation Issues’. This means, for example, that the existing rules on booking transactions are unchanged and applied to all PE’s in the UK. Thus, income booked in another location but proper to the PE will need to be included in the attribution of profit to that PE and not the booking location see INTM267707.

Following the approach in the publication ‘Transfer Pricing and Multinational Enterprises: Three Taxation Issues’, the new legislation makes it clear that where the PE is raising funds as an agent or conduit for other parts of the same company it will still need to be rewarded by an appropriate fee, or turn, but the PE will not be expected to have capital to support these transactions if it would not have such capital at arm’s length. However, HMRC will need to be satisfied that the PE is in fact raising funds as an agent or conduit, and that the funds so raised are for non-UK business. That is, it must be clear that the raising or finding of money in the domestic market for lending elsewhere is an activity commonly carried on by independent banks in the UK market, and that the PE has not sacrificed a profit (and forgone a third-party asset) which it could have made in the normal course by lending the money to a third party itself.

Thus, to the extent that intra-company transactions can be respected for tax purposes, the attribution of income will need to be taken into account, but there will be no requirement to attribute capital. Where intra-company transactions cannot be respected, because the third-party asset properly resides with the UK PE and not, say, with a booking location, then not only should the branch be attributed the income from that asset, but the amount of capital required to support that asset must also be considered.