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HMRC internal manual

International Manual

Foreign banks trading in the UK through permanent establishments: The approach in determining an adjustment to funding costs - STEP 2: Risk weighting the assets - the Basel II regulatory regime: Overseas branches of UK-resident banks

TIOPA10/S43(1) will continue to provide symmetry in applying the provisions of CTA09/Part 2/Chapter 4 as the starting point in computing double taxation relief (DTR) for foreign tax on UK banks’ overseas branches. It is possible that where the fiscal authorities in the host country apply a Basel I risk weighting regime while the UK bank as a whole applies a Basel II regime, that the profits attributed to the overseas branch exceed those that would be attributed using Basel II.

Part II of the OECD Report on Attribution of Profits to Permanent Establishments (PE’s) authorises approaches to the attribution of capital to PE’s. They relate, however, only to the level and blend of capital to be attributed to the permanent establishment and not the method of risk weighting assets prior to that step.

Nevertheless, where the foreign fiscal authority applies an authorised OECD approach and we are content it is correctly applied, the appropriate level of relief should be given whether a Basel I or Basel II regulatory regime was applied by those authorities in attributing profits to the branch. An exception to this would be the case where the tax authorities of the host country apply a different regulatory regime to that applied by the regulatory authorities. In such a case TIOPA10/S43(1) may act to restrict relief due, although the relevant treaty may provide an avenue for the UK and the host country to avoid double taxation.

In summary:

For the purposes of giving DTR:

Where the host country fiscal authority uses an authorised OECD approach to capital attribution, we will grant the appropriate level of relief irrespective of the method of risk weighting that is required by the host country regulator.

Where the host country fiscal authority does not use an authorised OECD approach to capital attribution we would not, during the interim period, regard the method of risk weighting used at arriving at that attribution as a significant risk in computing DTR.

When the interim period ceases, we will apply CTA09/Part 2/Chapter 4 for the purposes of computing the UK measure of tax to be relieved and that will include a calculation of the tax which would have been payable if the Financial Services Authority (FSA) were the relevant regulator.

New capital allocation approach

Subsequent to the publication of this interim guidance ICTA/S797(2A) was rewritten as TIOPA10/S43, applying the provisions of Chapter 4, Part 2 CTA09. TIOPA10/S43 was amended by Finance Act 2011, introducing specific rules for the PEs of UK resident companies, particularly in relation to the attribution of capital - see INTM281000 for detail.

The amended TIOPA10/S43 specifies a capital allocation approach. This is based on an allocation of the actual total equity and loan capital of the company between its overseas PEs and the rest of the company. This should not result in the allocation of more than the total capital of the company so again under this approach the approach to risk weighting should be that of the UK regulator.