The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 5: Determining the capital attribution tax adjustment: Disallowance of interest and other costs
A UK branch of a foreign bank is funded by its head office with:
- short terms loans of £800m at an interest cost of 5%
- a ten year loan of £25m at an interest cost of 7%, and
- an interest-free allotment of capital of £75m.
- The analysis under CTA09/Part 2/Chapter 4 requires the branch to have equity capital of £150m and loan capital of £50m. Therefore, £200m of the actual funding is to be treated as displaced by the attributed equity and loan capital for the purposes of computing the costs to be disallowed under CTA09/Part 2/Chapter 4.
- The appropriate interest rate for attributed loan capital is agreed at 6%.
- The funding to be displaced by the attributed equity and loan capital is agreed as the £75m allotted equity, £25m ten-year loan and £100m of the short-term loans.
The attributed capital and its cost will be:
|Type of capital||Amount of capital||Interest rate||Cost|
The funding that will be displaced by the capital will be:
|Type of funding||Amount of funding||Interest rate||Cost|
Therefore, the costs to be disallowed under CTA09/Part 2/Chapter 4 as the capital attribution tax adjustment are £6.75m - £3.0m = £3.75m