INTM267782 - 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.

Assumptions:

1. 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.
2. The appropriate interest rate for attributed loan capital is agreed at 6%.
3. 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
Equity capital	£150M	0%	0
Loan capital	£50M	6%	£3.0M
-	-	Total	£3.0M

The funding that will be displaced by the capital will be:

Type of funding	Amount of funding	Interest rate	Cost
Allotted capital	£75M	0%	0
10-year loan	£25M	7%	£1.75M
Short-term loan	£100M	5%	£5.0M
-	-	Total	£6.75M

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