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HMRC internal manual

International Manual

HM Revenue & Customs
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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:

Multi-currency books and the currency/interest rates to be used in arriving at the disallowances and allowances for equity and loan capital

Calculations of the capital attribution tax adjustment should be performed in the functional currency that the permanent establishment (‘PE’) uses to calculate its taxable profits. If the actual funding of the branch is in a mix of currencies then these will need to be translated to the functional currency of the PE.

The funding costs used in the capital attribution tax adjustment calculations should be the actual funding costs of the PE and not the costs of an equivalent amount and type of funding in the functional currency. For example, if the PE is funded at short-term US dollar rates of say 2%, then the sterling equivalent of that amount of interest should be used in the calculations.

It would not be appropriate to translate the amount of the funding into sterling and then apply short-term sterling rates of say 4% to that amount for the purposes of the calculation. Similarly when determining the interest rate on attributed loan capital, the interest rates to be applied should be related to the currency of the loan capital not those applicable to the functional currency of the PE. However, where the funding has been hedged or converted into the equivalent of another currency by, for example, raising funds in one currency and using swaps into another currency, then the costs of the hedge must also be taken into account. For example, a PE with a functional currency of sterling that is normally funded in sterling raises funds more cheaply by borrowing in US dollars and swapping the US dollars into sterling. The calculation of the capital attribution tax adjustment should take into account both the US dollar costs translated into sterling and the swap costs.