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HMRC internal manual

International Manual

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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: Guarantee fees - no deduction available

No deduction should be given in respect of guarantee fees paid or claimed to be paid by a UK permanent establishment (PE) to the head office or to another PE of the same company.

The legislation specifies that the PE should be treated as having the same credit rating as the rest of the bank of which it is a part. This was done to put the matter beyond doubt in the context of determining the amount of capital the PE would have if it were a separate enterprise carrying on the same or similar activities under the same or similar conditions.

The PE of a bank will, as a matter of fact, have the credit rating of the bank as a whole. When dealing with the PE, the credit rating that third parties will take into account will be that of the bank.

Claims made for the deduction of guarantee fees between a PE and its head office or another PE fail because it is not possible for a company to guarantee parts of itself. Therefore, there is no transaction to recognise for tax purposes. This is part of the existing OECD principles on the taxation of PE’s, which do not recognise such a guarantee as a transaction that can be taken into account when determining the profits attributable to a PE for tax purposes. To recognise such a guarantee fee, contrary to the international consensus, would be likely to lead to less than single taxation where the fiscal authority of the home country of the PE did not recognise the receipt of the putative guarantee fee. It would also be likely to lead to double taxation where such fees were imputed to the PE’s of UK companies and the fiscal authority of the host country did not recognise the payments of the putative guarantee fee and so gave no relief.

Any guarantees provided to the PE by associates should be considered on normal transfer pricing lines, both as to the amount of the fees and whether the associates are capable of providing the guarantees claimed.