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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: Alternative approaches to calculating the capital attribution tax adjustment

A number of possible alternatives exist to using the five-step approach to calculating the capital attribution tax adjustment.

Use of comparables

The legislation in CTA09/Part 2/Chapter 4 requires a UK permanent establishment (PE) to be regarded as a separate and distinct enterprise carrying on the same or similar activities under the same or similar conditions. There are a number of reasons why the activities of the PE might differ from those generally carried on by a separate entity of the same size as the PE trading in the UK. It may therefore be difficult to find UK banks that are true comparables to the PE in terms of both size and level or type of activities. If appropriate comparables can be found, then these can be used as an indicator of the amount of equity and of loan capital that the PE would have at arm’s length.

If comparables are used then Steps 1 and 2, described at INTM267707 and INTM267710 onwards respectively, would need to be carried out in broadly the same way and should demonstrate that there is indeed a high degree of comparability between the business of the PE and the UK comparable.

The use of comparables might prove to be most helpful as a check where capital has been attributed to the PE based on the capital mix of the company as a whole.

Use of calculations based on funding of the company

In most cases the way the bank, of which the PE is part, funds itself in the market will be the most obvious measure of an arm’s length mix of funding for that company. Where this is so, there is clearly scope for considering the extent to which the funding of the PE would replicate the funding of the whole company. Generally, unless the activities carried on by the PE are sufficiently different from those carried on by the bank as a whole (that is, either inherently riskier or less risky), it may be possible to apply the capital ratios of the bank to the PE. Even where the activities of the PE are sufficiently different from those of the rest of the bank to warrant an argument that the PE would have a somewhat different capital structure, the capital structure of the whole company could still be used as a starting point with appropriate adjustments being made.

While this is only one possible way of arriving at an arm’s length range of capital, for the purposes of calculating the tax adjustment, PE’s may see it as the most straightforward method. HMRC will be very happy to consider this approach in suitable cases, including those where the nature of the businesses of the company and the UK PE differ significantly but where it is possible to adjust for these differences