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HMRC internal manual

International Manual

HM Revenue & Customs
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Interest imputation: transfer pricing the lender: information gathering on outward loan cases

This section deals with the basic facts relating to a straightforward interest imputation case. If the argument is raised that the loan is performing an equity function, more information will be needed. That subject is dealt with at INTM502000 onwards.

The caseworker should establish the facts of the case, obtaining the following:

  • a copy of the accounts of the borrower. This should not be a problem, whether the borrower is UK or overseas, particularly if the borrower is a subsidiary of the lender, as the lender will control the subsidiary. If the borrower is an overseas company not owned directly or indirectly by the UK company, it should still be possible to obtain accounts, since both companies are under common control. Otherwise, it may be possible to obtain them using the Exchange of Information provisions (see INTM156000) or from the internet or a commercial database. It is highly likely that to consider the reasoning which the lender puts forward as the basis for its transfer pricing policy, these papers will be essential, and should be volunteered in support of that policy.
  • a copy of the loan agreement, if one exists, together with any minutes of meetings, notes or correspondence which shed light on the circumstances of the making of the loan or record its terms.
  • details of any divergence in practice from the terms of the loan agreement.
  • background on the loan: duration and usage. Was it originally lent to be used for a specific purpose and does that have a bearing on the borrower’s ability to service and repay? How risky is the loan? Were there previous loans, were they written off or repaid, and if so when? Has the lender tried to apply the terms of the agreement, and if so how rigorously? What action has been taken where there was delay or default?
  • details of unsettled trading debts and other balances run up informally with group companies, with a breakdown of by how much and for how long debts have been running beyond a normal third party commercial credit period.
  • where it is thought that favourable intra-group trading terms have created a de facto loan out of extended credit, it is vital to obtain details of normal third party credit terms and the procedures for pursuing and enforcing collection from reluctant or defaulting debtors. If the UK company has no third party debtors of a comparable scale or type, because it deals largely with connected companies or because its intra-group business is different in nature from its third party business, the customary third party practice for that type of business may be used instead, adapted as necessary. The suggestions at INTM461230 - Risk assessment: review of information from other sources - may be helpful.
  • it should be borne in mind that in looking at related party and third party debtors, it may not be a case of comparing like with like so far as the commercial relationship is concerned. The related party relationship may be more complex, with aspects which may counterbalance the apparently overlong credit.