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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: introduction: the aims of this module

This part of the manual provides practical guidance on the processes and techniques of working thin capitalisation cases.

Together with:

  • the Thin Capitalisation Legislation & Principles chapter (INTM413000), and
  • the Intra Group Funding module (INTM500000),

this material covers financial aspects of transfer pricing work. The Intra Group Funding module concentrates on lender- and on treaty-related issues, whereas thin cap is largely about the borrower.

This material assumes some familiarity with transfer pricing and the UK legislation, which are covered in more theoretical terms from INTM413000 onwards.

The UK approach to thin capitalisation is to apply the arm’s length principle to lending and borrowing transactions - treating parties to a transaction as if they were independent of each other. The legislation in Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA10), previously in Schedule 28AA ICTA 1988, commits HMRC to interpreting transfer-pricing transactions in accordance with the principles set down by the Organisation of Economic Co-operation and Development (OECD). This commitment centres on Article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines - see INTM541040 and INTM421130.

This guidance is intended for technically-trained people within HMRC, while providing tax advisors with insight into the processes (Advance Thin Cap Agreement applications, withholding obligations, etc) and offering transparency on HMRC’s approach to financial transfer pricing issues.