MTT32070 - Calculating top-up amounts: Substance based income exclusion: Interaction with international shipping exclusion
The substance based income exclusion (SBIE) and international shipping exclusion (see MTT45600+) both represent an exclusion of profits from the adjusted profits used to determine the top-up tax amount. (The exclusion of international shipping income and expense takes place when determining the adjusted profits of each member. The SBIE amount is deducted when the adjusted profits or losses of members in a territory are aggregated.)
In order to prevent double counting, the international shipping exclusion is treated as superordinate. Where an amount was already excluded under those rules, it cannot be excluded again under the SBIE. These amounts are said to be excluded from the SBIE amount.
A complication arises where the ancillary international shipping cap has effect. This cap limits the amount of income and expense that can be excluded as part of the international shipping exclusion. These amounts may then be included within the SBIE amount.
The rules at MTT32000+ still apply in relation to these amounts. The rules for internationally mobile employees and assets discussed at MTT32050 are likely to be particularly relevant.
Payroll costs
Where payroll costs are excluded from the adjusted profits as part of the international shipping exclusion, they are not to be included in the eligible payroll costs for SBIE purposes.
Tangible assets
An asset is excluded from the calculation of the eligible tangible asset amount where it has been used in the course of core international shipping activity (see MTT45620) or ancillary international shipping activity (see MTT45630).
For this purpose, the value of an asset used in international shipping activity should be attributed between its various uses (core activity, ancillary activity, and non-international shipping activity).
Ancillary international shipping cap
Where the ancillary international shipping cap applies, the value of the asset attributed to ancillary international shipping activity should be included in the SBIE. This value is to be reduced by the proportion to the ratio of ancillary shipping profits that were within the cap amount to total ancillary shipping profits.
Example
A Ltd has income for the 2045 period, some of which falls with the international shipping exclusion.
A Ltd has £120 million of core international shipping profits and £200 million of ancillary international shipping profits. Because of the cap on the ancillary international shipping profits at 50% of core international shipping profits, it is only eligible for the exclusion on £60 million of its ancillary international shipping profits.
This means that £140 million of ancillary profits are included in adjusted profits of A Ltd.
In 2045 A Ltd incurs payroll costs relating to its international shipping activity. These payroll costs meet the general conditions for the substance based income exclusion. These are broken down as follows:
| Usage | Payroll costs |
|---|---|
| 100% related to core international shipping profits |
£80 million |
| 100% related to ancillary international shipping profits |
£120 million |
Therefore, the £80 million of costs fully attributable to core international shipping profits are excluded from the SBIE amount.
The application of the ancillary cap has prevented 70% of the ancillary international shipping profits from being included in the international shipping exclusion. This means that 70% of the payroll expense relating to ancillary profits can be included in the SBIE amount.
Therefore, only £84 million of these payroll costs (70% of £120 million) can be included in the eligible payroll costs when determining the SBIE amount for A Ltd’s territory.
The remaining £36 million has already been excluded from the profits as a result of the international shipping exclusion.