Non-residents working on the UK continental shelf: computation of profits: companies - double taxation agreements - example
An example of how the computation of profits works in practice is illustrated by the UK/France DTA
- A resident of France carrying on activities offshore UK in connection with the exploration or exploitation of the natural resources of the UK (the relevant activities) is (with certain exceptions) deemed to be carrying on a business in the UK in respect of those activities through a permanent establishment situated in the UK (Article 29A).
- The ‘industrial or commercial profits’ attributable to the relevant activities, and therefore to the deemed UK permanent establishment, may be taxed in the UK (Article 6(1)).
- The term ‘profits’ takes a broad meaning and includes all income derived from carrying on the relevant activities (Article 6(5)).
- Any income arising in the UK in the form of interest or royalties effectively connected with the carrying on of the relevant activities may also be taxed in the UK (Articles 11(3) and 12(3), see also DT1729).
- The industrial or commercial profits are those which the company might be expected to make if the relevant activities were carried on through a ‘distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm’s length with the enterprise of which it is a part.’ (Article 6(2))
- No profits arising from the relevant activities should be allocated, for example, to a shore base in France engaged in the purchase of materials for use in the performance of those activities (Article 6(4)).
- There should be no attribution of profits to ancillary establishments as listed in Article 4(3). See also the OECD Commentary on Article 7(3) and (4).
- In arriving at the amount of profits chargeable to UK tax, allowance should be made for expenses which are incurred for the purposes of the permanent establishment. That is expenses incurred in carrying on the relevant activities. These expenses include not only direct expenses (for example labour and materials) but also a reasonable amount for allowable executive and administrative expenses laid out by the company (Article 6(3)). Allowance may be made for expenditure on repairs or refitting, irrespective of when and where these take place, if it can be demonstrated that the purposes for which they are incurred are the purposes of the permanent establishment. See also DT1728 and the OECD Commentary on Article 7(3) and (4).
- It should be possible to isolate the income attributable to the relevant activities (normally the total price receivable under the contract) and also the direct expenses relating to the performance of those activities. Indirect expenses can then be calculated on some reasonable basis to arrive at the net profit attributable to the deemed permanent establishment. Once a basis of attribution is agreed it should normally be followed year by year (Article 6(7)).
Further guidance on the application of the arms length principle to the allocation of profits to a permanent establishment can be found at DT1727.