INTM267782 - The attribution of capital to foreign banking permanent establishments in the UK: The approach in determining an adjustment to funding costs - STEP 5: Determining the capital attribution tax adjustment: Disallowance of interest and other costs

A UK branch of a foreign bank is funded by its head office with:

  • short terms loans of 拢800m at an interest cost of 5%
  • a ten year loan of 拢25m at an interest cost of 7%, and
  • an interest-free allotment of capital of 拢75m.

Assumptions:

  1. The analysis under CTA09/Part 2/Chapter 4 requires the branch to have equity capital of 拢150m and loan capital of 拢50m. Therefore, 拢200m of the actual funding is to be treated as displaced by the attributed equity and loan capital for the purposes of computing the costs to be disallowed under CTA09/Part 2/Chapter 4.
  2. The appropriate interest rate for attributed loan capital is agreed at 6%.
  3. The funding to be displaced by the attributed equity and loan capital is agreed as the 拢75m allotted equity, 拢25m ten-year loan and 拢100m of the short-term loans.

The attributed capital and its cost will be:

Type of capital Amount of capital Interest rate Cost
Equity capital 拢150惭 0% 0
Loan capital 拢50惭 6% 拢3.0惭
- - Total 拢3.0惭

The funding that will be displaced by the capital will be:

Type of funding Amount of funding Interest rate Cost
Allotted capital 拢75惭 0% 0
10-year loan 拢25惭 7% 拢1.75惭
Short-term loan 拢100惭 5% 拢5.0惭
- - Total 拢6.75惭

Therefore, the costs to be disallowed under CTA09/Part 2/Chapter 4 as the capital attribution tax adjustment are 拢6.75m - 拢3.0m = 拢3.75m