Download Worldwide Debt Cap 28 October 2010.ppt

Worldwide Debt Cap
Tax treatment of financing
costs and income
28 October 2010
Worldwide Debt Cap
Agenda
•
Introduction and background
•
Overview of rules
•
Anti-avoidance
•
Practical issues
•
Case studies
2
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Worldwide Debt Cap
Introduction and Background
• Policy objectives
• Commencement
• Who will it apply to?
• Pre Budget Report 2009 / Budget 2010 changes
• Outstanding matters
• The GAAR?
• The future of Debt Cap?
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Overview of Rules
1. Identify the relevant worldwide group and subsidiaries
2. Determine whether the Gateway test has been passed
3. If so – calculate available amount (gross consolidated finance expense)
4. Calculate tested expense amount (sum of relevant group companies’ net finance
expenses)
5. If tested expense amount is greater than available amount, calculate disallowed amount
6. Allocate disallowed amount between relevant group companies
7. Calculate corresponding finance income adjustment
8. Allocate corresponding adjustment to UK group companies
9. Administration – Elections and Returns
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1. Identifying the Relevant Worldwide Group and Subsidiaries
• Worldwide group (s337 TIOPA 2010)
‒ Large group
‒ SME is broadly: less than 250 employees and either (i)
turnover < €50 million or (ii) balance sheet assets < €43
million
‒ One or more relevant group company (“RGC”)
UK plc/
OS
• Meaning of “group” (s338)
‒ IFRS
‒ >1 ultimate parent → separate groups
‒ parent of ultimate parent ≠ group member
UK1
• Relevant Group Company (s345)
UK2
OS
‒ UK resident or non-UK with UK PE; and
‒ ultimate parent or relevant subsidiary (75% of shares,
profits or assets - Chapter 6 of Part 5 of CTA 2010
extension [ICTA, Sch.18])
• Ultimate parent (s339)
‒
‒
‒
‒
5
member of group
corporate or relevant non-corporate entity
not a collective investment scheme (“CIS”)
not a subsidiary of above
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1. Identifying the Relevant Worldwide Group and Subsidiaries
What is the worldwide group for debt cap
purposes?
OS
• UK plc cannot be the ultimate parent as it is a
subsidiary of OS
Other
• OS is the ultimate parent of the group
60%
5m
UK plc
3m
10m
• No RGC as UK plc/UK 1 not 75% subsidiaries of
OS
• No debt cap group
• Other examples could include joint ventures,
minority interest, minority quoted stake etc
UK1
OS Co
• Private equity backed groups can be particularly
complex
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2. Has the Gateway test been passed?
Gateway test
s261 TIOPA 2010
• Debt cap only applies where UK net debt of the group exceeds 75% of the worldwide
gross debt of the group.
• Average at Balance Sheet dates
• UK net debt (relevant liabilities less relevant assets) (s262 TIOPA 2010)
‒ Aggregate of individual relevant group companies’ net debt
‒ Dormant companies not included
‒ Based on company Balance Sheet
‒ De minimis of £3m includes any companies with negative debt (i.e. can’t include net
asset companies)
• Worldwide gross debt (relevant liabilities) (s264 TIOPA 2010)
‒ Based on consolidated financial statements
• Where accounts not in sterling translate at spot rate at the relevant date (unless both
parent and all relevant group companies account in same currency) (s273 TIOPA 2010)
N.B. UK headed of groups with significant intra UK loans likely to fail
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2.
Has the Gateway test been passed?
Third party
debt £1.2bn
Gateway Test - Illustrative Computation – Limited Netting
Relevant
liabilities
Relevant
assets
Sub-total
£m
£m
UK1
1,200
1,000
200
200
UK2
1,000
1,200
(200)
0
UK3
1,000
1,000
1,000
1,000
(1,000)
0
3,200
0
1,200
UK4
3,200
I/co
"Net debt"
UK 1
£1bn
£m
Third party
receivable
£0.2bn
UK 2
UK 3
I/co
£1bn
Assume that 75% Worldwide gross debt is
Gateway test passed?
£900m
Yes
Therefore debt cap applies
8
UK 4
Third party
receivable £1bn
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3. Calculate “Available amount”
Available Amount
s332 TIOPA 2010
• Worldwide group’s gross consolidated finance expense – amounts disclosed in respect of:
‒ Interest payable on amounts borrowed
‒ Amortisation of discounts relating to amounts borrowed
‒ Amortisation of premiums relating to amounts borrowed
‒ Amortisation of ancillary costs relating to amounts borrowed
‒ Financing cost implicit in payments under finance leases
‒ Financing cost relating to debt factoring
• Include capitalised interest (but only once...)
• Does not include:
‒ Interest receivable
‒ Interest on pension deficit
‒ Dividends payable on preference shares
‒ Fair value movements in respect of loan relationships
‒ Non-group members
‒ Derivative contract amounts
N.B. Forthcoming changes
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4. Calculate “Tested Expense Amount”
Tested Expense Amount
s329 TIOPA 2010
• Sum of net financing deductions for each RGC – financing expense amounts less financing income
amounts
‒ Type A: Loan relationships – excluding FX, impairment losses, reversals of impairment losses
and debits or credits in respect of related transactions
‒ Type B: Financing cost / income implicit in finance lease payments
‒ Type C: Financing cost / income from debt factoring
• Excludes
‒ Net income
‒ De minimis of £500k
• Note no amounts in respect of derivative contracts
‒ e.g. Fair value movements in interest payments / receipts on interest rate swaps movements
• Problem Areas (these will be discussed later in the case-studies)
‒ Interaction with late interest rules
‒ Derivatives – mismatch in rules
‒ Functional currency
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4. Calculate “Tested Expense Amount”- Example
Interest
600k
Interest
1,100k
• Available Amount
= 1,100k
• Tested Expense Amount
UK plc (500) + UK1 (500)
= 1,000k
UK plc
OS
UK1
Interest 500k
Assume:
Gateway Test is met
External financing cost
1,100k
External financing income 600k
Upstream UK-OS loan interest
11
11
500k
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4. Calculate “Tested Expense Amount”- specific exemptions
• Treasury companies (s316 TIOPA 2010)
‒ Elect for treasury companies to be ignored for finance income/expense test.
‒ Treasury company needs >90% “treasury revenue” when compared to “relevant income” –
proposed changes in 2009 PBR draft legislation
• Short term debt (s319/320 TIOPA 2010)
‒ Elect to exclude short term debt interest
‒ Short term is <12months
‒ Subject to anti-avoidance
• Trapped NTLR deficits and Management Expenses (s322-325 TIOPA 2010)
‒ Can elect to ignore financing expense of company
‒ Corresponding income also ignored in the company with brought forward losses
‒ Prevents losses being trapped in companies, but some flaws
• Securitisation companies (proposed change – exclude from relevant group company and UK
group company definitions)
• Other specific industry exclusions available e.g. Financial services, REITs and oil extraction
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5 & 6.
Calculate and Allocate Disallowed Amount
5. Calculate Disallowed Amount
s274 TIOPA 2010
• Available Amount less Tested Expense Amount
6. Allocate Disallowed Amount
• Total Disallowed Amount
‒ Allocate to any relevant group company with an expense amount noting whether Type
A, B, C
‒ Flexibility of allocation
‒ Default calculation if no Statement submitted - 12 month deadline
• Tax free balancing payment mechanism available
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7 & 8.
Calculate and Allocate Finance Income Adjustment
7. Calculate Corresponding Income Adjustment
s286 TIOPA 2010
•
Calculate Tested Income Amount (sum of net financing income for each 51%+ group company)
‒ Type A: Loan relationships – exclude FX, impairment losses, reversal of an impairment loss,
profit and loss from related transactions
‒ Type B: Finance leases
‒ Type C: Debt factoring
•
Excludes
‒ De minimis of £500k
‒ Negative amounts
8. Allocate corresponding income adjustment
•
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Allocate to any UK group company with an income amount noting whether Type A, B, C
‒ Maximum exemption (amount treated as non taxable) is lower of Total Disallowed Amount and
Tested Income Amount
‒ Flexibility of allocation
‒ Default calculation if no Statement submitted - 12 month deadline
‒ Tax free balancing payment mechanism available
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7 & 8.
Calculate and Allocate Finance Income Adjustment - Example
Compensating adjustment
•
•
•
•
Interest 5m
Interest 5m
UK plc
AA
= 5m
TEA UK2
= 6m
Total disallowed amount = 1m
TIA UK1
= 0.5m
• UK2 makes a disallowance of 1m
UK2
UK1
Interest
2.5m
Interest 3m
Assume:
External UK financing cost
External UK financing income
UK-UK loan interest
UK-OS loan interest
15
OS
Interest
3m
• A compensating adjustment can be allocated
to any “Group Company” with finance income
up to the lower of
‒ the total disallowed amount, and
‒ the tested income amount.
• Either UK1 or UK plc can make a
compensating adjustment of 0.5m, or share it
5m
2.5m
8m
3m
• There is a net disallowance of 0.5m.
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9. Administration – Elections and Returns
Administration
• Returns:
‒ Two returns required (Group filing requirement)
‒ Returns not required if:
• (i) Gateway test failed or
• (ii) Tested Expense Amount does not exceed Available Amount (no Total Disallowed
Amount)
‒ Returns still required if :
• Tested Income Amount > Total Disallowed Amount >£nil (i.e. Where there is no net
disallowance for the group)
‒ 12 month time limit or default allocations
‒ Ability to amend within 36 months of end of period, and ability to amend post enquiry
included in draft regulations
• Nominated companies
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9. Administration – Elections and Returns
Administration
• Elections:
‒ Non trading deficits/management expenses
‒ Treasury companies
‒ Short term debt
‒ 36 month time limit
• Evidencing
‒ Contents of returns is prescribed in s280/292 TIOPA 2010
‒ Even if no returns are required: Documentation for SAO declaration/ potential HMRC
enquiry/ potential future due diligence process.
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Anti-avoidance
• If a scheme is entered into before the period end and as a result the gateway test is failed
and the main purpose was to fail the gateway test:
‒ Gateway test is passed.
• If a scheme is entered into before the period end with a main purpose (or one of the main
purposes) to enable the group to increase available amount, decrease tested expense
amount, or increase tested income amount (known as reducing the relevant net deduction)
and as a result of the scheme the taxable profits of the UK group are less than they would
have been had scheme not been entered into, or if losses carried back or forward have been
increased
‒ recalculate these amounts as if the scheme was not entered into (the more likely
than not alternative)
• But list of excluded schemes in guidance (which includes tidying up the UK debt structure)
‒ see Appendix 1 – Gateway test: TAAR
• Statutory Instrument to be published
• EEA finance income anti-avoidance
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Practical Issues
• Compliance burden
• Information not readily available
‒ after year end
‒ not all in one place
• Appointed company for returns (3 months before filing deadline)
• Format for returns/elections
‒ statement of allocated disallowances
‒ statement of allocated exceptions
• Time limit
• Tax software ‘debt cap’ enabled?
• No compliance for gateway
‒ Document filing position
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Proposed Changes
• Definition of “relevant liabilities” and “relevant assets” for Gateway test – arrangements which produce a
return economically equivalent to interest
‒ N.B. election to defer introduction
• Conflicts between group and company accounts for Gateway test – group accounts prevail
• DRICs – must allocate disallowance to companies other than DRICs first
• Inclusion of guarantee fees receivable in financing income amounts
• Regulation-making powers for mismatches between accounting and tax treatment
• Available amount:
‒ Repos, AFAs, SFAs
‒ Securitisation companies
‒ Partnerships
• Ultimate corporate parent cannot be an LLP
• Securitisation companies are not relevant group companies or UK group companies
• To take effect from 1 January 2010
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Case Study Examples
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Case Study Example 1 – Allocation of Disallowances and Exempt Income
200
UK1
100
150
50
UK2
UK3
PCTCT
Financing income /
(expense)
UK4
Debtors
Creditors
UK1
UK2
UK3
UK4
5
10
20
15
10
(15)
-
(15)
300
-
50
-
(200)
(150)
(50)
(150)
50
• UK4 has brought forward losses of £30
Question
What is the optimum allocation of the disallowed amount and finance income amount? Assume interest of
10% is applied to each balance.
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Case Study Example 1 – Allocation of Disallowances and Exempt Income
200
UK1
100
150
PCTCT
50
UK2
Financing income /
(expense)
UK3
Debtors
UK4
Creditors
50
UK1
UK2
UK3
UK4
5
10
20
15
10
(15)
-
(15)
300
-
50
-
(200)
(150)
(50)
(150)
Question
What is the optimum allocation of the disallowed amount and finance income amount?
• Disallowed Amount is allocated to UK4 to maximise the use of brought forward losses
• FIE is allocated to UK1 to reduce profits to nil and then to UK3
Available Amount - 20
UK1
UK2
UK3
UK4
Total
-
15
-
15
30
10
-
-
-
10
-
-
-
10
10
(5)
-
(5)
-
(10)
Brought forward losses used
-
-
-
(25)
(25)
Adjusted PCTCT
-
10
15
-
25
TEA
TIA
Disallowed Amount
Finance Income Exemption
23
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Question
What would be the difference
if the disallowance and
exemption were not allocated?
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Case Study Example 2 – Stranded Losses
UK Plc
Interest paid by
UK 1 to UK Plc
£10m
Questions
1.What is the Available Amount, Tested Expense
Amount , Total Disallowed Amount and corresponding
income adjustment?
2.How are the Total Disallowed Amount and
corresponding income adjustment allocated?
3.What is the net effect and the impact on the UK loss
position? Can anything be done to improve the scenario?
UK1
Assume:
External financing cost nil
UK plc has NTLRDs B/F £10m
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Case Study Example 2 –
Stranded Losses
UK Plc
UK 1
£10m
£(10m)
Before election
Interest income (expense)
UK Plc
TDA allocated
Interest paid by UK
1 to UK Plc £10m
£10m
Corresponding income adjustment
£(10m)
PCTCT
Nil
nil
£10m
£(10m)
After election
Interest income (expense)
TDA allocated
UK1
Assume:
External financing cost
UK plc has NTLRDs B/F
nil
£10m
£nil
Corresponding income adjustment
£nil
Bfwd NTLRD utilised
£(10m)
NTLRD for group relief
£10m
PCTCT
Nil
nil
Questions
1.What is the Available Amount, the Tested Expense Amount, the Total Disallowed Amount and the corresponding income adjustment?
2.How are the Total Disallowed Amount and corresponding income adjustment allocated?
3.What is the net effect and the impact on the UK loss position? Can anything be done to improve the scenario?
Answers
1.AA
£nil (no external financing cost)
TEA
£10m (UK 1 net finance expense)
TDA
£10m
Corresponding income adjustment £10m
2.TDA allocated to UK1 - Interest expense of £10m disallowed in UK1
Corresponding income adjustment claimed in UK Plc – Interest income £10m non-taxable
3.Net effect for UK tax is nil but two debt cap returns required and prevents access to b/f NTLRDs
Trapped NTLR deficits election - Elect UK-UK loan outside the debt cap in order to utilise NTLRD b/f
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Case Study Example 3 – Gateway Test
Assume:
UK1 External liability
UK1 Internal asset
UK2 Internal liability
UK2 External asset
UK3 Internal liability
UK4 Internal asset
No other group members
Ignore de minimus
100
UK1
100
100
UK2
UK3
100
100
100
100
76
76
UK4
76
Question
Does the group meet the gateway test?
Is the analysis different if the loan from UK4 to UK 3 is 74?
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Case Study Example 3 – Gateway Test
Assume:
UK1 External financing cost
UK1 Internal financing income
UK2 Internal financing cost
UK2 External financing income
UK3 Internal financing cost
UK4 Internal financing income
No other group members
Ignore de minimis
100
UK1
100
100
UK2
UK3
100
100
100
100
76
76
UK4
76
Question
Does the group meet the gateway test?
Is the analysis different if the loan from UK4 to UK3 is 74?
Answer
- Yes
- The gateway test would not be met as net debt in UK1, UK2 and UK4 is nil and net debt in UK3 is 74 which
is less than 75% of worldwide gross debt (100)
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Case Study Example 4 – Group Treasury Companies
UK Co 1
UK Co 2
UK Co 3
75% subsidiary?
Yes
Yes
Yes
Activities
Holding company which borrows
and lends from/to worldwide
group companies
Manages group surplus cash and
overdrafts on behalf of the
worldwide group companies
Trading company, which invests
surplus cash deposits generated by
its trade
Income and
expenditure in the
year
Interest income
Interest expense
Interest income
Interest expense
Trading income
Interest on cash deposit
Net financing
income/(expense)
£2m - £4m = £(2m)
[Net financing expense]
£2m
£4m
£2m - £1m - £1
[Net financing income]
£2m
£1m
£50m
£2m
£2m
[Net financing income]
Elections can be made to exclude the finance income and finance expense amounts of all group treasury companies (“GTC”) from the
calculation of Tested Expense Amount (“TEA”) and Tested Income Amount (“TIA”).
Broadly speaking, a group treasury company is a member of the worldwide group which:
• Undertakes “treasury activities” for members of the worldwide group in the period including (amongst other things) lending money,
managing surplus deposits of money /overdrafts, or making/receiving deposits of money. The receipt of dividends from non-GTC
subsidiaries (e.g. trading subs) does not qualify as a treasury activity.
• Where at least 90% of its accounting income arises from treasury activities that it undertakes.
Questions
1.Which of the companies above should qualify as a GTC on the basis of the information above?
2.What is the effect of making the elections on the group tax position, after considering the allocation of the group’s Total Disallowed
Amount (“TDA”) and corresponding income adjustments? (assume the group’s overall debt cap disallowance is £2m before the
elections i.e. TIA<TDA)?
3.How would the group tax position in 2. change if UK Co 1 also received a £50m dividend in the period from a trading subsidiary?
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Case Study Example 4 – Group Treasury Companies
UK Co 1
UK Co 2
UK Co 3
75% subsidiary?
Yes
Yes
Yes
Activities
Holding company which borrows
and lends from/to worldwide
group companies
Manages group surplus cash and
overdrafts on behalf of the
worldwide group companies
Trading company, which invests
surplus cash deposits generated by
its trade
Income and
expenditure in the
year
Interest income
Interest expense
Interest income
Interest expense
Trading income
Interest on cash deposit
Net financing
income/(expense)
£2m - £4m = £(2m)
[Net financing expense]
£2m
£4m
£2m - £1m - £1
[Net financing income]
£2m
£1m
£50m
£2m
£2m
[Net financing income]
Answer
1.UK Co 1 and UK Co 2 should qualify as GTC’s as they undertake treasury activities for members of the worldwide group,
and 100% (>90%) of their accounting income arises from these activities. UK Co 3 would not qualify as it does not
undertake treasury activities for the worldwide group (it only undertakes them for itself – this point has been confirmed by
HMRC guidance in CFM92540).
2.The net finance expense of UK Co 1 and the net finance income of UK Co 2 would be ignored, therefore TEA (and
therefore TDA) would decrease by £2m and the TIA would decrease by £1m. The overall effect on the group tax position
would be a £1m decrease (TDA reduction £2m – TIA reduction £1m = £1m) in the group’s overall debt cap disallowance
from £2m to £1m.
3.As a result of the dividend income UK Co 1 would no longer qualify as a GTC, as the dividend income received is not
classed as treasury activities causing the 90% test to be failed by UK Co 1. UK Co 2 would be the only GTC in the period,
and the election would reduce TIA by £1m and therefore increase the group’s net debt cap disallowance amount by £1m
(from £2m to £3m).
N.B. The 90% test used in this example is based upon latest draft legislation. In legislation currently in force the
90% test is applied to the aggregate accounting revenue of all group companies with “treasury activities”.
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Case Study Example 5 – JVs
UK Plc
JV Partner
51%
49%
Questions
1. Which are the UK Plc group’s relevant group
companies (“RGC’s”) for the purposes of the debt
cap?
2. What is the effect of JV co being a joint venture
company (rather than a 75% subsidiary) on
i. UK Plc group’s Available Amount?
ii. UK Plc group’s Tested Expense Amount/Tested
Income Amount?
UK JV Co
Interest paid by
Sub 1 to UK
Plc, £1m
UK Sub 1
Interest paid
by UK Plc to
Sub 2 £1m
UK Sub 2
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Case Study Example 5 – JVs
UK Plc
JV Partner
51%
49%
UK JV Co
Interest paid by
Sub 1 to UK
Plc, £1m
UK Sub 1
UK Sub 2
31
Questions
1. Which are the UK Plc group’s relevant group companies
(“RGC’s”) for the purposes of the debt cap?
2. What is the effect of JV co being a joint venture company
(rather than a 75% subsidiary) on
i. UK Plc group’s Available Amount
ii. UK Plc group’s Tested Expense Amount/Tested Income
Amount
Answers
1. UK Plc only. The others are not 75% subsidiaries of UK Plc.
2. The effects are:
i. Available amount is not affected as JV is still consolidated in
the UK Plc consolidated accounts (and interest flows to JV
Interest paid
co are eliminated as they would be if JVco was a 75%
by UK Plc to
subsidiary).
Sub 2 £1m
ii. Tested expense amount is reduced by £1m as Sub 1 is not
a RGC (75% subsidiary).
Tested Income Amount is unchanged as Sub 2 is a 51%
subsidiary and therefore its net financing income is still taken
into account.
Overall change is that the Tested Expense Amount has
decreased by £1m which will reduce any disallowance
elsewhere in the UK Plc group.
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Case Study Example 6 – Interest rate hedging
Loan £100m @6%
UK Co
Bank
Fixed to floating rate swap
@LIBOR +1%
Fair Value adjustment to swap
Fair Value adjustment to debt
LIBOR is 2%
Ignore any other group companies
£15m Cr (excluding interest)
£15m Dr
Question
What are the Available Amount, the Tested Expense Amount, and the Total Disallowed Amount in the UK Co debt
cap group?
Is there anything that can be done?
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Case Study Example 6 – Interest rate hedging
Loan £100m @6%
UK Co
Bank
Fixed to floating rate swap
@LIBOR +1%
Fair Value adjustment to swap
Fair Value adjustment to debt
LIBOR is 2%
Ignore any other group companies
£15m Cr (excluding interest)
£15m Dr
Question
What are the Available Amount , the Tested Expense Amount and the Total Disallowed Amount in the UK Co debt cap
group?
Answer
Interest on loan
Net interest under swap
Tested Expense Amount
Available Amount
Total Disallowed Amount
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£6m Dr
£3m Cr
£21m (6 + 15) (swap is ignored)
£6m (FV movement of the debt is not included)
£15m (£21m - £6m)
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Case Study Example 7 – Late Interest
UK Sub
Haven Co
£100m Interco loan
External interest paid each year
Interest accrued but not paid on intercompany loan in year 1
Interest accrued but not paid on intercompany loan in year 2
Interest accrued on intercompany loan in year 3
£100m External debt
£4m Dr
£4m Dr
£4m Dr
£4m Dr
Interest is paid by UK Sub at the end of year 3 (£12m in total).
Question
What is the Available Amount, the Tested Expense Amount and the Total Disallowed Amount in years 1 to 3?
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Case Study Example 7 – Late Interest
UK Sub
Haven Co
£100m Interco loan
External interest paid each year
Interest accrued but not paid on intercompany loan in year 1
Interest accrued but not paid on intercompany loan in year 2
Interest accrued on intercompany loan in year 3
£4m Dr
£100m External debt
£4m Dr
£4m Dr
£4m Dr
Interest is paid by UK Sub at the end of year 3 (£12m in total).
Question
What is the Available Amount, the Tested Expense Amount and the Total Disallowed Amount in years 1 to 3?
Answer
Available Amount
£4m pa
Tested Expense Amount
Year 1 – nil / Year 2 – £4m/ Year 3 – £8m
This means there is a Total Disallowed Amount of £4m in year 3.
HMRC considering whether amendments to the debt cap rules are required for this anomaly – awaiting further guidelines.
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Case Study Example 8 – Functional Currency
Sterling
Exchange
Rates
Average
Closing
USD
1.7
1.5
EUR
1.1
1
Available Amount from USD Parent
consolidated accounts $10m. This should be
translated into Sterling at the average rate in
order to calculate the Available Amount (s350
TIOPA 2010
UK Parent
•USD Functional
currency for
consolidated
accounts
UK Co 1
UK Co 2
UK Co 3
•USD Functional
currency
•Net finance exp
$2m
•EUR Functional
currency
•Net finance exp
€4m
•UK Functional
currency
•Net finance exp
£1m
Question
What are the Tested Expense Amount and the Total Disallowed Amount when translating Tested Expense Amounts
using (i) Average rates and (ii) Closing rates
36
© 2010 Deloitte LLP. Private and confidential
Worldwide Debt Cap
Case Study Example 8 – Functional Currency
UK Parent
• USD Functional
currency for
consolidated accounts
UK Co 1
• USD Functional
currency
• Net finance exp $2m
UK Co 2
• EUR Functional
currency
• Net finance exp €4m
UK Co 3
• UK Functional
currency
• Net finance exp £1m
Sterling
Exchange
Rates
Average
Closing
USD
1.7
1.5
EUR
1.1
1
Available
Amount
from
USD
Parent
consolidated accounts $10m. This should be
translated into Sterling at the average rate in
order to calculate the Available Amount (s350
TIOPA 2010
Question
What are the Tested Expense Amount and the Total Disallowed Amount when translating Tested Expense Amounts using
(i) Average rates and (ii) Closing rates
Answer
Entity
Average rate
Closing
UK Co 1
$2m/1.7 = £1.18m
$2m/1.5 = £1.33m
UK Co 2
€4m/1.1 = £3.64m
€4m/1 = £4m
UK Co 3
£1m
£1m
Tested Expense Amount
(“TEA”)
£5.82m
£6.33m
Available Amount (“AA”)
$10m/1.7 = £5.88m
$10m/1.7 = £5.88m (average
rate always used)
Total Disallowed Amount
Nil (as TEA<AA)
£6.18m – 5.88m = £0.45m
37
• Currently, the rate to be used in
translating the Tested
Expense/Income Amounts is not
specified in the legislation.
• HMRC has indicated that average
rate should be used.
• Depending on movements in
exchange rates, the choice of rate
could create beneficial or
detrimental effects.
© 2010 Deloitte LLP. Private and confidential
Worldwide Debt Cap
Case studies – Other examples
• A statement of allocated exemptions must be received by HMRC within 12 months of
the end of the relevant period of account and may revise this within 36 months of the
end of the relevant period of account (s291 TIOPA).
‒ Enquiry window (potentially extended to 51 months dependant on when any
amendment is made)
‒ Group relief and other 2 year claims
‒ Due diligence
‒ Balancing payments to minority shareholders
• Interaction with treaty DTR if interest income is not “subject to tax”
• Quarterly instalment payments
• Stripping out impact of derivatives from Available/Tested Expense/Tested Income
Amounts
• Subs account in old GAAP, but with consolidated accounts in New GAAP/IFRS
‒ Floating to fixed interest rate swaps
38
© 2010 Deloitte LLP. Private and confidential
Worldwide Debt Cap
Case studies – Other examples
• New GAAP issues
‒ Fair valuing of fixed rate debt under New GAAP to reflect an economic (but not
designated) hedge (similar to Interest rate hedging pitfall discussed above)
‒ Derecognition of interest cost e.g. when cash pooling (interest expense in Tested
Expense Amount but not Available Amount).
• IFRS for SMEs
‒ Impact of initial recognition of non-derivative financial instruments will be included in
the Tested Income/Expense amount, but not in the Available Amount (consolidated
accounts already IFRS)
‒ Transitional adjustments
• Intra-group debt factoring
‒ Timing differences in recognition of the discount in Factoring co and debt purchaser
• EEA finance income
39
© 2010 Deloitte LLP. Private and confidential
Worldwide Debt Cap
Appendix 1- Gateway Test: TAAR
• Excluded schemes per draft guidance:
‒ repaying debt with surplus cash
‒ repaying debt with proceeds from the payment of a loan asset
‒ debt waiver
‒ Capitalisation
‒ repayment of an upstream loan
• In each case the liability must not be replaced with something that gives a similar
deduction and which would not be treated as a relevant liability.
• Comment regarding housekeeping exercises to reduce compliance burdens where the
group would not suffer a disallowance under the detailed rules to meet the gateway test
‘is not in itself objectionable’.
40
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