Answer-to-Question-_1_
i) Overview of Diverted Profits Tax
Diverted profits tax is a UK tax that is aimed at taxing profits that should be attributable
to UK companies and subject to UK taxation, but has been diverted to overseas
territories.
Consequently, diverted profits tax was introduced in 2015 (1 January 2015) and should be
viewed as a separate taxation to corporation tax.
Diverted Profits tax is levied on the identified profits that meet the provisions at 25%.
It should be noted that diverted profits tax is punitive, such that no double taxation relief
on the 'diverted profits' is available to reduce the charge under the diverted profits tax
provisions.
Diverted profits tax is aimed at:
- UK companies, where entities or transaction lack economic substance;
- Non UK companies that operate through a UK permanent establishment ("PE"); and
- Non UK companies that avoid a UK PE.
In assessing diverted profits tax, it is important to analyse the following conditions:
- The participation condition.
The participation condition relates to the parties involved in the transaction. This
essentially looks to ensure that the transactions in question are between one of the entities
set out above (as outlined in s.80, s.81 and s.86(2) of the provisions), such as a UK
company, non UK company with UK PE or non UK company with an avoided PE (the
"Relevant parties").
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The other side of the transaction should be a directly or indirectly participating party in
the management, control or capital of the Relevant parties noted above.
Broadly, the participation condition requires a relevant entity and another Group entity to
have entered into a transaction or arrangement.
- The Effective Tax Mismatch Outcome
The second condition assesses wether the parties identified in the 'participation condition'
have entered in to an arrangement or transaction that results in an effective tax mismatch
outcome for the accounting period.
An effective tax mismatch outcome is an outcome that either results in expenses for one
party resulting in a tax deduction or a reduction in the income of the party which would
otherwise be subject to taxation. This is compared against the other side of the transaction
such that where the relevant deduction from taxable profits exceeds the resulting increase
in taxes payable by the other party then the results of the taxable deduction are not
allowed to be taken for tax purposes.
The mismatch between the relevant deduction and relevant income is that the relevant
income does not equal 80% of the relevant deduction.
It should be noted that there are exceptions to the effective tax mismatch outcome where
the relevant expenses / deductions are exempted if they arise solely by reason of
contributions or payments to a registered charity, registered pension fund, overseas
pension scheme, payment to persons on the grounds of sovereign immunity.
Additionally, to the extent that the relevant deductions are expected loan relationship
outcomes, such that the results arise wholly from debits or credits under Part 5 CTA2009
or loan relationships and relative contracts under Part 7 CTA 2009 (i.e. derivative
contracts), then these deductions are not included for the purposes of the effective tax
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mismatch.
- The insufficient economic substance condition
The insufficient economic substance condition is met to the extent that the effective tax
mismatch outcome is referable to a single (or more) transaction and it is reasonable to
assume that the transaction/transactions was/were designed to secure a tax reduction,
unless it was reasonable to assume that the non tax benefits outweigh the tax benefits.
In addition to the conditions above, s.86 regarding avoided PEs notes an additional
condition, the tax avoidance condition.
This condition is met to the extent that the supplies of services, goods, or other property
arrangements re in place with the main purpose or one of the main purposes of which is
to avoid or reduce a charge to corporation tax.
In light of the above, to the extent that any arrangements conducted by relevant parties
meets the above conditions, then a charge to diverted profits tax is likely to arise.
It should be noted that, to the extent that the Group's transfer pricing policies is adequate
and robust, such that the arrangements are all arm's length and each territory is fairly
remunerated, then the diverted profits tax provisions should not apply.
Where a company has diverted profits, they have a duty to notify HMRC in writing and
within 3 months after the end of the accounting period for which the diverted profits have
arise.
HMRC will review the charge and issue a preliminary notice, stating the accounting
period of the company to which the notice applies, the basis on which the officer has
reason to believe that one or more of the provisions apply and the basis for the proposed
charge calculation. Additionally, the preliminary notice should include reference to the
UK entity chargeable and the interest applied.
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the preliminary notice should be received within 24 months after the end of the
accounting period to which it relates.
If not notification has been received by HMRC form the UK entity, then this window for
preliminary notice extends to 4 years.
The UK company has 30 days to make representations to the office from the date of the
preliminary service.
Following this, a charging notice may be issued by HMRC, following considering the
representations provided and the preliminary notice.
the charging notice must be issued within 30 days after the representations to the extent
that the officer believe that a diverted profits tax charge should be applied.
the payment of the assessed taxation should be settled within 30 days after the day the
charging notice is issued and the payment may not be delayed under any circumstances.
ii) Application of Diverted Profits Tax ("DPT")
In light of the diverted profits tax provisions above, Green Ltd is a UK company and
therefore should be assessed for DPT purposes under s.80.
Under the participation condition, the transaction with Red is a connected company
transaction given that Green and Red are commonly owned by a parent entity.
Therefore, it would appear reasonable to note that the participation condition is met.
Under the effective tax mismatch condition, the transaction between Red and Greed gives
rise to an expense on the purchase of materials for Green.
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given this should be considered an expense wholly and exclusively for the purposes of
Green's UK trade, we would expect a taxable deduction t arise equal to £50m.
However, we note that Red is resident in a low tax jurisdiction, therefore we would
expect that the receipt of taxable income will be subject to a lower rate of tax than in the
UK.
It is unclear how much tax will be generated on the £50m of income by Red, however, to
the extent that the tax generated is less than £7.6m, being the taxable benefit received by
Green of £9.5m and applying the 80% test, then this condition shall also be met. This is
likely to be an effective tax rate of 15% or less in Red's territory.
It should be noted that the payment for the supplies is not an expected loan relationship
outcome nor is it exempted under the exemptions noted above.
finally, the insufficient economic substance test may be met on the basis that it is
reasonable to assume that the transaction was entered into to secure a tax benefit and this
benefit outweighs the other benefits. Consideration should be given to the relationships
between the parent co and Red as to the acquisition of materials and whether Green could
actively enter into a direct relationship with the parent for the acquisition as this may
indicate the relevant motives for the transaction.
It is likely that the insufficient economic substance test is met.
It is noted that the transfer pricing position of the group is not determined, therefore we
have assumed that appropriate transfer pricing methodologies and arm;s length
arrangements are not entered into between the entities. Therefore, DPT should continue
to apply.
As such, we would expect Green to have a duty to notify HMRC that is may be liable to a
diverted profits tax on the payment of £50m to Red.
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The tax charge is likely to be equally to 25% of the payments made, giving rise to a
charge of £12.5m payable by Green Ltd. This will be payable within 30 days after the
charging notice is issued.
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Answer-to-Question- 2
To: Archie
From: Tax Advisor
Date: 11 December 2019
Subject: General considerations on transfer of Patent to overseas territory
Hi Archie,
Thanks for your note, we have read through the information provided and have
summarised our key thoughts below. In doing so we have specfically looked at the
following areas.
Double Taxation Agreements
The UK is party to a wide range of treaties with other territories globally.
The purpose of a double taxation agreement is to facilitate international trade amongst
various territories so that factors such as the tax costs arising from operating cross border
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does not create a significant impact on your cost of doing business.
Specfically, for UK buinsesses operating overseas, a double taxation agreement will
provide some clarity on which territory has the right to tax the income being generated,
whether the income can be repatriated free of withholding taxes and other issues such as
tax residency, permanent establishments, amongst others.
Consequently, the double taxation agreements provide a good facility to help enable cross
border trade such that taxation is leviedin a fair and consistent approach.
With a specfic focus on payments of royalties, each country is likely to have a domestic
tax rate on which they require their resident company to apply to payments made in
respect of royalites. This is nown as withholding taxes and the rate varies. For example,
the domestic withhing tax rate in the UK is 20%.
However, under a double taxation agreement, assuming it follows the OECD model
treaty, article 12 notes that withholding taxes on the payment of royalties shall not apply
(i.e. 0% withholding taxes) if the beneificial owner of the royalties carries on a bisiness in
a contracting state.
consequently, the UK would not levy withholding taxes on the payment of a royalty to
the beneficial owner under this article assuming the other party is in a teritory that has a
double tax agreement.
Principle Purpose Test
The principle purpose test is an anti avoidance measure that was introduced as part of the
multi lateral insturment iniative under the BEPs action points.
Broadly, the multilateral instument has set out a principle purpose that that contracting
states may sign up to as part of the multilateral instrument to take effect and be enacted
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into the double taxation treaties that the corresponding teritories that agree to the
amendment.
Consequently, the principle purpose test has been accepted by the UK and is likely to be
effective as of 2020.
The princple purpose test effectively requires the two contracting entities to consider the
basis for which the arrangements or trasnaction has been entered into, such that if the
arragements or transaction has been entered into for the purpose of utilising the beneficial
provisions of a specfic treaty, the this purpose is a bad purpose.
As such, the principle purpose test provisions would apply such that the arrangements
that have been entered into will not be able to benefit from the treaty provisions, and
taxation shall apply in line with the domestic tax codes of the territories in question.
The principle purpose test is typically referred to as the provision to stop multination
group 'treaty shopping'.
In the case of the tax scheme suggested, it appears that consideration should be given to
the principle purpose test on the basis that the arrangeemnts have only been entered into
for a tax benefit, based on the information provided, and the tax benefit is being
conferred by the double taxation agreement governingthe two territories party to the
trasnaction.
As such, there would appear to be a high risk that the principle purpose test provisions
shall apply and result in the arrangements not being able to benefit from the preferential
treaty provsions.
It would be advisable to conduct further work on this area to ascertain any other
supporting rationale that should allow the treaty benefits to apply, sch that the
arrangemnts are being conducted in the ordinary course of business and comercially this
is a sensible structuring option.
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However, as noted above, it does look unlikely that the current arrangements will support
a non tax benefit such that the treaty provisions will not apply by virtue of the principle
purpose test.
UK General Anti Abuse Rules ("GAAR")
The UK GAAR is an anti avoidance provision targeted at any general anti abuse
arrangements that may not be caught by other specfic anti avoidance rules enacted by UK
law in dealing with tax avoidance of the UK tax net.
The GAAR is wide reaching and looks to counteract tax advantages from arrangements
that are seen to be abusive, and applies across income tax, corporaition tax, capital gains
tax, petroleum tax, diverted profits tax, apprenticeship levy, inheirtance tax, stamp duty
land tax and annual enveloped dwellings.
Tax arranegments are, having regard to all circumstances, it would be reaosnable to
conlcude that the obtaining of a tax advantage was the main purpose, or one of the main
purposes of the arrangements.
A tax advantage includes releif or increased rleeif from tax, repayment of increased
repayment of tax, avoidance or reduction of a charge to tax or an assessment to tax,
avoidance of a possible assessment to tax, deferral of a payment of tax or advancement of
a repayment of tax, and avoidance of an olifation to deduct or account for tax.
Additionally, tax arrangements are abusive if they are arrangements entering into or
carrying out of which cannnot be reasonable regarded as a reasonable course of action in
relation to the relevant tax provisions, having regard to all curcumstance, including,
whether the substantive resilts f the arrnagements are consistent with any principles on
which those provisions are based and the policy objectives, whether the means of
achieving those results involves one or more contrived or abnormal steps and whether the
arrangements are intended to exploit any shortcomings in those provisions.
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Given the expected tax outcome of the suggested tax planning, the fact that the provisions
should supposedly result in no UK taxation resulting in the disposal of the patent to the
group entity, no UK tax on patent income yet has ful access to the patent income and UK
no withholdign on paying royalty to the party.
All of these circumstances would suggest that the arrangements, i.e the transfer of the
patents, are not being conducted in the spirit of the UK tax law and is likely to be
considered abusive and reuslts in a tax advantage such that the result is the rleief or
potential avoidance of UK taxation on the transfer of the patent and payment of the
royalties.
In light of the items discussed, it is likely that both the princople purpose test and the UK
GAAR should apply. Under UK tax law, s.212 of FA2013 notes that the priority rule has
effect subject to the GAAR.
The tax treaties are included in this by virtue of s,6(1) TIOPA 2010 that provides the UK
tax treaty has priority.
therefore given the wording of s.212, it would appear that the GAAR actually takes
priority over the tax treaty as the priority rules are subject to the GAAR. As such, it is
likely that the GAAr will take affect and counteract the UK tax advantage of the
arrangements, resulting in UK taxation.
We appreciate that we have convered a lot of information above, but to the extent you
would like to discuss this further, or analyse any further information, please let us know.
Kind regards,
Tax Advisor
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Answer-to-Question-3
Tax Advisor Address
Finance Director
Multi National Company Address
11 December 2019
Dear Fiancne Director
RE UK anti Hybrid and Corporate Interest Restriction Provisions
the purpose of this letter is to assess the Group tax position in respect of the various
intercompany transactions and the application of the UK anti hybrid provisions and UK
corporate interest restriction provisions.
Firstly, we shall consider the UK anti hybrid provisions.
Hybrid Provisions
The UK anti hybrid provisions were a response to Action 2 of the OECD base erosion
and profit shifting regime.
The provisions were enacted with effect from 1 January 2017 and only impact
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transactions conducted from this point onwards.
The hybrid legislation looks to conteract certain case that it is reaosnable to suppose
would otherwise give rise to either a deduction / non inclusion mismatch or from a
double deduction mismatch.
The cases to which the hybrid legislation focuses on is:
a) payments or quasi-payments in respect to financial instruments, repos or sock;
b) hybrid entities;
c) companies with permanent establishments, or
d) dual resident companies.
To the extent that any of the above cases results in a deduction/non inclusion mismacth or
a double deduction, then the hybrid provisions primary response should apply.
The primary responses for a deduction/non inclusion mistmach is to deny the deduction
arising.
The primary response for a double deduction is to deny the deuction in the parent entity.
To the extent that the primary responnse cna not be enforced, the secondary response
takes affect.
For a deudction non inclusion, the secondary response is for the income to be included
for tax purposes, and for a double deduction, it is for the deduction of the subsidiary to be
denied in the subsidaiary entity.
Application to the Group
We understand that Company B is wholly owned by Company E and that in State S
(where Company E is located), it is possible to elect for the subsidiaries to be treated as
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branches.
We understand that the election is in place for Company B.
consequently, this is likely to give rise to a hybrid entity and a potential deduction non
inclusion mismatch.
This type of arrangement is governed by Chapter 5.
On the basis that Company B is seen as a branch for state S and a legal netity in the UK,
this gives rise to a hybrid entity.
The payment of interest should be veiwed by both territories as a debt financial
instrument and no hybridity arises on the instrument itself.
However, we would expect the UK to take a tax deudction for the payment of interest,
however, the receipt of interest in State S will not be taxable as it is seen to receive a
payment from the branch which is an extension of itself.
Consequently, this results in a deduction in the UK and non inclusion of oridnary income
in Sate S.
We have not been informed of any dual inclusion income as part of this arrangeement. As
such, we would expect the promary response to apply such that the £8m of interest
payments by Company B is disallowed for UK tax purposes and no tax deudction is
taken.
UK Corporate Interest Restriction Provisions
The UK corporiate interest restrictions ("CIR") were also a response to the OECD base
erosion and profits shifting initiative, notably, Action 4.
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The purpose of the CIR provisions is to ensure that there is a more prescriptive method of
clacualting allowable interest expenses of a UK group given that the other UK anti
avoidance legilsation around thin capitalisation is based on transfer pricing principles
which can be difficult to apply consistently and accurately given the subjectiveity of what
is arm's length.
As such, the CIR provisions will assess a UK group on its net interest expenses and
compare this to the interest capcity.
For the purposes of the CIR provisions, interest capacity is calculated as either the
deminimis of £2m or based on the default fixed ratio method.
Note there is another method known as the Group ratio method that can give rise to a
higher interest capacity in scenarios where there is singificant inter company lending.
It should be noted that the CIR provisions are enforced after the other itnerest
deductibility provisions, such as Thin cpaitalisation or the UK anti hybrid provisions. As
such, the £8m disallowance noted above should be considered in the UK CIR
calcualtions.
High Level CIR Calculation
firstly, we should establish the UK groups net interest expenses for the period. After
taking ino account the hybrid disallowance, the net interest expenses should be equal to
£3m. This is the aggregate of the UK interest expenses and UK interest income for all
entities.
The deductibility of the £3m should be compared against the interest capacity.
Based on the fixed ratio method, we should adjust the EBITDA for the interest payments
and receipts, resulting in an aggregate Tax -EBITDA of £69m.
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The tax-EBITDA of the worldwide group is equal to £69m. Applying the 30% restriction,
this gives rise to £20,7m. This is higher than the aggregate net group interest expesne of
£20m, therefore the interest capacity is £20m.
As such, we would expect that the £3m of interest expenses arising in the UK group
should be deudctibility, and the Group has unused interest capacity of c.£17.7m.
The unsued interest capacity can be carried forward to future periods where an
apprioriate full interest restriction return is submitted alongside the UK tax ocmputations.
it should be noted that a UK entity should be choosen as the reporting entity that should
file the full interest restriction return on behalf of the entire group.
Please note the calcualtions and analysis conducted above is high level, and further
analysis should be conducted ofr the purposes of filing a UK corporation tax reutnr for
each UK entity to ensure it is accurate.
Please do let us know if you have any questions or require further assistance.
Yours sincerley,
Tax Advisor
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Answer-to-Question-5
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UK tax obligations
When incorporating a UK company, various tax obligations shall arise.
Firstly, the UKco should notify HMRC within 3 months of the start of the accounting
period that they are liable to the UK corporation tax charge for the period.
The UKco will be required to file annual UK corporation tax returns. The corporation tax
returns shall be due 12 months after the end of the accounting period for which the
financial statements are calculated.
Additionally, the UKco will be liable to settle UK taxation that arises. Typically, small
companies are liable to UK corporation tax within 9 months and 1 day after te end of the
acounting period for which the liability relates.
To the extent that UKCo triggers quarterly installment payments ("QIPs"), the first period
should be exempt from the regime, however, subsequent periods will result in tax
pyamnets being due on the 14th day of the 7th, 10th, 13th and 16th month following the
end of the accounting period.
Additionally, we note tht UKCo shall have UK employees. Therefore, UKco shall have
an obligation to operate UK payroll on the employees and deduct PAYE and national
insurance form the slalaries. This will be reportable and payable to HMRC on the 21st
day of the following month after payment of the salaries.
UKco will make taxable suppls of £300k in the first year. AS such, it is likley that the
UKco shall need to reigster for UK VAT and submit UK VAT returns either on a quarterly
r month basis showing the output and input tax incurred on supplies made.
Owner/Director's personal income
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We have assumed for the purposes of this analysis that the owner director is non UK
resident and non UK domiciled on the basis they are based in ruritania.
However, given the Directors duties for the UK entity, it may be that the director is a UK
reisdent under the satutory residence rules, such that they may spend 183 days in the UK
or works full time in the UK.
It would appear unlikely, however, consideration should be given to tax residency and
further information should be provided as to the Direcotrd whereabouts through the year
and the Directors allocation of work.
Nevertheless, a non UK resident and non domciled individual is taxable in the UK on the
UK duties performed.
Where UK duties are performed on behalf of the UK entity, then the UK director should
pay UK income tax on the portion of his UK earnings derived from the UK duties
conducted.
To the extent that th Direcotrs UK duties are merely incidental, then the UK income
would not be taxable and would be considered part of the wider foreign income. this
would not appear to be likely on the basis that the Directr is the only director of the UKco
and there are only one full, or part time, employee.
Additionally, the Directors overseas income should not be taxable in the UK on the basis
that the Director is non resident, non domiciled and the income is based outside of the
UK.
Anti Avoidance Provisions
Under UK tax law there are numerous anti avoidance provisions, depending on the
transaction that is being entered into and the arrangements in place.
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In respect to the transactions between UKco and Rco, these are related party transactions.
We do not expect the transaction to be party to transfer pricing provisions on the basis
that UKco and Rco are a small meduim enterprise group. Theefore, the transfer pricing
provisions is unlikely to apply.
Additionally, there appears to be non debt funding for which the unallowable purpose
provisions should be considered and UKco is a subsidiary of Rco, therefore no controlled
oreing company provisions should be considered.
However, with regards to the purchase of stock from ruritania, this will result in a tax
expense in the UK, which should on the face of the information provided, be tax
deductible.
Therefore, consideration may need to be given to the UK diverted profits tax provisions
which would look to counter any UK tax advantage to the extent that the UK company
has entered into a related party transaction, an effective tax mismatch has arisen and there
is insuffient economic substance.
The UK diverted profits tax provisions should not apply on the basis that the Group is not
large for tax purposes.
for completeness, the UK General anti abuse rules should not apply in this instance given
that the arrangements do not seem to be abusive, but rather in the ordinary course of
business.
Additionally, not enough information is provided to ascertain whether a UK hybrid
mismtach may arise on the purchase of stock from Ruritania, however, there is a risk that
to the extent that the purchase of stock from a related party may give rise to a hybrid
mismatch. Further analaysis shsould be conducted to ascertain whether these provisons
may apply and what structuring could be comppleted to ensure that the hyrbid mismtatch
provisions do not captue UKco.
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Answer-to-Question - 9
To: Mary
From: Tax Advisor
Date: 11 December 2019
Siubject: Calculation of UK branch profits and general principles
Hi Mary,
We have reviewed the information of zleda Inc and have providd our comments below.
Background
Where an overseas entity has a UK permanent establishment, the profits that are
attributable to the permanent establishment ("PE") should be those profits as outlined in
Artcile 7 of the tax treaty.
Under Artcile 7, the profits that are attributable to the PE are the profits it might be
expected to make, in particular in its dealings with other parts of the enterprise, if it were
a seperate and independent enterprise engaged in the same or similiar acitivites under the
same or similiar condiction, taking into account the fucntions performed, assets used and
risks assumed by the enterprise through the PE and through the other parts of he
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enterprise.
It should be noted that given the UK PE is an extension of Zelda Inc, we would expect
that double taxation is likely to arise. Article 7 notes that the profits subject to double
taxation should benefit from a tax credit to reduce or eliminate the double taxation
arising.
In determining such an adjustment, the competent authories of the two territories my
consult each other if necessary.
Branch Profits
In calculating the profits attributable to the UK PE, it is likely that an element of transfer
pricing shall need to be conducted to ascertain the risks and functions of the UK PE
alongside any assets that the PE holds.
As such, we note form the ifnormation provided that there are various intercompany
recharges fro the purposes of US staff, use of IP, intercompany financing, etc.
Consequently, consdieration shall need ot be given as to what is an arm's legnth price for
the UK PE to pay for these services given that the payments will result in a reduced tax
base in the UK for the purposes of UK corporation tax.
Based on a high level review of the information provided, we would ecpect the following
items to be included as profits attributable to the UK PE:
- UK branch sales
- UK staff costs
- Administrative expenses (to the extent this is all related to the branch; and
- Depreciation of fixed assets.
Intercompany recharges
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It should be noted that further analyssi should be conducted as to the arm;s length nature
of the 'contribution for facilitation of sales by US Head office at cost plus 5% and the
charge made for use of US staff at cost plus 5%.
It is likely that these balances are reasonable given that these services are routine services
and should not give rise to a significant remuneration. As such, these income and
expenses are likely to be reaosnable based on the information receeived to date.
Intercompany Funding
Regarding the interest on the intercpmany funding, transfer pricing rules should be
applied such that the UK PE should be assessed as a standalone UK entity and whether
the UK entity would have received those terms, quantum of funds and interest rate form a
third party.
To the extent the interest payments are not arm's length, such that to much interest is
being applied, then the excess interest above wat is arm's legnth should not be deducted
in calcualting the UK PE profits.
Again, further consideration should be given to the interest charge given the quantum of
£20m is relatively large and a disallowance may need to be calculated.
Additionally, on the interest income, the interest charge on the funds may result in a
hybrid mismatch on the basis that the UK entity is looking to take a deduction for
income, the US parent is likely to take a deduction also given the UK PE is an extension
of the US parent.
As such, consideration should be given to the application of Chapter 10, double
deudctions given that Zelda and the UK PE will meet condition A such that they are a
relevant multinational company and condition B given that a deduction shall arise in both
territories.
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The primary response being to disallow the deudction in Zelda. Given Zelda is outside
the UK tax net an the US do not operate hybrid provisions, the secondary repsonse would
likely apply such that the deduction is not available to the UK PE.
Intellectual Property
Finally, the notional royalty to Zelda Inc is not likely to be available as a deductible
expense of the UK PE on the basis that the UK PE is an extension of Zelda inc, and is
therefore legally the same entity.
As a result, the use of the IP is technically from Zelda Inc operating in the UK and this
gives rise to the UK PE.
Therefore, it is unlikley that a notional royalty payment will be an allowable expense of
the UK PE.
Revised UK Branch Profits
- UK sales $120m
- US Head office $20m
- UK staff ($50m)
- US staff ($20m)
- Admin expenses ($7m)
- Depreciation ($1m)
Profits $62m
The $62m of profits should be transalated in to GBP for UK tax purposes, with the
foreign exhcnage gain or loss being a non trading foreign exchange gain or loss of the
UK PE.
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the translation of the profit and loss account should be conducted at an average exhcnage
rate for the period, with the relevent debits or credits being brought into UK taxation as
they are accounted for as profit and loss expenses for UK tax purpsoes.
The $62m of profits should be subject to UK taxation at 19% and the corporation tax
return shall be due by 31 December 2019.
Given the size of the profits, the tax payable will fall under the UK quarterly installment
regime, such that tax should be paid in four equal installments on the 14th day of the 7th,
10th, 13th and 16th month following the end of 31 December 2018.
Further to the above, it would be advisable that further work is conducted to ascertain the
correct transfer pricing positon for the intercompany recharges, the application of the UK
hyrbid provisions and the positiion on the notional royalty charge.
Please let us know if you have any questions or require further assistance with the above.
Kind regards,
Tax Advisor