CORPORATE TAX Jones Day Finance Bill 2009 OUR UPDATE THIS MONTH FOCUSES ON THE DRAFT The important point to note is that the tested legislation and explanatory notes produced by HM amount is based on a tax fi gure, representing update: a new basis Revenue & Customs (HMRC) and HM Treasury in the fi nance expenses that would, apart from the December 2008 that introduces a new regime for application of the debt cap, be available after all for the taxation of the taxation of foreign profi ts. other adjustments and anti-avoidance provisions have been applied. In other words, the calculation foreign profi ts It is acknowledged in the explanatory notes that of the tested amount is based on the fi nance the legislation is very much in draft form to allow expenses that would be allowable after applying, enough time to conduct a proper consultation for example, the transfer pricing rules and the process. However, the majority of the issues arising unallowable purpose anti-avoidance legislation. from the draft legislation stem from the underlying The schedule also contains detailed provisions policies directing the legislation. After outlining the that allow certain amounts to be disregarded for BY BLAISE approach of the draft legislation, we consider some businesses in the fi nancial services industry, and MARIN- of the diffj culties that taxpayers and advisers may an anti-avoidance provision to prevent companies face in adjusting to the new regime. reducing the tested amount by channelling CURTOUD intra-group fi nancing through third parties under partner, WORLDWIDE DEBT CAP AND EXTENSION back-to-back arrangements. Jones Day OF THE UNALLOWABLE PURPOSE RULES The introduction of the worldwide debt cap for Available amount large groups (s9(1) of the draft legislation) and the The available amount is defi ned as the non-UK expansion of the unallowable purpose rules (para 13) external fi nance of the group less the external is seen by the government as necessary to deliver a fi nance income of the group. These fi gures are ‘balanced and afg ordable package’ of tax reforms in derived from the consolidated profi t and loss relation to foreign profi ts. The fear of the government accounts of the group for the relevant period. is that without the restriction of interest relief the UK external fi nance income is removed from the BY IAN REID introduction of the dividend exemption would place calculation as it is accepted that external fi nancing associate, too great a risk on the UK tax base. is not within the scope of the debt cap and Jones Day therefore should continue to be allowable. The draft The aim of the worldwide debt cap is to restrict legislation contains provisions that disallow certain groups of companies from pushing debt into amounts relating to businesses in the fi nancial UK entities that exceeds the group’s external services industry that mirror the provisions in borrowing. In other words, the debt cap assumes relation to the tested amount. that interest is only deductible if it represents the BY ANTHONY movement of external fi nance into a UK company. The available amount is therefore based on an accounting fi gure, rather than a tax fi gure. The WHALL The draft legislation achieves this by comparing draft legislation states that references to fi nancial associate, two fi gures, the ‘tested amount’ and the ‘available statements are to international accounting Jones Day amount’. The amount of allowable deductions standards (IAS) consolidated accounts of the group. are restricted if the tested amount exceeds the If the group accounts are prepared in accordance available amount. with another basis, such as local generally accepted accounting principles (GAAP), and those fi gures Tested amount are materially difg erent from the fi gures that would The tested amount represents the total intra-group be produced if the company accounted under IAS, fi nance expenses in the UK from the corporation then the IAS fi gures will apply for the purposes of tax computation of each relevant group company. the debt cap. Whether or not required by law, the ‘Relevant group company’ is defi ned as any UK draft legislation requires a group of companies to company which is either: produce IAS accounts to determine how the debt cap applies, if only to determine whether the draft i) the ultimate parent of the worldwide group; or legislation applies. ii) a 75% subsidiary of the ultimate corporate Disallowance of deductions parent. The fi nance expenses of the relevant group companies are disallowed to the extent that the The tested amount is calculated by adding the net tested amount exceeds the available amount. In loan relationship and derivative contracts debits to other words, the available amount (representing any fi nance costs from fi nance leases for plant and the non-UK external fi nance expense) efg ectively machinery and debt factoring arrangements from ‘franks’ the tested amount (intra-group fi nance the relevant corporation tax computations. income of the relevant group companies). 2 The In-House Lawyer March 2009
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