Finance Act 2015

Calculation of taxable diverted profits: section 86 cases

88 Calculation of taxable diverted profits in section 86 case: introduction

(1) If section 86 applies for an accounting period, section 89, 90 or 91 applies to determine the taxable diverted profits of the foreign company.

(2) But see also section 97 for how a designated HMRC officer estimates those profits when issuing a preliminary notice under section 93 or a charging notice under section 95.

(3) Subsections (4) to (12) define some key expressions used in sections 89 to 91 and this section.

(4) “The foreign company” has the same meaning as in section 86.

(5) “The notional PE profits”, in relation to an accounting period, means the profits which would have been the chargeable profits of the foreign company for that period, attributable (in accordance with sections 20 to 32 of CTA 2009) to the avoided PE, had the avoided PE been a permanent establishment in the United Kingdom through which the foreign company carried on the trade mentioned in section 86(1)(b).

(6) “The material provision” has the same meaning as in section 86.

(7) “The relevant alternative provision” means the alternative provision which it is just and reasonable to assume would have been made or imposed as between the foreign company and one or more companies connected with that company, instead of the material provision, had tax (including any non-UK tax) on income not been a relevant consideration for any person at any time.

(8) For the purposes of subsection (7), making or imposing no provision is to be treated as making or imposing an alternative provision to the material provision.

(9) “The actual provision condition” is met if—

(a) the material provision results in expenses of the foreign company for which (ignoring Part 4 of TIOPA 2010 (transfer pricing)) a deduction for allowable expenses would be allowed in computing what would have been the notional PE profits for the accounting period, and

(b) the relevant alternative provision—

(i) would also have resulted in allowable expenses of the foreign company of the same type and for the same purposes (whether or not payable to the same person) as so much of the expenses mentioned in paragraph (a) as results in the effective tax mismatch outcome mentioned in section 86(2)(c), but

(ii) would not have resulted in relevant taxable income of a connected company for that company’s corresponding accounting period.

(10) “Relevant taxable income” of a company for a period is—

(a) income of the company, for the period, which would have resulted from the relevant alternative provision and in relation to which the company would have been within the charge to corporation tax had that period been an accounting period of the company, less

(b) the total amount of expenses which it is just and reasonable to assume would have been incurred in earning that income and would have been allowable expenses of the company for that period.

(11) “Connected company” means a company which is or, if the relevant alternative provision had been made, would have been connected with the foreign company.

(12) “The mismatch condition” has the same meaning as in section 86.

89 Section 86: calculation of profits where only tax avoidance condition is met

(1) This section applies where—

(a) section 86 applies for an accounting period, and

(b) the mismatch condition is not met.

(2) The taxable diverted profits that arise to the foreign company in the accounting period by reason of that section applying are an amount equal to the notional PE profits for that period.

90 Section 86: mismatch condition is met: calculation of profits by reference to the actual provision

(1) This section applies where—

(a) section 86 applies for an accounting period,

(b) the mismatch condition is met, and

(c) the actual provision condition is met.

(2) The taxable diverted profits that arise to the foreign company in the accounting period, in relation to the material provision in question, are an amount equal to the notional PE profits for that period.

91 Section 86: mismatch condition is met: calculation of profits by reference to the relevant alternative provision

(1) This section applies where —

(a) section 86 applies for an accounting period,

(b) the mismatch condition is met, and

(c) the actual provision condition is not met.

(2) The taxable diverted profits that arise to the foreign company in the accounting period, in relation to the material provision in question, are determined in accordance with subsections (3) to (5).

(3) Subsection (4) applies if the actual provision condition would have been met but for the fact that the relevant alternative provision would have resulted in relevant taxable income of a company for that company’s corresponding accounting period.

(4) The taxable diverted profits that arise to the foreign company in the accounting period are an amount equal to the sum of—

(a) the notional PE profits for the accounting period, and

(b) the total amount of any relevant taxable income of a connected company, for that company’s corresponding accounting period, which would have resulted from the relevant alternative provision.

(5) If subsection (4) does not apply, the taxable diverted profits that arise to the foreign company in the accounting period are the sum of—

(a) what would have been the notional PE profits of the foreign company for that period had the relevant alternative provision been made or imposed instead of the material provision, and

(b) the total amount of any relevant taxable income of a connected company, for that company’s corresponding accounting period, which would have resulted from the relevant alternative provision.