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Corporate interest restriction ‘devil is in the detail’ – transfer pricing

CIR ‘devil is in the detail’ – transfer pricing

This week we look at the interaction between the UK’s transfer pricing rules and the CIR regime.


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This is the thirty first in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR legislation has now been enacted in Finance (No.2) Act 2017, which received Royal Assent on 16 November 2017. The start date continues to be 1 April 2017. This week we look at the interaction between the UK transfer pricing (TP) rules and the CIR regime. 

The CIR rules impose an additional potential restriction on UK tax relief for finance costs, after the existing tax rules (including the TP rules) have been applied.

For purposes of calculating the additional restriction imposed by the CIR rules, any adjustments made under the UK TP rules will be taken into account in calculating a CIR group’s ‘tax-interest’ and ‘tax-EBITDA’. However, no equivalent transfer pricing adjustments will be made for the purposes of calculating the group’s ‘group-interest’ and ‘group-EBITDA’. This may lead to some (favourable or unfavourable) mismatches affecting the quantum of the group’s ‘interest capacity’ under the CIR rules and therefore ultimately the quantum of the restriction imposed by the CIR rules.

Note that the consequences of a disallowance of interest costs under the CIR rules may be different to a disallowance of interest costs under the TP rules. Where the CIR rules effectively result in a group being disallowed UK tax relief for interest costs paid to a related party lender, the related party lender will not be able to:

  • Claim a compensating adjustment to reduce its taxable income by the amount disallowed by CIR; or 
  • Make a tax-exempt balancing payment to the borrower

On the other hand, by contrast with interest costs disallowed by the TP rules, to the extent interest costs are disallowed by CIR, they may be carried forward for potential ‘reactivation’ in future periods.

It should also be noted that the definition of ‘related parties’ in the CIR rules (which applies for the purposes of excluding ‘related party’ interest costs when applying the group ratio method) is significantly broader than the equivalent connection tests in the TP rules. As such, it is possible that some loans might be treated as ‘related party’ loans for CIR purposes (and therefore treated less favourably under the CIR rules) in circumstances where they are not subject to potential adjustment under the TP rules.

A number of taxpayers have expressed concern whether, in light of the CIR provisions, it is still worth entering into an Advanced Thin Capitalisation Agreement (ATCA) with HMRC in relation to interest deductibility under the thin capitalisation provisions. In many circumstances, the answer will still be ‘yes’. The thin capitalisation provisions will still apply before the CIR provisions and for some groups the certainty an ATCA provides over the arm’s length debt and interest position will remain valuable. However, how valuable such certainty will be will ultimately depend on the interplay with the CIR rules.

The previous articles in this series can be found here.

For further information please contact:

Alexandra Ives

Richard Rudman

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