UK: New CIR rules intersect with transfer pricing | KPMG Global
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UK: New corporate interest restriction rules intersect with transfer pricing

UK: New CIR rules intersect with transfer pricing

The new corporate interest restriction (CIR) rules—enacted in Finance (No.2) Act 2017 that received Royal Assent on 16 November 2017—impose an additional potential restriction on UK tax relief for finance costs, after the existing tax rules (including the transfer pricing rules) have been applied.


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The CIR rules have an effective date of 1 April 2017. 


For purposes of calculating the additional restriction imposed by the CIR rules, any adjustments made under the UK transfer pricing 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.

Interest costs

The consequences of a disallowance of interest costs under the CIR rules may be different to a disallowance of interest costs under the transfer pricing rules. When 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 transfer pricing rules, to the extent interest costs are disallowed by CIR, they may be carried forward for potential “reactivation” in future periods.

Related parties

The definition of “related parties” in the CIR rules (that 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 transfer pricing 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 when they are not subject to potential adjustment under the transfer pricing 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 HM Revenue & Customs 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.


Read a November 2017 report prepared by the KPMG member firm in the UK

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