MTT21240 | Calculating the effective tax rate: Adjusted profits: Intra-group financing arrangements

When determining the adjusted profits, expenses arising from certain intra-group financing arrangements are to be excluded.

Expenses are to be excluded from a member’s underlying profits where:

• the member is a low tax member for that period, and

• over the expected duration of the arrangement, the intra-group financing arrangement is reasonably expected to increase the expenses of a low tax member (in its underlying profits), with no corresponding increase in the taxable income of a high tax member of the same group.

This is set out in Section 154 of Finance (No.2) Act 2023.

Qualifying intra-group financing arrangement

‘Intra-group financing arrangement’ means an arrangement between two or more members of a group under which a member (member A) directly or indirectly provides credit or otherwise makes an investment in another member (member B).

An intra-group financing arrangement is ’qualifying’ if member A is a high tax member and member B is a low tax member.

High tax member and low tax member

For this purpose, a member of a group is a ‘low tax member’ in an accounting period if the effective tax rate for the standard members of the group located in the member’s territory for that period would, ignoring intra-group financing arrangements, be less than 15%.

For this purpose, a member of a group is a ‘high tax member’ in an accounting period if the effective tax rate for the standard members of the group located in the member’s territory would, ignoring intra-group financing arrangements, be 15% or more.

Qualifying tier 1 capital

Where an expense is required to be included according to the rules on qualifying tier one capital, those rules will take precedence, and the expense is not to be excluded from the adjusted profits due to the rule on intra-group financing arrangements.

See MTT21300 for guidance on qualifying tier 1 capital.