Clause 34 - Payments of excessive interest etc
Finance Bill
4:15 pm
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
First, perhaps the questions of early election before a return is submitted would be more appropriately dealt with on clause 36, which has to do with elections. I think that we shall find it easier to deal with the matter in that context, and I am happy to come back to it.
The hon. Gentleman asked whether the guarantor receives the same fee. That would undermine the effect of the thin capitalisation rule. A foreign-owned company could support a large amount of debt in a UK subsidiary through a guarantee, and the role of the thin capitalisation rule is to restrict interest deduction in line with the debt that the borrower could support through its own income and assets, not those of the entire group. The clause makes changes to the thin capitalisation rules that run parallel with the changes made to transfer pricing. The existing thin capitalisation rule is repealed and its equivalent is brought into the main transfer pricing framework. Consequently, as for other aspects of transfer pricing, the rules will apply to transactions wholly within the UK.
Thin capitalisation rules deal with a particular aspect of transfer pricing. As we discussed earlier, they exist to prevent companies from reducing taxable profits unfairly by means of excessive interest deductions. To do that, they deny interest deductions on loans to the extent that they exceed the amount that the company would borrow from, or would have paid in interest to, an unconnected lender. That approach is consistent with the arm's-length principle that forms the basis for transfer pricing legislation and bilateral tax treaties. It is therefore appropriate that thin capitalisation should be dealt with alongside transfer
pricing and to do that, the clause introduces two new paragraphs to the transfer pricing rules.
Those changes have been made following intensive consultation. Many features of the legislation follow directly from representations made during that process, and I am grateful to those who participated. In particular, there is a special rule to give a compensation adjustment to a loan guarantor, in clause 35, and a special rule to meet the particular needs of securitisations, which the hon. Gentleman touched on, in clause 36.
The loan guarantee rule provides a strong and necessary defence against dumping of excessive debt in the UK. At the same time, the compensating adjustment rule for loan guarantors ensures fairness and allows existing financial structures to remain undisturbed. For inward investment, it will ensure that all UK assets and income are taken into account in the determination. The clause is fairly based on practices, so I hope that I have dealt with the hon. Gentleman's queries. Perhaps we can pick up on his other points as we move onto clauses 35 and 36.
Question put and agreed to.
Clause 34 ordered to stand part of the Bill.