Permanent establishments and intangible fixed assets
In Bloomberg Inc and another v HMRC [2018] UKFTT 205 (16 April 2018), the FTT found that the acquisition of partnership units by the UK permanent establishments (PEs) of US entities did not constitute the acquisition of intangible fixed assets (IFAs).
The two appellants, Bloomberg Inc (BI), a US resident company, and BLP Acquisition Holding (BAH) LLC, a US LLC, had increased their holding of units in BLP, a Delaware registered limited partnership. They considered that under the UK/US double tax treaty Art 7, their PEs in the UK should be treated as separate and distinct from them. They also considered that the PEs should be regarded as having acquired IFAs when they had acquired the units. They had therefore made elections under FA 2002 Sch 29, which allows a debit to be brought into account for corporation tax purposes in relation to the writing down of the capitalised cost of an IFA on a fixed rate basis. HMRC had refused these elections.
HMRC considered that the relevant trade in the UK was carried out at the partnership’s level, so that the relevant accounts were those of the partnership and the partnership had not acquired IFAs.
The FTT observed that the two appellants should be treated as trading in the UK through the PEs through which the partnership business was carried on. It was therefore necessary to determine the profits of that trade and attribute that to the UK PEs. In this respect, the FTT observed that the trading profit of the partnership should be calculated without regard to any changes in the partners (TA s 114(1)(c)).
The issue was whether the fact that the UK/US double tax treaty treated the PEs as separate and distinct entities meant that the transaction had been a transfer of assets to them. Referring to the OECD 2000 commentary, the FTT thought that there was ‘ample support’ for HMRC’s submission that the function of the treaty is the allocation of taxing rights. The FTT accepted that both the treaty and the supporting material supported a factual or functional analysis, as a legal one ‘would not work’, since a PE does not have legal personality. However, this did not mean that the transaction was a transfer of assets. Furthermore, the fact that the partnership was fiscally transparent did not mean that the PEs were the economic owners of its underlying assets.
The tribunal also rejected the appellants’ contention that HMRC’s analysis meant that the acquisition of the units had no tax implications, which could not have been intended. Agreeing with HMRC, the FTT thought that this was not an anomaly, as nothing had happened at the level of the partnership.
Why it matters: Once again, the tax tribunal was called upon to determine the limits of a legal fiction, this time that of the ‘separate and distinct’ PE. The appellants’ argument that this fiction was ‘strong’ was robustly rebutted. The purpose of the fiction was to allocate taxes. It did not mean that a PE could also be deemed to hold assets.
Permanent establishments and intangible fixed assets
In Bloomberg Inc and another v HMRC [2018] UKFTT 205 (16 April 2018), the FTT found that the acquisition of partnership units by the UK permanent establishments (PEs) of US entities did not constitute the acquisition of intangible fixed assets (IFAs).
The two appellants, Bloomberg Inc (BI), a US resident company, and BLP Acquisition Holding (BAH) LLC, a US LLC, had increased their holding of units in BLP, a Delaware registered limited partnership. They considered that under the UK/US double tax treaty Art 7, their PEs in the UK should be treated as separate and distinct from them. They also considered that the PEs should be regarded as having acquired IFAs when they had acquired the units. They had therefore made elections under FA 2002 Sch 29, which allows a debit to be brought into account for corporation tax purposes in relation to the writing down of the capitalised cost of an IFA on a fixed rate basis. HMRC had refused these elections.
HMRC considered that the relevant trade in the UK was carried out at the partnership’s level, so that the relevant accounts were those of the partnership and the partnership had not acquired IFAs.
The FTT observed that the two appellants should be treated as trading in the UK through the PEs through which the partnership business was carried on. It was therefore necessary to determine the profits of that trade and attribute that to the UK PEs. In this respect, the FTT observed that the trading profit of the partnership should be calculated without regard to any changes in the partners (TA s 114(1)(c)).
The issue was whether the fact that the UK/US double tax treaty treated the PEs as separate and distinct entities meant that the transaction had been a transfer of assets to them. Referring to the OECD 2000 commentary, the FTT thought that there was ‘ample support’ for HMRC’s submission that the function of the treaty is the allocation of taxing rights. The FTT accepted that both the treaty and the supporting material supported a factual or functional analysis, as a legal one ‘would not work’, since a PE does not have legal personality. However, this did not mean that the transaction was a transfer of assets. Furthermore, the fact that the partnership was fiscally transparent did not mean that the PEs were the economic owners of its underlying assets.
The tribunal also rejected the appellants’ contention that HMRC’s analysis meant that the acquisition of the units had no tax implications, which could not have been intended. Agreeing with HMRC, the FTT thought that this was not an anomaly, as nothing had happened at the level of the partnership.
Why it matters: Once again, the tax tribunal was called upon to determine the limits of a legal fiction, this time that of the ‘separate and distinct’ PE. The appellants’ argument that this fiction was ‘strong’ was robustly rebutted. The purpose of the fiction was to allocate taxes. It did not mean that a PE could also be deemed to hold assets.
