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CFM96790 - INTEREST RESTRICTION: JOINT VENTURES: INTEREST ALLOWANCE (NON-CONSOLIDATED INVESTMENT) ELECTION: EXAMPLE 2: OPAQUE JV WITH LOAN FROM THE PRINCIPAL WORLDWIDE GROUP Link to the
structure diagram for this example Here the amounts are the same as the previous example at CFM96780, but X plc has taken out additional third party interest which it has on-lent to the JV.
In this situation TIOPA10/s427(3)(a) and TIOPA10/s428(5) apply to the loan from X plc to the JV. Therefore the election effectively ignores these amounts featuring in the financial
statements of the principal worldwide group and the associated worldwide group. These amounts do not form part of adjusted net group-interest expense in either the principal worldwide group
or the associated worldwide group. The net effect of this is to ignore the 30 of adjusted net group-interest expense of the JV and to ignore the 30 of corresponding interest income in the
calculation of adjusted net group-interest expense in X plc. This means that X plc has 80 of adjusted net group-interest expense and similarly for qualifying net group-interest expense
because none of this is offset by any interest income from the JV. ACCOUNTS X PLC JV X PLC GROUP Operating profit 100 150 100 3rd party interest (expense) - 80 - 60 - 80 Related party
interest (expense)/income 30 - 30 30 Share of profits of JV - - 30 Profit before tax 50 60 80 Profit before tax ( ignoring loan) - 90 - Share of profits of JV (ignoring loan) - - 45 * X plc
group share of profits from JV - 50% CALCULATION OF QNGIE X PLC GROUP QNGIE in X plc 80 Share of JV QNGIE 30 Total QNGIE - (A) 110 CALCULATION OF GROUP - EBITDA X PLC GROUP PBT of X plc
group (pre-election) 80 Remove interest on loan to JV - 30 Remove share of JV’s profits - 30 PBT of X plc group after adjustments 20 Addback NGIE (excluding loan to JV)) 80 Group-EBITDA of X
plc group (before share of JV (before share of JV group-EBITDA) 100 Share of JV’s group-EBITDA 75 Group-EBITDA - (B) 175 * Group ratio - (A/B) - 63% INTEREST ALLOCANCES X PLC Tax-EBITDA 100
X plc group ratio 63% Interest allowance 63 X plc has a net tax-interest expense of 50 (tax-interest expense of 80 less tax interest income of 30). All of its third party interest of 80 is
qualifying net group-interest expense to use in its group ratio. The group interest income from JV is ignored for the purposes of TIOPA10/S427. It obtains a further qualifying net
group-interest expense of 30 by its share in the third party interest of the JV. The group ratio is 63% and as there is an interest allowance of 63 there is no restriction of the net
tax-interest expense in X plc. Previous page Next page Print this page