On 26 February we held a transfer pricing event which focused on debt markets and transfer pricing of intercompany debt.

1. DEBT MARKETS AND TRANSFER PRICING OF
INTERCOMPANY DEBT - AN UPDATE
26 February 2010
Copyright © March 10 BDO LLP. All rights reserved.

2. AGENDA
8.45am – 9.00am Current corporate finance market – BDO
Current UK and European debt markets – HSBC
9.00am – 9.15am Questions
9.15am – 9.45am Transfer pricing and intercompany debt
9.45am – 10.00am Questions
10.00am – 10.30am Worldwide debt cap
10.30am – 10.45am Questions and close
Client name - Event - Presentation title
Page 2

3. HSBC Debt Finance
Origination
UK debt market - The latest trends and
developments
26 FEBRUARY 2010

4. Agenda
• How we got here…
• Cycles in the Loan Market
• Current Market Conditions
• Expectations for 2010
• HSBC in the Market
• Recent Deals
• Contact Details
4

5. How we got here….
Credit spreads
Comment re • Up to the end of 2007 the bank debt market was characterised by
reached
pricing? highs
unprecedented over-supply and virtually infinite liquidity
in Q4 2008 following
Lehman’s collapse and • Due to the laws of supply and demand the cost of liquidity reduced
widespread concerns dramatically to historical lows
regarding global
macroeconomic • With banks chasing deals to deploy assets, transactions also bore a
conditions
higher risk tolerance, longer maturities and both credit standards and
structures were weakened (i.e. ‘cov-lite’ deals)
• However, credit markets reached near melt-down in Q4 2008
following Lehman’s collapse and widespread concerns regarding
global macroeconomic conditions
• Banks’ funding costs soared with banks unable to fund themselves at
or near to LIBOR, leading to a “freezing” of interbank lending with
many banks funding themselves from central banks
• With liquidity in short supply and demand from borrowers unrelenting
cost of debt increased significantly
5

6. Cycles in the Loan Market
2003 2006
2004 2005
Banks looking Weakening
Higher risk Longer
for assets of credit
tolerance maturities
standards
2002 2006/7
Low margins
for prime
risks
2008/ Lower
differentiation
between risks
9
2009 Start 2008
More 2008 End 2007
Restricted Credit losses
differentiation Higher
lending
between risks margins
policies
6

7. Current Market Conditions
Sustained co ordinated
government and central
• Pricing has increased dramatically in the post crunch era, although
bank intervention has it has stabilised and is beginning to tighten for borrowers at the top
sought to bolster banks’ end of the credit spectrum, however there remains a premium for
balance sheets and any new money requirements
‘unlock’ liquidity, assisted
also by the fall in • Structures will continue to be conservative
LIBOR/interbank levels
and a renewed ability for • - lower debt multiples
banks to access
wholesale funding. • - amortising debt
The key pockets of
- - financial covenants,
liquidity to support UK - restrictions on additional indebtedness
Corporates continue to
reside with the four UK - limited appetite for deals beyond three years
clearing banks
- underwriting appetite remains constrained
Conservative structures • Banks remain focused on the need for ancillary business to satisfy
based around ‘Club’
arrangements overall return on capital targets
• Overseas banks have retrenched to domestic markets
• Corporates have focused on deleveraging to reduce reliance upon
bank debt funding with record levels of rights issues used to repair
their balance sheet
7

8. Expectations for 2010
Greater market liquidity • A push on tenor is inevitable and is already evident with recent
overall but a continued
focus on pricing, tenor transactions stretching to 3.5 to 4 years maturity. However a
and structure and a lower limited number of banks are able to offer these terms and
volume of deals
companies should expect to pay a premium
Selective use of bank
balance sheets will • Pricing will tighten over the coming months for companies with a
continue strong credit profile
Signs of support for mid – • Structures will continue to be conservative with a focus on
market borrowers from
Svenska, Bank of Ireland,
amortising debt and covenants
Kfw and Bank of China
(latter focus on • Non UK banks will come back into the marketplace as they are
investment grade credit) given a green light to start lending
• Ability and willingness to underwrite is set to increase, although it
will be restricted to good quality credits
• Diversified capital structures for increased stability
• Access to alternative financing in the form of Rights Issues,
Private Placements, corporate or convertible bonds and high
yield bonds to reduce reliance upon bank debt
8

9. HSBC in the Market
We are a relationship
focused bank looking to
• Throughout the ‘credit crisis’ HSBC remained firmly open for
lead on deals with quality business and has increased lending to the mid market sector
credits priced for risk and will continue to do so
We have the ability to
provide customers with
• Active new customer acquisition program – 20% of 2009
the means to address a transactions for new customers
‘funding gap’ as the
economy undergoes a • c. 30 middle market corporate transactions completed in 2009
process of deleveraging
• We are keen to lead transactions at Mandated Lead Arranger
level and support this role via higher hold levels for good quality
credits
• Although pricing is set to tighten HSBC will continue to price for
risk
• We are comfortable to lend beyond three years, however we will
not drive the market there on our own
• We have the ability and expertise to assist customers looking to
diversify their capital structure
9

10. Recent Deals
February 2009 February 2009 February 2009 March 2009
Genus Plc Clifford Chance LLP William Hill PLC Premier Oil plc
£135 million £200 million £588 million $550 million
Revolving credit facilities
Revolving credit facilities Term and Revolving credit facilities Acquisition facilities
Mandated Lead Arranger
Mandated Lead Arranger Mandated Lead Arranger and Bookrunner Mandated Lead Arranger and Bookrunner
April 2009 May 2009 May 2009
May 2009
Shanks PLC The BSS Group plc Micro Focus International Plc
Misys PLC
EUR300 million £90 million $175 million £210 million
Revolving credit facilities Revolving credit facilities Acquisition facilities Revolving credit facilities
Mandated Lead Arranger Mandated Lead Arranger Mandated Lead Arranger Mandated Lead Arranger
September 2009 September 2009 September 2009 September 2009
St Ives plc Gerber Juice Company Ltd Purolite
Tui Travel Plc
£70 million €110 million $135 million £350 million
Revolving credit facilities
Revolving credit facilities Revolving credit facilities Convertible Bond
Mandated Lead Arranger
Mandated Lead Arranger Mandated Lead Arranger Bookrunner
10

11. Contact Details
• SPEAKER: REST OF TEAM:
• David C Stephens Andy Smith
• Director Head of Debt Finance Origination
• Debt Finance Origination T: 020 7991 1394
• HSBC Corporate and Structured M: 0771 7690 884
Banking E: andy.smith@hsbc.com
• T: 020 7991 1328 Matt J Osborne
• M: 07771 841 067 Director
• E: david.c.stephens@hsbcib.com Debt Finance Origination
T: 020 7991 1485
M: 07795 684 689
E: matt.j.osborne@hsbcib.com
Ben Handler
Associate Director
Debt Finance Origination
T: 020 7991 5552
M: 07920 082122
E: ben.handler@hsbcib.com
11

12. THE TRANSFER PRICING OF
INTERCOMPANY DEBT AND
INTEREST
Anton Hume
Head of Transfer Pricing
anton.hume@bdo.co.uk
Copyright © March 10 BDO LLP. All rights reserved.

13. THE UK ENVIRONMENT FOR TAX RELIEF FOR
FINANCING EXPENSES - A MINEFIELD!
• Thin capitalisation (thin cap)
• Transfer pricing
• Anti-arbitrage provisions
• Corporate debt provisions
• Distribution rules
• Other anti-avoidance
• Worldwide debt cap (WDC)

14. INTRODUCTION – WHY WE ARE HERE?
Thin cap attracts a lot of tax authority attention There can be
significant amounts of tax at stake
• It is complex area for TP - the risks and returns seen in financial
markets are more volatile than seen by your usual ‘cost-plus’
service provider!
• There is no OECD guidance (and little HMRC guidance) as to how to
address it
Impact of HMRC adjustments
• Reduced interest deduction = increased taxable profit
• Double taxation
• Penalties on unpaid tax
• WHT on interest

15. WHAT I’D LIKE TO CONVEY TO YOU TODAY
• Some of the lessons we have learned about HMRC’s approach to
thin cap
• How BDO go about supporting interest rates and the quantum of
allowable debt
• How to achieve certainty on your thin cap position
• How to deal with the consequences of any adjustment
• Some observations (hopefully useful!) as we go along

16. STRUCTURE
• An overview of HMRC’s approach
• Intra-group financing – particular considerations
• Intra-group financing – outbound financing
• Leveraged buyouts – particular considerations
• Economic support
• Consequences of adjustments and compensating adjustments
• Our experience of working with HMRC

17. HMRC’S APPROACH
Determine the amount and terms of debt which would be obtained
from a third party in the context of:
• Financial covenants – loan to value (LTV)
Pre credit crunch – Post credit crunch -
leveraged buyouts leveraged buyouts
70% LTV
Allowable shareholder debt
Mezzanine debt
50% LTV
Allowable shareholder debt
Senior debt
Senior debt

18. HMRC’S APPROACH (CONT.)
Determine the amount and terms of debt which would be obtained
from a third party in the context of:
• Financial covenants – debt to EBITDA, EBITDA interest cover
Trends in financial covenants seen in third party financing
arrangements
7
6
5
Multiple (x1)
4
Debt to EBITDA
3 EBITDA Interest Cover
2
1
0
2007 2008 2009 2010

19. HMRC’S APPROACH (CONT.)
Determine the amount and terms of debt which would be obtained
from a third party in the context of:
• Financial forecasts at the inception of the financing arrangement
• Arrangement fees
• Risk assumed
• The strength of the company and the nature of the industry in
which it operates
• Seniority and nature of debt
• Currency used
• Guarantees

20. HMRC’S APPROACH – ACHIEVING CERTAINTY
HMRC introduced the ATCA process in October 2007
• Replaced COP10 procedure – now strict ‘arm’s length standard’
applied (both by reference to the amount and terms of the debt)
and binding by statute
• COP 10 - dealt with by HMRC in a legalistic and heavily caveated
manner often leaving the taxpayer with little certainty. COP 10 left
the taxpayer open to subsequent HMRC enquiry and a possible
reassessment
• ATCAs can be used for UK-UK financing (such as those involving PE
investors) although they are only a unilateral agreement
• ATCAs can also be used for certainty on interest rates, guarantee
fees and quasi-equity arguments for loans made by UK taxpayers

21. INTRA-GROUP FINANCING
• Trends
• Complexities
• Example
• Our experience
• Overseas financing

22. INTRA-GROUP FINANCING - TRENDS
The global financial crisis has limited the availability of once plentiful
and relatively inexpensive external funding
• Many companies are not meeting the covenants set under existing
thin cap agreements with HMRC, or have experienced a sustained
period of below par performance, such that thin cap has now
become an issue
• Lack of guidance from the OECD, and more aggressive tax
authorities, increases the double taxation risk

23. INTRA-GROUP FINANCING - COMPLEXITIES
Difficulty of verifying business valuations and parent co. guarantees
• Unlike management buyouts, the re-financing of intra-group debt tends to
take place with less / no due diligence regarding the borrower’s business,
especially where it is not ‘new’ debt associated with an acquisition
• Also, third party banking covenants (as a possible external ‘CUP’) may not
be helpful due to the existence of cross guarantees
• Furthermore, ‘pass-through’ loans are unlikely to be a suitable CUP
• Is it possible to borrow against goodwill?
• Issues with assessing the borrowing capacity of the borrowing company –
notional intra-group guarantees and compensating adjustments
• Other corporate tax issues:
• World wide debt cap
• Arbitrage rules
• Loans for unallowable purposes

24. INTRA-GROUP FINANCING - EXAMPLE
Problem
US Parent
UK Hold co
Trade 1 Trade 2 Trade 3
• If finance is provided to UK Hold co, one cannot consider Trade 3 in isolation
– need to look at the borrowing capacity of the consolidated UK group
• Therefore more complex than private equity backed acquisitions
• It is important to have consolidated UK accounts to determine the arm’s
length borrowing capacity of the UK group
• If existing group is financially weak, this could impact upon the thin cap
position relating to the acquisition of further companies

25. INTRA-GROUP FINANCING - OUR EXPERIENCE
We have dealt with HMRC on many cases
• These cases tend to be the most complex, and allowable amounts of debt tend to be
lower due to the factors outlined above
• Lending criteria likely to be tighter for intra-group financing than on leveraged
buyouts – HMRC will make reference to the ‘conservative nature of UK lenders’(!)
and the fact that the debt : equity ratios of the FTSE top 200 companies are
‘significantly less than 1:1’
• To maximise the allowable interest deductions we recommend:
• Re-negotiate any “COP10” agreements still in place, even where covenants have
not been broken
• Prepare consolidated UK forecasts, and document the commercial rationale
behind the debt finance
• The best deals are agreed where HMRC feels the debt is in place in the UK for a
legitimate commercial purpose, and there is a strong business model backing up the
arrangement
• For ‘smaller’ deals (generally under £100m), we have been able to agree a fixed LTV
proportion, with no financial covenants to meet

26. INTRA-GROUP FINANCING – OVERSEAS FINANCING
• Most countries have safe harbour rules – some for amounts of debt,
and some (eg USA) for interest rates
• When providing funds overseas, advice is needed in multiple
jurisdictions
• Do I always need to charge interest on intra-group loans?
• UK equity function concept – would a third party lender offer
funding?
BUT need to consider
- Legal form important
- Accounting presentation
- Legal agreements
- Board minutes

27. LEVERAGED BUYOUTS
• Trends
• Complexities
• Our experience

28. LEVERAGED BUYOUTS - TRENDS
Less common since the credit crunch / fall in asset prices
• The volume and amounts of leverage seen in buyouts has fallen
considerably in the last two years
• The above chart shows a fall in total debt to EBITDA ratios seen in
Western Europe LBOs from a height of 5.91:1 in Q1 2008 to 4.11:1 in
Q4 2009

29. LEVERAGED BUYOUTS - COMPLEXITIES
Aggressive levels of leverage, and complex instruments
• Generally, several ‘tranches’ of debt, of varying seniority and
security
• Debt on buyouts of international groups may have been novated to
individual entities in the UK
• Interest is being paid in the form of ‘PIK’ notes, effectively
increasing the indebtedness of the company over time
• The structure of repayments (senior debt being repaid, new PIK
notes being issued) can lead to the level of debt not changing, but
the allowable interest deduction falling over the period of the
financing, if a fixed proportion of the debt at inception is treated as
allowable

30. LEVERAGED BUYOUTS - OUR EXPERIENCE
We have dealt with HMRC on many cases
• It is important to model the changes in the level of each tranche of
debt over the length of the financing arrangements to help negotiate
a position that can be easily understood by all parties
• Prior to the credit crunch, it was possible to agree an allowable
proportion of debt with a LTV of upwards of 70 per cent. However,
now HMRC is likely to agree a LTV of somewhere between 45 per cent
and 60 per cent
• HMRC places a great deal of emphasis on financial covenants on third
party debt. Unfortunately, the use of these as a CUP is flawed, as
they tend to be based on a ‘headroom’, rather than the most
aggressive financial covenants a third party would be prepared to
offer
• HMRC tends to relax senior debt covenants by 10-12 per cent for
subordinated debt (pre credit crunch, this was 10-12 per cent for
mezzanine finance and a further 10-12% for junior debt)

31. ECONOMIC SUPPORT
• Interest rates
• Quantum of debt
• Compensating adjustments
• Our experience

32. SUPPORTING INTEREST RATES
• Search for CUPs using primary loan issue information, however the
perfect CUP will not exist
• Search for loan price by loan rating, loan size, issue date and loan
type (Reuters Dealscan, Bloomberg)
• Most comparables are floating rate, but fixed rate loans are better
for corporate and tax planning
• Consider using credit default swap rates as a proxy to price loans
• It is not appropriate to use the same interest rates throughout an
international group, as each country’s ‘borrowing unit’ will have a
different borrowing capacity, and there will be local differences in
interest rates

33. SUPPORTING QUANTUM OF DEBT
What are the relevant factors to consider?
Banking facilities tend to include financial covenants for:
debt to EBITDA, EBITDA interest cover
Banks tend to consider the following factors:
Security, cash flow, industry, state of economy and prevailing
economic climate for the business
Analytical tools
Modelling credit rating, then search for loans
• Type of loan – LBO, acquisition, revolver, general corporate
purposes, distressed debt
• Financial covenants specified - Debt to EBITDA etc
But -
OECD guidelines indicate you can have a level of debt even if not
observable with comparables if it is economically justified

34. THE ISSUE OF COMPENSATING ADJUSTMENTS
Transfer Pricing legislation should protect against double tax charge
• Investors, whether body corporates or individuals, are within the
scope of the transfer pricing legislation when lending funds in ‘a
businesslike way’
• As such, an investor can ensure that he is not treated as having
received taxable interest payments to the extent that the borrower
does not receive a deduction for interest under the arm’s length
standard
• A key question is whether at arm’s length, the ‘provision’ of
finance would have taken the form of equity, or would not have
occurred at all
• Investors must be mindful of this uncertainty when planning their
tax position in relation to any disallowance of interest

35. OUR EXPERIENCE OF WORKING WITH HMRC
We have built up a good working relationship with several TP
specialists at HMRC
• Increasingly experienced and sophisticated in their approach
• Variable pragmatism
• Role of TP panel
• Attitude to ATCAs
• Appetite for thin cap enquiries
• Our qualitative approach to the business and the industry it operates in:
• gives HMRC more confidence about the strength of the company
• enables check on reasonableness of capital structure
• Our economic analysis gives HMRC reassurance about current lending
patterns
• Our headroom sensitivity analysis offers transparency to HMRC and the
client on the interest deductibility

36. SUMMARY
• Thin cap adjustments can have a very significant impact on a
corporate’s tax charge
• One of the most complex areas of transfer pricing
• No OECD guidance is available
• HMRC is increasingly experienced at financing transactions and is
also increasingly challenging them

37. WORLDWIDE DEBT CAP
A tax raising measure with limited interest?
Richard Bertini
Copyright © March 10 BDO LLP. All rights reserved.

38. WDC BREAKFAST SEMINAR
Contents
• Tax treatment of financing costs
• A brief WDC overview
• Planning and anti-avoidance
• WDC anomalies
• Other practical aspects
• Ongoing issues

39. TAX RELIEF FOR FINANCING EXPENSE
An historical perspective

40. TAX RELIEF FOR FINANCING EXPENSE I
2009 (ie 1 BC) – UK is a dumping ground for debt?
UK company
incurs interest
Distribution
rules
Transfer Thin
pricing capitalisation
Arbitrage Corporate debt Other anti-
rules rules avoidance
Corporation tax
relief
for interest

41. TAX RELIEF FOR FINANCING EXPENSE II
2010 (ie now) – UK still attractive to business?
UK company
incurs interest
Distribution
rules
Transfer Thin
pricing capitalisation
Arbitrage Corporate debt Other anti-
rules rules avoidance
Worldwide debt cap
Corporation tax
relief
for interest

42. WORLDWIDE DEBT CAP
A brief overview

43. WDC – THE MISCHIEF
Bank
Treasury/HMRC policy objective:
Relief for UK financing costs
should not exceed a group’s gross External debt of
external financing costs Parent £10m owing to Bank
>75 per cent
Internal debt of
£100m owing to Parent
UK Sub

44. WDC HEADLINE ISSUES
The debt cap is already a reality
• WDC is a blunt tax raising instrument
• Restricts the availability of tax relief for finance expense
• Applies for periods of account commencing after 31 December 2009
• Many will escape the worst by passing the gateway test
• Some will suffer significant financing disallowances
• Compliance obligations are onerous
• Anti-avoidance targeted at manipulation of WDC
• Legislation is still being fine-tuned, with retrospective effect
• Limited time or opportunity to correct inherent defects
• Does not apply to banks

45. WDC – WHO’S AFFECTED?
Is there a large group?
• ‘Group’ is defined by IAS
• ‘Large’ group uses EU definitions
Relevant group company means
• UK company or non-UK company trading
in UK via UKPE which is either:
- the ultimate parent of worldwide group
or
- a 75 per cent subsidiary of the ultimate
parent
Gateway test
• Groups with debt mainly in UK will fail
test
- eg many outbound and domestic groups

46. WDC – WHO’S LARGE
EC Recommendation 03/361 – Annex (6.5.03)
Does the group have 250
employees or more?
Yes
No
No
Is the group’s annual turnover
€50m or more?
Yes
Yes
No
Is the group’s annual balance
sheet total €43m or more?
The group The group
is large is not large

47. WDC CURRENT RULES
Arrangement of the legislation
• Primary legislation – Schedule 15 Finance Act 2009
• SI 2009/3173 - CT (Financing Costs & Income) Regulations
• SI 2009/3217 - CT (Acceptable Financial Statements) Regulations
• SI 2009/3313 - CT (Exclusion from Short Term Loan Relationships) Regulations
• Coming soon:
- Taxation (International & Other Provisions) Act 2010 (rewritten primary legislation)
- Finance Bill 2010 (retrospective changes to TIOPA 2010, draft released with PBR)
- Accounting mismatches regulations
- Structured finance and quasi loan mismatch regulations
- Excluded schemes regulations

48. WORLDWIDE DEBT CAP
Planning and Anti-Avoidance

49. WDC PLANNING & ANTI-AVOIDANCE I
Headline thoughts
• Is there a “group” (IAS definition)
• Which entity is the “ultimate parent” (WDC definition)?
• If there is a group is it large (EU definition)?
• Are there any relevant group companies (WDC definition)?
• Can RGCs be disregarded for the gateway test (NDA <£3m)?
• Can RGCs be disregarded for the disallowance (NFD <£0.5m)?
• Can financing income of UKGCs avoid de minimis (NFI >£0.5m)?
• Could surplus funds be imported into UK?
• Is there scope to increase external non-UK borrowings?
• Is there a magical derivative financial instrument available?

50. WDC PLANNING & ANTI-AVOIDANCE II
GT, TEA, AA & TIA Anti-Avoidance
Manipulation of gateway test:
• Scheme entered into before end of relevant period
• Without the scheme GT would be failed
• Passing GT is (one of the) main purpose(s) of scheme
• Scheme is not an excluded scheme
Manipulation of debt cap disallowances or exemptions:
• Scheme entered into before end of relevant period
• Reducing relevant net deduction is (one of the) main purpose(s)
• Scheme achieves a reduction of UKGC profits or increase in losses
• Scheme is not an excluded scheme

51. WDC PLANNING & ANTI-AVOIDANCE III
General Anti-Avoidance
HMRC published examples of acceptable planning:
• Repay debt with surplus cash or proceeds from loan repayment
• Debt waivers and capitalisation
• Transfer liability to a UK group treasury company
• Increasing overdraft to fund working capital
• Borrowing (no more than needed) to fund acquisition or share buy-back
• Acquiring assets under FLs or external factoring of trade debts
• Unwinding old intra-group financing arrangements
• Bona fide intra-group financing

52. WDC PLANNING & ANTI-AVOIDANCE IV
Other Anti-Avoidance
EEA financing income exemption:
• Scheme entered into before financing income received
• Scheme results in EEA financing income
• Securing EEA financing income is (one of the) main purpose(s)
• Scheme is not an excluded scheme
Change of period of account of worldwide group:
• No longer relevant
• Countered attempts to defer start date of WDC

53. WDC PLANNING & ANTI-AVOIDANCE V
Further comments
• Legislation is framed to allow swift counteraction via regulations
• HMRC code of practice on taxation for UK banks
• Excluded schemes regulations not a top priority
• HMRC unlikely to challenge acceptable planning included in published
guidance
• WDC anti-avoidance non-statutory clearance:
- requires commercially significant material uncertainty
- HMRC will not bless tax planning or opine on purpose
- available pre or post transaction

54. WDC ANOMALIES
Observations and examples

55. WDC ANOMALIES I
External debt matters – a tale of two groups
You might expect the debt cap
£1m pa £10m pa to penalise debt laden groups…
external external
interest
Bank interest
payable payable £m
Black group
Tested expense amount 10
Available amount 1
Foreign Foreign
parent parent Disallowed amount 9
£10m pa Red group
internal
interest Tested expense amount 10
>75% >75%
payable Available amount 10
Disallowed amount nil
UK UK
subsidiary subsidiary

56. WDC ANOMALIES II
Foreign tax matters – an unwelcome surprise
Black group may also have non-
£1m pa UK tax implications…
external
interest
Bank
payable £m
Foreign parent
Interest receivable 10
Interest payable 1
Foreign
parent Taxable amount? 9
£10m pa UK subsidiary
internal
interest Tested expense amount 10
>75%
payable Available amount 1
Disallowed amount! 9
UK
subsidiary

57. WDC ANOMALIES III
Disregard derivatives – synthetic debt is ignored
Interest rate hedging, cross
pay £8m fixed
pay £10m fixed currency swaps and other
receive £9m Bank receive £9m synthetic borrowings are not
floating
floating taken into account…
£9m pa floating
rate interest
£m
Foreign Foreign Brown group
parent parent Tested expense amount 10
Available amount 9
Disallowed amount 1
£10m pa £8m pa
>75% fixed fixed >75%
Purple group
Tested expense amount 8
UK UK Available amount 9
subsidiary subsidiary Disallowed amount nil

58. WDC ANOMALIES IV
Gateway test – accounting figures can skew results
Non-arm’s length internal
Bank borrowings can adversely affect
£100m
the gateway test, which uses
external amounts taken from financial
debt
statements…
£m
Foreign GT accounting results
parent UK net debt 140
Worldwide group gross debt 100
£140m GT failed > 75%
internal
debt
>75%
[50% arm’s GT arm’s length position
length] UK net debt (£140m @ 50%) 70
UK Worldwide group gross debt 100
subsidiary GT passed < 75%

59. WDC ANOMALIES V
Gateway test – domestic groups will always fail
- -
~
But in theory there should be no
net disallowance…
£2m pa
interest on
£m
shareholder Grey group
debt Tested expense amount 11
Available amount 2
UK
parent
Disallowed amount 9
Income exemption
£9m pa
intercompany - UK parent 9
>75%
interest
Overall disallowance nil
UK
subsidiary

60. WDC ANOMALIES VI
De minimis limits – unintended consequences
In practice an overall debt cap
disallowance could arise within
Bank domestic groups…
£1.2m pa external £m
Interest payable Blue group
Tested expense amount 2.0
£0.4m pa
UK £0.4m pa Available amount 1.2
internal internal
interest parent interest
Disallowed amount 0.8
payable payable
Income exemptions (up to £0.8m)
>75% UK Sub 1 (<£0.5m) nil
UK Sub 2 (<£0.5m) nil
UK UK
sub 1 sub 2

61. WDC ANOMALIES VII
Interaction with late interest rules – bad timing
- -
=
Late interest accruing after 2009
could lead to an unfair
permanent disallowance…..
£2m pa
interest on
£m
shareholder Scarlet group
debt Year 1 (2010):
[payable end
of year 5] Tested expense amount 1
UK
parent
Available amount 2
Disallowed amount nil
£1m pa
intercompany Year 5 (2014):
>75%
interest Tested expense amount 9
Available amount 2
UK Disallowed amount 7
subsidiary Exempt income 1
Net disallowance (Y1-3) 6

62. WORLDWIDE DEBT CAP
Other practical aspects

63. WDC PRACTICAL POINTS I
Opportunities
Income exemptions
• Disallowance applies to RGCs (75 per cent subs)
• Exemptions apply to UKGCs (51 per cent subs)
• Standalone exemption for EEA income
Late interest
• Pre-2010 deferred interest/discount carved out from FEAs
• Possible planning regarding timing of interest payments
Quasi group relief features
• Disallowances and exemptions can be allocated in the most favourable
way

64. WDC PRACTICAL POINTS II
Compliance issues
Does WDC apply?
• Q&D calculations to determine
• May not know for sure till end of POA (eg forex rates)
• Have to make QIPs in meantime
Reporting aspects
• 12 months to file provisional SOAD & SOAE
• Complicated if POA of worldwide group differs to APs of UK group!
• 36 months to file final SOAD & SOAE
• Reporting body and form of returns

65. WDC ONGOING ISSUES
Prospective changes and consultation Issues

66. WDC RETROSPECTIVE CHANGES
Known knowns
• Draft FB 2010 clauses and explanatory notes published with PBR
• Consultation closed 29 January 2010
• Further changes will be made, which are expected to include:
- Gateway test definition of financial assets and liabilities
- Exclusion of securitisation companies
- Protected company proposals to change
- Changes for distributions from industrial and provident societies
- Exclusion of LLPs and overseas corporate collective investment scheme vehicles
from being the ultimate parent of a group

67. WDC PROSPECTIVE CHANGES
Known unknowns
• Interaction with late interest rules
• Unintended consequences of de minimis amounts
• Refinement of GT definition of relevant assets and liabilities
• Accounting mismatch regulations
• Inclusion of interest rate hedges and other derivatives
• Excluded schemes regulations
• Structured finance and quasi loan regulations

68. Thank you
Any questions?
Copyright © March 10 BDO LLP. All rights reserved.