In determining the profits of the permanent establishment, once
it has been established that transactions between the enterprise
and the permanent establishment are on an arm's length basis,
expenses which are incurred for the purposes of the permanent
establishment can be deducted. These expenses do not necessarily
have to be incurred only by the permanent establishment but can
also include expenses incurred by the enterprise itself for the
purposes of the permanent establishment. In addition there can be
deducted a reasonable allocation of executive and administrative
expenses incurred for the purposes of the enterprise as a whole.
Such expenses can be incurred either in the United Kingdom or
elsewhere.
Inspectors will need to know what the executive and
administrative expenses are and any reasonable allocation to the
United Kingdom permanent establishment can be accepted, for example
a proportionate part based on the ratio that the permanent
establishment's turnover (or gross profits) bears to that of the
enterprise as a whole. The expenditure to be apportioned should be
the actual amounts incurred. It is not necessary for these expenses
to have been reimbursed by the permanent establishment. There is no
definition of expenses in agreements or in the Taxes Acts, but it
is considered that the deductible expenses must be of a revenue
nature and capital expenditure would not be deductible.
