There is sometimes some difficulty in deciding whether interest
is treated as having a United Kingdom source where the borrowing is
made by a United Kingdom branch. The source of the interest is
relevant because only United Kingdom source interest is within the
charge to tax under Case III of Schedule D, and, in accordance with
Section 349, Income Tax is deductible from payments of Case III
interest with specific exceptions, including some interest on
advances from banks in the United Kingdom and certain interest paid
by those banks (including non-resident banks trading through
branches in the United Kingdom). Interest within Section 349 may
qualify as a charge under Section 338(4)(a) (see also DT1951).
The leading case on this subject is a Privy Council decision
on a Hong Kong estate duty matter (Kwok Chi Leung Karl (1988)
STC728). The Privy Council decided that where a debtor company has
two places of residence where a debt may be enforced, the locality
of the debt (and its source for tax purposes in the absence of
statutory provision to the contrary) falls to be determined by
reference to the place of residence where under the contract
creating the debt the primary obligation is expressed to be
performed (that is where the creditor would apply first for his
money). Savings and Investment Division can advise on the situs of
debts.
