扒哥吃瓜

For visual illustration view 

The diagram shows X plc controlling a partnership and consolidating it into its accounts following an Investment Allowance (consolidated partnerships) election. X plc has an operating profit of 100 and pays interest of 75 to a third party. X plc and other investors each hold a 50% interest in the partnership. The partnership has an operating profit of 150 and pays interest of 30 to a third party. Because X plc controls the partnership, its results are consolidated.

X plc gets a 50% profit share from the partnership but it controls the partnership. This means that the partnership is consolidated into X plc鈥檚 financial statements. X plc has an operating profit of 100 with third party interest expense of 75. The partnership has operating profits of 150 and 30 of third party interest expense.

The position without the election

Firstly assume that an election is not made.

Accounts	X plc	Partnership	X plc group
Operating profit	100	150	250
3rd party interest expense (QNGIE)	- 75	- 30	- 105
Profit before tax	25	120	145

Calculation of group ratio	X plc Group
Qualifying net group-interest expense  (A)	105
PBT	145
Add back interest expense	105
Group EBITDA  (B)	250
Group Ratio (A/B)	42%

Interest allowance	X plc
Tax-EBITDA	175
X plc group ratio	42%
Interest allowance	74
Net tax-interest expense	90
Less interest allowance	- 74
Restriction	16

For the purpose of calculating the group ratio X plc picks up a small amount of interest but a large amount of group-EBITDA from the partnership. The group ratio is calculated on a group-EBITDA of 250. However when calculating the interest allowance the group ratio is applied to a tax-EBITDA of 175. This disparity between group-EBITDA and tax-EBITDA causes an interest restriction of 16.

With the consolidated partnership election

Applying the same figures and making an interest allowance (consolidated partnerships) election. Under this election the financial statements for the group are assumed to include a share of the partnership's profits instead of being fully consolidated. 

Accounts	X plc	Partnership	X plc group
Operating profit	100	150	100
3rd party interest expense (QNGIE)	- 75	- 30	-75
Share of profits of partnership	-	-	60
Profit before tax	25	120	85

Calculation of  group ratio	X plc Group
Qualifying net group-interest expense (A)	75
PBT	85
Add back interest expense	75
Group-EBITDA (B)	160
Group ratio (A/B)	47%

Interest allowance	X plc
Tax-EBITDA	175
X plc group ratio	47%
Interest allowance	82
Net tax interest expense	90
Less interest allowance	- 82
Restriction	8

 The election is applied by treating the partnership as a joint venture. The election increases the group ratio to 47% and reduces the interest restriction to 8.

However, the worldwide group also has the option to elect into the Investment Allowance (non-consolidated investment) election.

With the consolidated partnership and non-consolidated investment elections

Applying the same figures and making an interest allowance (consolidated partnerships) election and an interest allowance (non-consolidated investment) election.

Accounts	X plc	Partnership	X plc group
Operating profit	100	150	100
3rd party interest expense(QNGIE)	- 75	-30	-75
Share of profits of partnership	-	-	60
Profit before tax	25	120	85

•  X plc group share of profits from JV - 50%

Calculation of QNGIE	X plc Group
QNGIE in X plc	75
Share of JV QNGIE	15
Total QNGIE	90

Calculation of group-EBITDA	X plc Group
Group-EBITDA of X plc group	160
Reduction in group-EBITDA from JV profits	- 60
Share of JV's Group-EBITDA	75
Group-EBITDA	175
Group ratio	51%

Interest allowance	X plc
Tax-EBITDA	175
X plc group ratio	51%
Interest allowance	90
Net tax-interest expense	90
Less interest allowance	- 90
Restriction	-

 Here the effect of the non-consolidated investment election with the consolidated partnership election increases the group ratio to 51%. X plc鈥檚 net tax-interest expense is not restricted.