Finance (No. 2) Bill (HC Bill 134)

Finance (No. 2) BillPage 90

(b) a qualifying CFC amount arising to C, for a permitted taxable
period, is “under taxed” if the highest rate at which tax is
charged on the amount, taking into account on a just and
reasonable basis the effect of any credit for underlying tax, is
5less than C’s full marginal rate for that period,

(c) in determining C’s “full marginal rate”, the reference to the
taxable profits mentioned in subsection (9) includes any
qualifying CFC amount, and

(d) in determining a “credit for underlying tax”, the reference to
10profits includes any qualifying CFC amount.

(12B) For the purposes of subsection (12A) a “qualifying CFC amount”
means an amount arising to C which is brought into account in
calculating chargeable profits for the purposes of a foreign CFC
charge.

(12C) 15But an amount is not regarded for this purpose as brought into
account so far as—

(a) the amount is excluded, reduced or offset for the purposes of
the foreign CFC charge by any exemption, exclusion, relief or
credit that—

(i) 20applies specifically to all or part of the amount (as
opposed to amounts brought into account for those
purposes generally), or

(ii) arises as a result of, or otherwise in connection with,
a payment or quasi-payment that gives rise to the
25amount, or

(b) the sum charged for the purposes of the foreign CFC charge
is, or falls to be, refunded (and section 259BC(6) and (7) apply
for the purposes of this paragraph with the necessary
modifications).”

(3) 30In subsection (13), in paragraph (b) of the definition of “chargeable profits”,
after “Part” insert “(including any qualifying CFC amount within the
meaning given by subsection (12B))”.

Hybrid and other mismatches from financial instruments: qualifying capital amounts

8 In section 259CC (interpretation of section 259CB), at the end insert—

(7) 35A qualifying capital amount arising to a payee is treated as an
amount of ordinary income of a payee and references to tax include
any qualifying capital tax.

(8) For the purposes of case 2—

(a) a qualifying capital amount arising to a payee, for a
40permitted taxable period, is “under taxed” if the highest rate
at which tax is charged on the amount, taking into account on
a just and reasonable basis the effect of any credit for
underlying tax, is less than the payee’s full marginal rate for
that period,

(b) 45in determining the payee’s “full marginal rate”, the reference
to the taxable profits mentioned in subsection (4) includes
any qualifying capital amount, and

Finance (No. 2) BillPage 91

(c) in determining a “credit for underlying tax”, the reference to
profits includes any qualifying capital amount.

(9) If the rate at which a qualifying capital tax is charged on a qualifying
capital amount of a payee exceeds the rate at which tax would be
5charged on an amount of income of the payee, the excess is to be
ignored.

(10) For the purposes of subsections (7) to (9) a “qualifying capital
amount” means an amount of a capital nature on which a qualifying
capital tax is charged.

(11) 10A qualifying capital tax is not regarded for this purpose as charged
on an amount so far as—

(a) the amount is excluded, reduced or offset for the purposes of
the tax by any exemption, exclusion, relief or credit that—

(i) applies specifically to all or part of the amount (as
15opposed to amounts of a capital nature generally), or

(ii) arises as a result of, or otherwise in connection with,
a payment or quasi-payment that gives rise to the
amount, or

(b) the tax is, or falls to be, refunded (and section 259BC(6) and
20(7) apply for the purposes of this paragraph with the
necessary modifications).

(12) For the purposes of subsections (7) to (11) a “qualifying capital tax”
means—

(a) capital gains tax or the charge to corporation tax in respect of
25chargeable gains, or

(b) any tax chargeable under the law of a territory outside the
United Kingdom that corresponds to a United Kingdom tax
mentioned in paragraph (a),

but does not include any tax chargeable at a nil rate.”

30Hybrid transfer deduction/non-inclusion mismatches: qualifying capital amounts

9 In section 259DB (meaning of “hybrid transfer arrangement”, “underlying
instrument” etc), at the end insert—

(7) For the purposes of subsection (4) references to tax include any
qualifying capital tax within the meaning given by section
35259DD(11).”

10 In section 259DD (hybrid transfer deduction/non-inclusion mismatches:
interpretation of section 259DC), at the end insert—

(6) A qualifying capital amount arising to a payee is treated as an
amount of ordinary income of a payee and references to tax include
40any qualifying capital tax.

(7) For the purposes of case 2—

(a) a qualifying capital amount arising to a payee, for a
permitted taxable period, is “under taxed” if the highest rate
at which tax is charged on the amount, taking into account on
45a just and reasonable basis the effect of any credit for

Finance (No. 2) BillPage 92

underlying tax, is less than the payee’s full marginal rate for
that period,

(b) in determining the payee’s “full marginal rate”, the reference
to the taxable profits mentioned in subsection (4) includes
5any qualifying capital amount, and

(c) in determining a “credit for underlying tax”, the reference to
profits includes any qualifying capital amount.

(8) If the rate at which a qualifying capital tax is charged on a qualifying
capital amount of a payee exceeds the rate at which tax would be
10charged on an amount of income of the payee, the excess is to be
ignored.

(9) For the purposes of subsections (6) to (8) a “qualifying capital
amount” means an amount of a capital nature on which a qualifying
capital tax is charged.

(10) 15A qualifying capital tax is not regarded for this purpose as charged
on an amount so far as—

(a) the amount is excluded, reduced or offset for the purposes of
the tax by any exemption, exclusion, relief or credit that—

(i) applies specifically to all or part of the amount (as
20opposed to amounts of a capital nature generally), or

(ii) arises as a result of, or otherwise in connection with,
a payment or quasi-payment that gives rise to the
amount, or

(b) the tax is, or falls to be, refunded (and section 259BC(6) and
25(7) apply for the purposes of this paragraph with the
necessary modifications).

(11) For the purposes of subsections (6) to (10) a “qualifying capital tax”
means—

(a) capital gains tax or the charge to corporation tax in respect of
30chargeable gains, or

(b) any tax chargeable under the law of a territory outside the
United Kingdom that corresponds to a United Kingdom tax
mentioned in paragraph (a),

but does not include any tax chargeable at a nil rate.”

35Hybrid payee deduction/non-inclusion mismatches

11 In section 259GB (hybrid payee deduction/non-inclusion mismatches and
their extent), after subsection (4) insert—

(4A) In applying subsection (4)(b) in a case where the payee is a
partnership, it is to be assumed that no amount of ordinary income
40arises to the payee, by reason of the payment or quasi-payment, if—

(a) a partner in the partnership is entitled to the amount, and

(b) having regard only to—

(i) the law of the territory where the partnership is
established, and

(ii) 45the law of the territory where the partner is resident
for tax purposes or, if the partner is not resident
anywhere for tax purposes, where the partner is
established,

Finance (No. 2) BillPage 93

the payee would not be regarded as a hybrid entity.

(4B) In subsection (4A) “partnership” has the meaning given by section
259NE(4).”

Multinational payee deduction/non-inclusion mismatches

12 5In section 259HB (multinational payee deduction/non-inclusion
mismatches and their extent), after subsection (2) insert—

(2A) The excess is to be taken (so far as would not otherwise be the case)
to arise for the purposes of subsection (1)(b) by reason of a payee
being a multinational company so far as it would not arise if it is
10assumed—

(a) that the company is not regarded, under the law of the parent
jurisdiction, the PE jurisdiction or any other territory, as
carrying on a business in the PE jurisdiction through a
permanent establishment in that jurisdiction, and

(b) 15that, for tax purposes under the law of the parent jurisdiction,
all amounts of ordinary income arising, by reason of the
payment or quasi-payment, to the company are regarded as
arising to it in that jurisdiction and nowhere else.”

Hybrid entity double deduction mismatches: use of restricted deduction

13 20In section 259IC(4) (counteraction where the hybrid entity is within the
charge to corporation tax), for the words from “unless” to the end substitute
“unless it is deducted from—

dual inclusion income for that period, or

(d) section 259ID income for that period.”

14 25After section 259IC insert—

259ID Section 259ID income for the purposes of section 259IC

(1) This section applies where—

(a) section 259IC applies,

(b) the restricted deduction exceeds the dual inclusion income of
30the hybrid entity (if any) for the hybrid entity deduction
period, and

(c) conditions A to D are met.

(2) Condition A is that—

(a) the investor in the hybrid entity makes a payment to the
35hybrid entity, and

(b) no amount is deductible, under the law of the investor
jurisdiction, from the income of the investor in respect of the
payment.

(3) Condition B is that, as a result of the payment, an amount of ordinary
40income arises to the hybrid entity for the hybrid entity deduction
period.

(4) Condition C is that the payment is made in direct consequence of a
payment made to the investor by a person (“the unrelated party”)

Finance (No. 2) BillPage 94

who is not related (see section 259NC) to the investor or the hybrid
entity.

(5) Condition D is that, as a result of the payment made by the unrelated
party, an amount of ordinary income arises to the investor.

(6) 5For the purposes of section 259IC “section 259ID income” is an
amount of income of the hybrid entity equal to the lesser of—

(a) the amount of the payment made by the investor to the
hybrid entity, and

(b) the amount of the payment made by the unrelated party to
10the investor.”

Imported mismatches: dual inclusion income

15 In section 259K (overview of Chapter 11), after subsection (4) insert—

(4A) Section 259KD provides for relief where an amount is deducted from
dual inclusion income.”

16 (1) 15Section 259KC (denial of the relevant deduction in relation to imported
mismatch payments) is amended as follows.

(2) After subsection (2) insert—

(2A) But any reduction under this section has effect subject to section
259KD (deductions from dual inclusion income).”

(3) 20In subsections (4)(a) and (7)(a), for “subsection (6)(a)” substitute “section
259KA(6)(a)”.

17 After section 259KC insert—

259KD Deductions from dual inclusion income

(1) If—

(a) 25section 259KA(6)(a) applies as a result of any of sub-
paragraphs (iii) to (vii), or

(b) section 259KA(6)(b) applies,

a reduction under section 259KC is not to exceed the relevant net
amount.

(2) 30For the purposes of this section “the relevant net amount” means—

(a) if section 259KA(6)(a)(iii), (iv), (v) or (vi) applies, the amount
which, if Chapter 5, 7, 8 or 9 applied to the tax treatment of
any person in respect of the mismatch payment, could not be
deducted from that person’s income under that Chapter
35(ignoring the effect of any of the carry-forward provisions),

(b) if section 259KA(6)(a)(vii) applies, the amount by which the
dual territory double deduction of the company mentioned
in section 259KB(2) for a deduction period exceeds its dual
inclusion income for that period, or

(c) 40if section 259KA(6)(b) applies, the amount by which the
excessive PE deduction of the company mentioned in section
259KB(4) for the permitted taxable period mentioned there
exceeds its dual inclusion income for that period.

(3) In subsection (2)(a) “the carry-forward provisions” means—

Finance (No. 2) BillPage 95

(a) section 259EC(3) (hybrid payer deduction/non-inclusion
mismatches),

(b) section 259IB(3) to (5) (hybrid entity double deduction
mismatches: investor within charge to corporation tax), and

(c) 5section 259IC(5) to (7) (hybrid entity double deduction
mismatches: hybrid entity within charge to corporation tax).

(4) In subsection (2)(b) “dual inclusion income” of a company for a
deduction period (that is to say, a period for which the dual territory
double deduction is deducted as mentioned in section 259KB(2)(a))
10means an amount that is both—

(a) ordinary income of the company for that period for the
purposes of a tax charged as mentioned in section
259KB(2)(a), and

(b) ordinary income of the company for a permitted taxable
15period for the purposes of a tax charged as mentioned in
section 259KB(2)(b).

(5) A taxable period of the company is “permitted” for the purposes of
subsection (4)(b) if—

(a) the period begins before the end of 12 months after the end of
20the deduction period, or

(b) where that period begins after that—

(i) a claim has been made for the period to be a permitted
period in relation to the amount of ordinary income,
and

(ii) 25it is just and reasonable for the amount of ordinary
income to arise for that taxable period rather than an
earlier period.

(6) In subsection (2)(c) “dual inclusion income” of a company for a
period means an amount that is both—

(a) 30ordinary income of the company for that period for the
purposes of a tax charged under the law of the PE
jurisdiction, and

(b) ordinary income of the company for a permitted taxable
period for the purposes of a tax charged under the law of the
35parent jurisdiction.

(7) A taxable period of the company is “permitted” for the purposes of
paragraph (b) of subsection (6) if—

(a) the period begins before the end of 12 months after the end of
the period mentioned in paragraph (a) of that subsection, or

(b) 40where the period begins after that—

(i) a claim has been made for the period to be a permitted
period in relation to the amount of ordinary income,
and

(ii) it is just and reasonable for the amount of ordinary
45income to arise for that taxable period rather than an
earlier period.”

Finance (No. 2) BillPage 96

Adjustments in light of subsequent events: accounting treatment

18 After section 259LA insert—

259LB Adjustments in light of later treatment for accounting purposes

(1) This section applies where—

(a) 5a payment or quasi-payment gives rise to a debit of a
company that is recognised for accounting purposes,

(b) a relevant deduction of the company in respect of some or all
of the debit is reduced by any provision of this Part,

(c) there is a reversal of some or all of the debit by a credit of the
10company that is recognised for accounting purposes after the
end of the payment period, and

(d) the credit is brought into account for corporation tax
purposes.

(2) Such consequential adjustments as are just and reasonable may be
15made in respect of so much of the debit as gives rises to the relevant
deduction and as is reversed by the credit.

(3) The adjustments may be made (whether or not by an officer of
Revenue and Customs) by way of an assessment, the modification of
an assessment, amendment or disallowance of a claim, or otherwise.

(4) 20The power to make adjustments by virtue of this section may be
exercised despite any time limit imposed by or under any
enactment.”

Commencement

19 (1) The amendments made by paragraphs 2(b), 3 to 6 and 12

(a) 25have effect, in the case of their application to Chapter 6 of Part 6A of
TIOPA 2010, in relation to excessive PE deductions in relation to
which the relevant PE period begins on or after 1 January 2018,

(b) have effect, in the case of their application to Chapter 9 or 10 of that
Part, in relation to accounting periods beginning on or after that date,
30and

(c) have effect, in the case of their application to any other Chapter of
that Part, in relation to—

(i) payments made on or after date, or

(ii) quasi-payments in relation to which the payment period
35begins on or after that date.

(2) For the purposes of sub-paragraph (1)(a), (b) and (c)(ii), where there is a
straddling period—

(a) so much of the straddling period as falls before 1 January 2018, and
so much of it as falls on or after that date, are to be treated as separate
40accounting periods or separate taxable periods (as the case may be),
and

(b) if it is necessary to apportion an amount for the straddling period to
the two separate periods, it is to be apportioned—

(i) on a time basis according to the respective length of the
45separate periods, or

Finance (No. 2) BillPage 97

(ii) if that would produce a result that is unjust or unreasonable,
on a just and reasonable basis.

(3) A “straddling period” means an accounting period or payment period (as
the case may be) beginning before 1 January 2018 and ending on or after that
5date.

(4) Part 6A of TIOPA 2010 has effect, and is to be deemed always to have had
effect, with the amendments set out in paragraphs 2(a), 7 to 11 and 13 to 18.

Section 24

SCHEDULE 8 Corporate interest restriction

10Part 1 Amendments of Part 10 of TIOPA 2010

Introductory

1 Part 10 of TIOPA 2010 (corporate interest restriction) is amended as follows.

Hedging of tax-interest expense amounts or tax-interest income amounts etc

2 (1) 15Section 384 (relevant derivative contract debits) is amended as follows.

(2) In subsection (3), for paragraph (c) substitute—

(c) it is in respect of a risk arising in the ordinary course of a
trade (other than a risk arising in the ordinary course of a
financial trade) where the derivative contract was entered
20into wholly for reasons unrelated to the capital structure of
the worldwide group (or any member of the worldwide
group).”

(3) After subsection (3) insert—

(3A) For the purposes of subsection (3)(c) a debit is in respect of a risk
25arising in the ordinary course of “a financial trade” only so far as the
risk relates to an amount which is or is likely to be—

(a) a tax-interest expense amount, or

(b) a tax-interest income amount,

of the company in any relevant accounting period.”

3 (1) 30Section 387 (relevant derivative contract credits) is amended as follows.

(2) In subsection (3), for paragraph (c) substitute—

(c) it is in respect of a risk arising in the ordinary course of a
trade (other than a risk arising in the ordinary course of a
financial trade) where the derivative contract was entered
35into wholly for reasons unrelated to the capital structure of
the worldwide group (or any member of the worldwide
group).”

Finance (No. 2) BillPage 98

(3) After subsection (3) insert—

(3A) For the purposes of subsection (3)(c) a credit is in respect of a risk
arising in the ordinary course of “a financial trade” only so far as the
risk relates to an amount which is or is likely to be—

(a) 5a tax-interest expense amount, or

(b) a tax-interest income amount,

of the company in any relevant accounting period.”

4 (1) Section 411 (“relevant expense amount” and “relevant income amount”) is
amended as follows.

(2) 10In subsection (1)(e), for sub-paragraph (iii) substitute—

(“iii) losses in respect of risks arising in the ordinary course
of a trade (other than risks arising in the ordinary
course of a financial trade) where the derivative
contract was entered into wholly for reasons
15unrelated to the capital structure of the worldwide
group (or any member of the worldwide group);”.

(3) In subsection (2)(d), for sub-paragraph (iii) substitute—

(“iii) gains in respect of risks arising in the ordinary course
of a trade (other than risks arising in the ordinary
20course of a financial trade) where the derivative
contract was entered into wholly for reasons
unrelated to the capital structure of the worldwide
group (or any member of the worldwide group);”.

5 In section 412 (section 411: interpretation), after subsection (3) insert—

(3A) 25For the purposes of section 411(1)(e)(iii) and (2)(d)(iii) losses or gains
are in respect of risks arising in the ordinary course of “a financial
trade” only so far as the risks relate to amounts which are or are
likely to be—

(a) relevant expense amounts, or

(b) 30relevant income amounts,

of the worldwide group for any period of account.”

Group ratio: leaving R&D expenditure credits out of account

6 In section 416 (meaning of “the group-EBITDA”), after subsection (2)
insert—

(2A) 35An amount is not to be taken into account in calculating a worldwide
group’s profit before tax for the purposes of subsection (2) if it is, or
relates to, an R&D expenditure credit within the meaning of section
104A of CTA 2009.”

Public infrastructure

7 (1) 40Section 433 (meaning of “qualifying infrastructure company”) is amended as
follows.

(2) In subsection (1)(c), for “(see subsection (11))” substitute “(see subsections
(11) and (12))”.

Finance (No. 2) BillPage 99

(3) In subsection (11)(a), for “activity that the company carries on” substitute
“source of income that the company has”.

(4) After subsection (11) insert—

(12) In determining whether the condition in subsection (11)(a) is met in
5the case of a company not resident in the United Kingdom in an
accounting period, a source of income of the company is ignored if,
having regard to all the circumstances, it is reasonable to regard as
insignificant the amount of income arising in the accounting period
from the source.”

8 (1) 10Section 434 (elections under section 433) is amended as follows.

(2) In subsection (1)(a), for “the beginning” substitute “the end”.

(3) In subsection (5), after paragraph (a) (but before the “and” at the end of it)
insert—

(ab) the time of the transfer falls in a period of account of a
15worldwide group of which both the transferor and transferee
are members,”.

9 (1) Section 436 (meaning of “qualifying infrastructure activity”) is amended as
follows.

(2) In subsection (2)(d), for “(see subsection (10))” substitute “(see subsections
20(10) and (10A))”.

(3) After subsection (10) insert—

(10A) In determining whether the condition in subsection (10)(a) is met in
relation to a company not resident in the United Kingdom at any
time, a source of income of the company is ignored if, having regard
25to all the circumstances, it is reasonable to regard as insignificant the
amount of income arising from the source for the accounting period
including that time.”

10 In section 443 (interest capacity for group with qualifying infrastructure
company etc), for subsection (2) substitute—

(2) 30There is an exception to the general rule (see subsections (4) and (5))
which—

(a) applies if no tax-interest income amounts of any qualifying
infrastructure company (“Q”) which is a member of the
group for the period are receivable from another qualifying
35infrastructure company which is not a member of the group
for the period but is a related party of Q at any time in that
period, and

(b) depends on the comparison set out in subsection (3),

and, for the purposes of paragraph (a), tax-interest income amounts
40are to be ignored if, having regard to all the circumstances, it is
reasonable to regard the amounts as insignificant.”

11 In section 444 (joint venture companies), in subsection (1), after “a qualifying
infrastructure company (“the joint venture company”)” insert “which is the
ultimate parent of a worldwide group at all times in that period”.