Finance (No. 2) Bill

Finance (No. 2) Bill - continued	House of Commons
PART III, INCOME TAX, CORPORATION TAX AND CAPITAL GAINS TAX - continued
Double taxation relief - continued

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Underlying tax reflecting interest or dividends.

104. - (1) Section 803 of the Taxes Act 1988 (underlying tax reflecting interest on loans) shall be amended as follows.

(2) In subsection (1)-

(a) in paragraph (b), after the words "a dividend" there shall be inserted the words "("the overseas dividend")";

(b) in paragraph (c), for the words "interest on a loan made" there shall be substituted the words "interest or dividends earned or received"; and

"(d) if the company which received the interest or dividends ("the company") had been resident in the United Kingdom, section 798 would apply in relation to that company."

(3) In subsection (3), for the words from "on so much" to the end there shall be substituted the words "on so much of the interest or dividends as exceeds the amount of the company's relevant expenditure which is properly attributable to the earning of the interest or dividends".

(4) In subsection (4)-

(a) in paragraph (a), for the words "section 798(2)" there shall be substituted the words "section 798(3)";

(b) for paragraph (b) there shall be substituted the following paragraph-

"(b) `the company's relevant expenditure' means the amount which, if the company referred to in subsection (1)(d) above were resident in the United Kingdom and were a qualifying taxpayer for the purposes of section 798, would be its financial expenditure in relation to the earning of the interest or dividends, as determined in accordance with section 798B."

(5) In subsection (5)-

(a) for the words "the dividend", in both places where they occur, there shall be substituted the words "the overseas dividend"; and

(b) for the words "the interest" there shall be substituted the words "the interest or dividends".

(6) In subsection (6)-

(a) for the words "the dividend" there shall be substituted the words "the overseas dividend"; and

(b) for the words "the permitted amount" there shall be substituted the following paragraphs-

	"(a) the amount of the spared tax which under any arrangements is to be taken into account for the purpose of allowing credit against corporation tax in respect of the overseas dividend; or
	(b) if it is less, 15 per cent of the interest or dividends;".

(7) For subsection (7) there shall be substituted the following subsection-

"(7) In this section "spared tax" has the same meaning as in section 798A."

(8) In subsection (8)-

(a) after the words "amount of tax which" there shall be inserted the words "is referable to interest and"; and

(b) for the words "the dividend" there shall be substituted the words "the overseas dividend".

(9) In subsection (9)-

(a) for the words "the interest", in both places where they occur, there shall be substituted the words "the interest or dividends"; and

(b) for the words "the dividend" there shall be substituted the words "the overseas dividend".

(10) For subsections (10) and (11) there shall be substituted the following subsection-

"(10) In subsection (1) above "bank" means a company carrying on, in the United Kingdom or elsewhere, any trade which includes the receipt of interest or dividends, and section 839 applies for the purposes of that subsection."

(11) This section does not apply where the overseas dividend is paid before 1st January 1999 in pursuance of arrangements which were entered into before, and are not altered on or after, 17th March 1998.

(12) Subject to subsection (11) above, this section applies where the overseas dividend is paid on or after 17th March 1998.

Notification of foreign tax adjustment.

105. - (1) In section 806 of the Taxes Act 1988 (supplemental provision with respect to double taxation relief), after subsection (2) there shall be inserted the following subsections-

	"(3) Subject to subsection (5) below, where-
	(a) any credit for foreign tax has been allowed to a person under any arrangements, and
	(b) the amount of that credit is subsequently rendered excessive by reason of an adjustment of the amount of any tax payable under the laws of a territory outside the United Kingdom,
	that person shall give notice in writing to an officer of the Board that an adjustment has been made that has rendered the amount of the credit excessive.
	(4) A notice under subsection (3) above must be given within one year from the time of the making of the adjustment.
	(5) Subsections (3) and (4) above do not apply where the adjustment is one the consequences of which in relation to the credit fall to be given effect to in accordance with regulations made under-
	(a) section 182(1) of the Finance Act 1993 (regulations relating to individual members of Lloyd's); or
	(b) section 229 of the Finance Act 1994 (regulations relating to corporate members of Lloyd's).
	(6) A person who fails to comply with the requirements imposed on him by subsections (3) and (4) above in relation to any adjustment shall be liable to a penalty of an amount not exceeding the amount by which the credit allowed has been rendered excessive by reason of the adjustment."

(2) This section shall be deemed to have come into force on 17th March 1998 in relation to adjustments made on or after that date.

Transfer pricing, FOREX and financial instruments

New regime for transfer pricing etc.

106. - (1) For sections 770 to 773 of the Taxes Act 1988 (transfer pricing provisions) there shall be substituted the following section-

"Provision not at arm's length.

770A. Schedule 28AA (which deals with provision made or imposed otherwise than at arm's length) shall have effect."

(2) After Schedule 28A to that Act there shall be inserted, as Schedule 28AA to that Act, the Schedule set out in Schedule 16 to this Act.

(3) In the Finance Act 1993-

(a) in sections 136(7) and (8) and 136A(5) (application of arm's length test in computing foreign exchange gains and losses), for the words "has been treated under section 770 of", in each place where they occur, there shall be substituted "falls to be treated in accordance with Schedule 28AA to"; and

(b) in section 136A(6), for "has at any time in that accrual period been treated under section 770 of" there shall be substituted "falls in relation to any time in that accrual period to be treated in accordance with Schedule 28AA to".

(4) In the Finance Act 1996-

(a) in section 100(3) (imputed interest on loan relationships), for the words from "which, in" to "of those sections" there shall be substituted "which, in pursuance of Schedule 28AA to the Taxes Act 1988 (provision not at arm's length), falls to be treated"; and

(b) in paragraph 16 of Schedule 9 (imputed interest)-

(i) in sub-paragraph (1), for the words from "sections 770" to "that Act" there shall be substituted "Schedule 28AA to the Taxes Act 1988 (provision not at arm's length)"; and

(ii) in sub-paragraph (2), for "Those sections" there shall be substituted "That Schedule".

(5) Subject to subsection (6) below, this section and Schedule 16 to this Act have effect (in relation to provision made or imposed at any time)-

(a) for the purposes of corporation tax, as respects accounting periods ending on or after the day appointed under section 199 of the Finance Act 1994 for the purposes of Chapter III of Part IV of that Act (self-assessment management provisions); and

(b) for the purposes of income tax, as respects any year of assessment ending on or after that day.

(6) The Schedule 28AA to the Taxes Act 1988 that is inserted by subsection (2) above shall not, in the case of any potentially advantaged person, apply as respects the consequences at any time of the difference between the actual provision and the arm's length provision if-

(a) that time falls before 17th March 2001;

(b) the actual provision is a provision made or imposed by means of contractual arrangements entered into by that person before 17th March 1998;

(c) the requirements of paragraph 1(1)(b) of Schedule 28AA to that Act (control requirements) are satisfied in the case of the actual provision and that person by reference only to paragraph 4(2)(b) of that Schedule (joint ventures etc.);

(d) the rights and obligations of that person by virtue of the actual provision are not ones that have been varied or continued in pursuance of any transaction entered into by that person in the period between 17th March 1998 and that time; and

(e) that person is not a party, and has not been a party, to any transaction by virtue of which he could during that period have secured the variation or termination of those rights and obligations.

(7) Expressions used in subsection (6) above and in Schedule 28AA to the Taxes Act 1988 have the same meanings in that subsection as in that Schedule.

Abolition of requirements for direction.

107. - (1) The following provisions of Chapter II of Part II of the Finance Act 1993 (exchange gains and losses) shall cease to have effect-

(a) in section 135(1), paragraph (d) (which makes the giving of a direction a condition of disregarding an exchange loss where it is the main benefit), and the word "and" immediately preceding that paragraph;

(b) in section 136, the following provisions (which make the giving of a direction by the Board a condition of disregarding or reducing an exchange loss where there is a transaction that is not on arm's length terms)-

(i) paragraph (d) of subsection (1) and the word "and" immediately preceding that paragraph; and

(ii) in each of subsections (5) and (9), the words after paragraph (b);

(c) in each of subsections (3) and (7) of section 136A, the words after paragraph (b) (which make the giving of a direction by the Board a condition of reducing an initial exchange loss where there is a transaction that is not on arm's length terms); and

(d) in section 137(1), paragraph (d) (which makes the giving of a direction a condition of disregarding an exchange loss on a currency contract which is not on arm's length terms), and the word "and" immediately preceding that paragraph.

(2) Accordingly, the word "and" shall be inserted-

(a) at the end of section 135(1)(b) of the Finance Act 1993;

(b) at the end of section 136(1)(b) of that Act; and

(3) In section 167(2) of the Finance Act 1994, paragraph (b) (which makes the giving of a direction by the Board a condition of adjusting the amounts brought into account in respect of a relevant transaction which is not on arm's length terms), and the word "and" immediately preceding that paragraph, shall cease to have effect.

(4) The preceding provisions of this section shall have effect (in relation to transactions entered into at any time) as respects accounting periods ending on or after the day appointed under section 199 of the Finance Act 1994 for the purposes of Chapter III of Part IV of that Act (self-assessment management provisions).

(5) Where a direction given on or after 17th March 1998 under-

(a) section 135(1)(d), 136(1)(d), (5) or (9), 136A(3) or (7) or 137(1)(d) of the Finance Act 1993, or

(b) section 167(2)(b) of the Finance Act 1994,

relates to any accounting period ending before the day appointed as mentioned in subsection (4) above, all such adjustments shall be made, whether by assessment, repayment of tax or otherwise, as are necessary to give effect to that direction.

Determinations requiring the sanction of the Board.

108. - (1) This section has effect where a determination requiring the Board's sanction is made for any of the following purposes, that is to say-

(a) the giving of a closure notice;

(b) the giving of a notice under section 30B(1) of the Taxes Management Act 1970 amending a partnership statement; or

(2) If the closure notice, the notice under section 30B(1) of the Taxes Management Act 1970 or, as the case may be, a notice of the discovery assessment is given to any person-

(a) without the determination, so far as it is taken into account in the notice or assessment, having been approved by the Board, or

(b) without a copy of the Board's approval having been served on that person at or before the time of the giving of the notice,

the closure notice, notice under section 30B(1) of that Act or, as the case may be, the discovery assessment shall be deemed to have been given or made (and in the case of an assessment notified) in the terms (if any) in which it would have been given or made had that determination not been taken into account.

(3) For the purposes of this section the Board's approval of a determination requiring their sanction-

(a) must be given specifically in relation to the case in question and must apply to the amount determined; but

(b) subject to that, may be given by the Board (either before or after the making of the determination) in any such form or manner as they may determine.

(4) In this section references to a determination requiring the Board's sanction are references (subject to subsection (5) below) to any of the following determinations, that is to say-

(a) a determination of an amount falling to be brought into account for tax purposes in respect of any assumption made by virtue of paragraph 1(2) of Schedule 28AA to the Taxes Act 1988 (provision not at arm's length);

(b) a determination of the amount of any adjustment falling to be made for tax purposes in respect of the disregarding or reduction, in accordance with section 135, 136, 136A or 137 of the Finance Act 1993 (main benefit and arm's length tests in relation to foreign exchange gains and losses), of any exchange loss, or of any exchange gain;

(c) a determination of the amount of any adjustment falling to be made for tax purposes in respect of any deduction from, or addition to, any amount in accordance with section 167 of the Finance Act 1994 (arm's length test in relation to financial instruments).

(5) For the purposes of this section a determination shall be taken, in relation to a closure notice, a notice under section 30B(1) of the Taxes Management Act 1970 or a discovery assessment, not to be a determination requiring the Board's sanction if-

(a) an agreement about the matters to which the determination relates has been made between an officer of the Board and the person in whose case it is made;

(b) that agreement is in force at the time of the giving of the notice or, as the case may be, of any notice of the assessment; and

(6) For the purposes of subsection (5) above an agreement made between an officer of the Board and any person ("the taxpayer") in relation to any matter shall be taken to be in force at any time if, and only if-

(a) the agreement is one which has been made or confirmed in writing;

(b) that time is after the end of the period of thirty days beginning-

(i) in the case of an agreement made in writing, with the day of the making of the agreement, and

(ii) in any other case, with the day of the agreement's confirmation in writing;

and

(c) the taxpayer has not, before the end of that period of thirty days, served a notice on an officer of the Board stating that he is repudiating or resiling from the agreement.

(7) The references in subsection (6) above to the confirmation in writing of an agreement are references to the service on the taxpayer by an officer of the Board of a notice in writing-

(a) stating that the agreement has been made; and

(b) setting out the terms of the agreement.

(8) The matters that may be questioned on so much of any appeal by virtue of any provision of the Taxes Management Act 1970 or Schedule 18 to this Act, as relates to a determination the making of which has been approved by the Board for the purposes of this section shall not include the Board's approval, except to the extent that the grounds for questioning the approval are the same as the grounds for questioning the determination itself.

(9) In this section-

"closure notice" means-

(a) a notice under section 28A(5) or 28B(5) of the Taxes Management Act 1970 stating the conclusions of an officer of the Board in relation to any self-assessment, partnership statement, claim or election; or

(b) a closure notice under paragraph 32 of Schedule 18 to this Act in relation to an enquiry into a company tax return;

"discovery assessment" means-

(a) an assessment under section 29 of the Taxes Management Act 1970; or

(b) a discovery assessment or discovery determination under paragraph 41 of Schedule 18 to this Act (including an assessment by virtue of paragraph 52 of that Schedule).

(10) This section has effect-

(b) for the purposes of income tax, as respects any year of assessment ending on or after that day.

Prepared 6 April 1998