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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Meaning of "financial expenditure".

103. After section 798A of the Taxes Act 1988 there shall be inserted the following section-

"Meaning of "financial expenditure".	798B. - (1) For the purposes of section 798 "financial expenditure", in relation to a qualifying taxpayer and any interest or dividends is, subject to the provisions of this section, the aggregate of-
	(a) so much of the financial expenses (consisting of interest, discounts or similar sums or qualifying losses) incurred by the taxpayer or a person connected or associated with him as-
	(i) is properly attributable to the earning of the interest or dividends; and
	(ii) falls to be taken into account in computing the taxpayer's or person's liability to income tax or corporation tax; and
	(b) so much of any other sum paid by the taxpayer or a person connected or associated with him which-
	(i) falls to be taken into account as mentioned in paragraph (a) above; and
	(ii) would not, apart from this paragraph, be taken into account in determining the amount of the interest or dividends,
	as it is reasonable to regard as attributable to the earning of the interest or dividends (whether or not it would fall, in accordance with normal accountancy practice, to be so treated).
	(2) There shall be deducted from the aggregate given by subsection (1) above so much of the qualifying gains and profits accruing to the qualifying taxpayer or a person connected or associated with him as-
	(a) is properly attributable to the earning of the interest or dividends; and
	(b) falls to be taken into account in computing the taxpayer's or person's liability to income tax or corporation tax.
	(3) In a case where the amount of a qualifying taxpayer's financial expenditure in relation to the earning of the interest or dividends is not readily ascertainable-
	(a) that amount shall be taken, subject to subsection (4) below, to be such sum as it is just and reasonable to attribute to the earning of the interest or dividends; and
	(b) in the case of interest, regard shall be had in particular to any market rates of interest by reference to which the rate of the interest is determined.
	(4) The Board may by regulations supplement subsection (3) above-
	(a) by specifying matters to be taken into account in determining such a just and reasonable attribution as is referred to in paragraph (a); and
	(b) by making provision with respect to the determination of market rates of interest for the purposes of paragraph (b);
	and any such regulations may make different provision for different cases.
	(5) In this section "qualifying losses" means-
	(a) losses falling to be brought into account for the purposes of Chapter II of Part II of the Finance Act 1993 (exchange gains and losses) in accordance with sections 125 to 127 of that Act; and
	(b) losses falling to be brought into account for the purposes of Chapter II of Part IV of the Finance Act 1994 (interest rate and currency contracts) in accordance with sections 155 to 158 of that Act;
	and "qualifying gains" and "qualifying profits" shall be construed accordingly."

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.

Prepared 24 June 1998