INTRODUCTION

1.     These explanatory notes relate to the Taxation (International and Other Provisions) Bill as introduced in the House of Commons on 19 November 2009. They have been prepared by the Tax Law Rewrite project at HMRC to assist readers of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of its contents. So if a clause or part of a clause does not seem to require explanation or comment, none is given.

3.     The commentary on each clause, or rewritten provision inserted in another Act by Schedules 1 to 7, indicates the main origin or origins of the clause or rewritten provision. A full statement of the origins of each clause, and of the paragraphs of Schedules 1 to 7 making such insertions, is contained in the Bill’s Table of Origins.

4.     At the end of the commentary, there is supporting material in two annexes:

• Annex 1 contains details of the minor changes in the law made by the Bill.

• Annex 2 contains a list of provisions not included in the Bill on the grounds of redundancy.

Summary

5.     The main purpose of the Taxation (International and Other Provisions) Bill is to rewrite primary legislation relating to a number of provisions with an international dimension so that they are clearer and easier to use but without changing their general effect.

6.     It contains provisions about double taxation relief, transfer pricing, advance pricing agreements, tax arbitrage, tax treatment of financing costs and income, and offshore funds. It also relocates and rewrites other provisions where it seems helpful to users to do so.

7.     The Bill reproduces the law on which it is based. It does not generally change the meaning of the law. The minor changes which it does make are within the remit of the Tax Law Rewrite project and the Parliamentary process for the Bill. In the main, such minor changes are intended to clarify existing provisions, make them consistent or bring the law into line with well established practice.

Background

The Tax Law Rewrite project

8.     In December 1995 the Inland Revenue presented a report to Parliament on the scope for simplifying the UK tax system (The Path to Tax Simplification). The main recommendation was that UK direct tax legislation should be rewritten in clearer, simpler language.

9.     This recommendation was warmly welcomed, both in Parliament and in the tax community. In his November 1996 Budget speech the then Chancellor of the Exchequer (the Rt Hon Kenneth Clarke QC MP) announced that the Inland Revenue would propose detailed arrangements for a major project to rewrite direct tax legislation in plainer language.

10.     The project team has been carrying out this work. The aim is that the rewritten legislation should use simpler language and structure than previous tax legislation. The members of the project are drawn from different backgrounds. They include HMRC employees, private sector tax professionals and parliamentary counsel including (as head of the drafting team) a senior member of the Parliamentary Counsel Office.

Steering Committee

11.     The work of the project is overseen by a Steering Committee, chaired by the Rt Hon the Lord Newton of Braintree OBE DL. The membership of the Steering Committee as at 19 October 2009 was:

The Rt Hon the Lord Newton of Braintree OBE DL (Chairman)

Dr John Avery Jones CBE

Adam Broke

Nicholas Dee

Dave Hartnett CB

The Rt Hon Michael Jack MP

Eric Joyce MP

District Judge Rachel Karp

Professor John Tiley CBE

John Whiting OBE

Consultative Committee

12.     The work is also reviewed by a Consultative Committee, representing the accountancy and legal professions and the interests of taxpayers. The membership of the Consultative Committee as at 19 October 2009 was:

Consultation

13.     The work produced by the project has been subject to public consultation. This has allowed all interested parties an opportunity to comment on draft clauses.

14.     Consultation took the form of a series of papers presenting clauses in draft and documents containing responses to comments received. These were published between September 2007 and October 2009. A draft Bill was published for consultation in March 2009. All these documents are available on the Tax Law Rewrite website.

15.     In addition to this consultation the project also presented its papers to the Consultative and Steering Committees to inform them and to seek their views on particular issues. The project also consulted on an informal basis with specialists in particular subject areas.

16.     Those who responded in writing to one or more of the papers or to the draft Bill include:

BDO LLP

Bircham Dyson Bell LLP

The British Property Federation

CASCS Development Forum

The Charity Law Association

Chartered Institute of Taxation

Colin Campbell

Confederation of British Industry

Dr David Williams

Ernst & Young LLP

Francis Sandison

Freshfields Bruckhaus Deringer LLP

Horwath Clark Whitehill

Institute of Chartered Accountants in England and Wales

KPMG LLP

Pinsent Masons LLP

PricewaterhouseCoopers LLP

Slaughter and May

The Law Society

The UK Oil Industry Taxation Committee

17.     As there was some movement of material between this Bill and the Corporation Tax Bill during the course of the work on the Bills, this list includes respondents to both Bills. The list excludes any individuals who requested that their responses be treated in confidence.

Taxation (International and Other Provisions) Bill

18.     The Bill contains provisions relating to:

• double taxation relief;

• transfer pricing;

• advance pricing agreements;

• tax arbitrage;

• tax treatment of financing costs and income;

• offshore funds; and

• relocation of provisions of tax legislation.

19.     The Bill has 382 clauses and 11 Schedules. The clauses are arranged as follows:

Part 1: Overview

Part 2: Double taxation relief

Part 3: Double taxation relief for special withholding tax

Part 4: Transfer pricing

Part 5: Advance pricing agreements

Part 6: Tax arbitrage

Part 7: Tax treatment of financing costs and income

Part 8: Offshore funds

Part 9: Amendments to relocate provisions of tax legislation

Part 10: General provisions

20.     The Schedules are:

Schedule 1: Oil activities: new Chapter 16A of Part 2 of ITTOIA 2005

Schedule 2: Alternative finance arrangements

Schedule 3: Leasing arrangements: finance leases and loans

Schedule 4: Sale and lease-back etc: new Part 12A of ITA 2007

Schedule 5: Factoring of income etc: new Chapters 5B and 5C of Part 13 of ITA 2007

Schedule 6: UK Representatives of non-UK residents

Schedule 7: Miscellaneous relocations

Schedule 8: Minor and consequential amendments

Schedule 9: Transitionals and savings etc

Schedule 10: Repeals and revocations

Schedule 11: Index of defined expressions used in Parts 2 to 8

Glossary

21.     The commentary uses a number of abbreviations. They are listed below.

COMMENTARY ON CLAUSES

Part 1: Overview

Clause 1: Overview of Act

22.     This clause gives an overview of the Bill. It is new.

Part 2: Double taxation relief

Overview

23.     This Part is based on sections 788, 790 to 806, 806L to 807G, 808A to 811 and 815A to 816 of, and Schedule 28AB to, ICTA, which are concerned with DTR.

24.     The United Kingdom’s comprehensive DTAs usually cover not only income tax and corporation tax but also capital gains tax, and may also cover PRT. The opportunity has therefore been taken to rewrite in this Part section 277(1) to (1C), (3) and (4) of TCGA (which apply certain provisions of Part 18 of ICTA (DTR) to capital gains tax) and sections 194(1), (3) and (5) and 195(2) of FA 1993 (which apply sections 788 and 816 of ICTA to PRT). This Part also rewrites section 278 of TCGA (deduction of foreign tax in calculating gains).

25.     Section 194(4) of FA 1993 is rewritten as new section 43D of TMA, which is inserted by Schedule 8.

26.     Section 808 of ICTA (DTR: restriction on deduction of interest or dividends from trading income) is rewritten in CTB2 and repealed. See clause 54 of CTB2.

27.     Section 158 of the Inheritance Tax Act 1984 makes provision for DTAs in relation to inheritance tax. Such DTAs are negotiated separately from the United Kingdom’s comprehensive DTAs. Section 158 is therefore not rewritten.

Chapter 1: Double taxation arrangements and unilateral relief arrangements

Overview

28.     This Chapter contains the main general provisions concerning DTAs and unilateral relief arrangements.

29.     In Part 18 of ICTA, DTAs are given the colourless label “arrangements” (see section 792(1) of ICTA) and unilateral relief is presented as a relief which is given under hypothetical “arrangements” (see section 790(1) of ICTA). But tax professionals commonly refer to “arrangements” having effect by virtue of section 788 of ICTA as, specifically, “double taxation arrangements”, and this convenient usage has been adopted in this Bill. This Part rewrites the unilateral relief provisions as provisions for relief under “unilateral relief arrangements”. Accordingly, in Chapter 2 of this Part “the arrangements” is used without qualification to refer to a DTA or, as the case may be, unilateral relief arrangements for a territory outside the United Kingdom. This approach means that there is no need to rewrite section 790(2) of ICTA (definition of “unilateral relief”). It is repealed without replacement.

30.     Clauses 2 to 7 deal with DTAs. Clauses 8 to 17 deal with unilateral relief arrangements.

Clause 2: Giving effect to arrangements made in relation to other territories

31.     This clause gives effect to DTAs made in relation to other territories. It is based on section 788(1) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.

Clause 3: Arrangements may include retrospective or supplementary provision

32.     This clause supplements clause 2. It is based on section 788(8) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.

33.     Subsection (2) includes a minor change in the law to clarify how section 277(1) of TCGA applies section 788(8) of ICTA. See Change 1 in Annex 1.

Clause 4: Meaning of “double taxation” in sections 2 and 3

34.     This clause deems tax spared because of international development relief to have been payable for the purposes of clauses 2 and 3. It is based on section 788(5) of ICTA.

35.     Clauses 2 and 3 refer to “double taxation” in general terms. Broadly speaking, there is double taxation if the same (for example) income is taxed in more than one territory. But that will not be the case if the income (in this example) is not in fact taxed in one of the territories concerned as a result of a relief. This clause supplements clauses 2 and 3. It requires certain reliefs to be ignored, with the result that one is to assume in certain cases that tax has been paid even though it has in fact not been paid. This deemed tax (in the territory giving the relief), taken with the actual tax (in the other territory), then means that there is “double taxation”. As a result of this clause, therefore, statutory effect can be given to provisions in arrangements which are about such cases.

36.     See also clause 20 (foreign tax includes tax spared because of international development relief).

Clause 5: Orders under section 2: contents and procedure

37.     This clause supplements clause 2. It is based on section 788(9) and (10) of ICTA.

Clause 6: The effect given by section 2 to double taxation arrangements

38.     This clause delimits the scope of the effect given by clause 2 to DTAs. It is based on section 788(3) of ICTA, section 277(1) of TCGA, section 194(1) and (3) of FA 1993 and section 107(5) of FA 2004.

39.     Subsections (2)(b) and (3)(b) reflect the view that section 788(3)(b) of ICTA is:

• about taxing non-UK residents on (a) income arising in the United Kingdom or (b) gains accruing on the disposal of assets in the United Kingdom; and

• not about taxing persons generally on (a) income arising in the United Kingdom that is received by non-UK residents or (b) gains accruing where assets are disposed of to non-UK residents.

40.     Subsection (3) expands section 788(3) of ICTA in relation to capital gains tax with the modifications directed by section 277(1) of TCGA. Section 788(3)(b) refers to income “arising from sources”, but this income tax terminology is not used in the legislation on capital gains tax. Accordingly, subsection (3)(b) refers to gains “accruing on the disposal of assets”, as does subsection (2)(c), the corresponding provision in relation to corporation tax on chargeable gains.

41.     Subsection (4) expands section 788(3) of ICTA in relation to PRT with the modifications directed by section 194(1) and (3) of FA 1993. On a literal interpretation, section 788(3) of ICTA, as thus modified, would enable DTAs to make provision about PRT generally. But this would run counter to the purpose expressed in section 194(1) of FA 1993. Accordingly, subsection (4) limits the effect of DTAs on PRT to the charge under section 12 of the Oil Taxation Act 1983. Furthermore, the requirement under section 194(1)(b) of FA 1993 to translate “income” in section 788 of ICTA as “consideration” is to be read in the context of section 194(1)(a) of FA 1993 and therefore does not extend to “income” in the phrase “corporation tax in respect of income or chargeable gains” in section 788(3)(a) of ICTA.

42.     Subsections (5) and (8) refer to the provisions concerning special withholding tax. These provisions are rewritten in Part 3.

43.     Subsection (6) expressly requires relief under subsection (2)(a), (3)(a) or (4) to be claimed. This requirement is implicit in section 788(6) of ICTA.

44.     Unlike section 788(6) of ICTA, on which it is based, subsection (6) does not expressly state to whom a claim should be made. By implication, the claim must be made to an officer of Revenue and Customs. This is a minor change in the law, reflecting administrative reality. See Change 2 in Annex 1.

Clause 7: General regulations

45.     This clause is a general regulation-making power. It is based on section 791 of ICTA.

46.     DTAs are colloquially known as tax treaties, and subsections (1) and (5) reflect this usage in the newly defined term “the treaty sections”.

Clause 8: Interpretation: “unilateral relief arrangements” means rules 1 to 9, etc

47.     This interpretative clause is based on section 790(3) and (4) of ICTA and section 277(1) of TCGA.

Clause 9: Rule 1: the unilateral entitlement to credit for non-UK tax

48.     This clause unilaterally gives DTR by way of credit (“credit relief”). It is based on sections 790(4), (5) and (12) and 793A(2) and (3) of ICTA and section 277(1) of TCGA.

49.     As directed by section 277(1) of TCGA, subsection (2)(b) extends “income arising or any chargeable gain accruing” in section 790(4) of ICTA beyond income tax and corporation tax to capital gains tax. On a literal interpretation, section 790(4) would have to be read, in relation to capital gains tax, as referring to gains “arising”. But this terminology is not used in the enactments relating to capital gains tax. Subsection (2)(b) therefore refers to gains “accruing”, as this terminology is used both in section 790(4) of ICTA and in the enactments relating to capital gains tax.

50.     Subsection (3) rewrites the words in brackets in section 790(4) of ICTA. Section 277(1) of TCGA has not been applied in subsection (3), as this would have produced a meaningless reference to capital gains.

Clause 10: Rule 2: accrued income profits

51.     This clause gives credit relief in certain cases involving accrued income profits. It is based on sections 790(5), 793A(2) and (3) and 807(1) and (5) of ICTA.

52.     Although this relief is not so termed in the source legislation, it is unilateral relief and is therefore rewritten in this group of clauses.

Clause 11: Rule 3: interaction between double taxation arrangements and rules 1 and 2

53.     This clause concerns the relationship between treaty relief and unilateral relief. It is based on sections 790(5) and 793A(2) and (3) of ICTA.

Clause 12: Rule 4: cases in which, and calculation of, credit allowed for tax on dividends

54.     This clause concerns unilateral credit relief for tax on dividends. It is based on section 790(5), (6) and (10) of ICTA.

55.     Subsection (3) reflects the view that, in section 790(10) of ICTA, “if the company paying the dividend and the company receiving it were related to each other within the meaning of section 801(5)” means “if the company paying the dividend was related (within the meaning of section 801(5)) to the company receiving it”.

Clause 13: Rule 5: credit for tax charged directly on dividend

56.     This clause specifies when, in principle, unilateral credit relief is allowed for tax charged directly on a foreign dividend. It is based on section 790(5) of ICTA.

Clause 14: Rule 6: credit for underlying tax on dividend paid to 10% associate of payer

57.     This clause specifies when, in principle, unilateral credit relief is allowed for underlying tax on a dividend paid to a substantial investor. It is based on section 790(5) to (6A) of ICTA.

58.     The title of this clause gives an indication of its contents. The title uses the expression “10% associate” by analogy with the use of that expression in clause 64. Note, however, that the definition of “10% associate” in clause 64(6) and (7) refers to control of at least 10% of the ordinary share capital, whereas the similar provision in subsections (4) and (5) does not.

Clauses 15 and 16: Rule 7: credit for underlying tax on dividend paid to sub-10% associate; Rule 8: credit for underlying tax on dividend paid by exchanged associate

59.     These clauses specify when, in principle, unilateral credit relief is allowed for underlying tax on a dividend paid in certain cases in which clause 14 does not apply. They are based on section 790(5) to (9) of ICTA, and are identical in every respect except for condition C (and the subsections which insert that condition).

60.     Subsection (2) provides that three conditions must all be met if the clause under review is to enable credit to be given under clause 9.

61.     Condition A in subsection (3) is the same as condition A in clause 14(3).

62.     Condition B in subsection (4) is met if condition B in clause 14(4) is not.

63.     Subsection (5) follows on from subsection (4). To lead into subsection (6), it defines “the held percentage” in that subsection.

64.     Condition C, in subsection (6), sets out the circumstances in which credit can in principle be given under the clause under review even though clause 14 does not apply.

65.     Subsections (7) to (10) are interpretative.

Clause 17: Rule 9: credit in relation to dividends for spared tax

66.     This clause specifies when, in principle, unilateral credit relief is allowed in relation to dividends for spared tax. It is based on section 790(10A) to (10C) of ICTA.

67.     Section 790(10A) of ICTA gives unilateral relief in cases in which:

• a UK resident company (company C) would have been entitled under a DTA to credit relief in relation to dividends for spared tax if it had invested directly in a non-UK resident company (company A); but

• instead company C invests in company A through a holding company resident in the same non-UK territory (company B).

68.     Subsection (1) is based on section 790(10A) of ICTA. Section 790(10A)(d) reads:

the circumstances are such that, had company B been resident in the United Kingdom, it would have been entitled, under arrangements made in relation to the territory outside the United Kingdom and having effect by virtue of section 788, to a relief to which subsection (5) of that section applies in respect of the spared tax.

69.     A relief to which section 788(5) of ICTA applies is a tax relief, given for development purposes, under the law of the non-UK territory to which the DTA under review relates. See the second sentence of section 788(5). Accordingly, a relief to which section 788(5) applies is not a UK tax relief to which a person is entitled under a DTA. It is a foreign tax relief with respect to which provision is made in a DTA for DTR.

70.     Accordingly, if company B had been resident in the United Kingdom, it would not have been entitled to a relief to which section 788(5) of ICTA applies. Rather, it would have been entitled to treat the spared tax as having been payable for the purposes of DTR by way of credit. Foreign tax is spared as a result of a relief to which section 788(5) applies. But entitlement to treat the spared tax as having been payable arises under the first sentence of section 788(5).

71.     Section 790(10A)(a) to (d) of ICTA therefore address the following case. Company A receives a tax relief under the law of the non-UK territory in which it is resident. It pays a dividend out of the relieved profits to company B, which is resident in the same non-UK territory. Company B, out of the dividend received from company A, pays a dividend to UK resident company C. There is a DTA in relation to the non-UK territory the effect of which, when read with section 788(5) of ICTA, is that if company B was UK resident it would be entitled, for the purposes of DTR by way of credit to treat as payable the non-UK tax which company A would have paid but for the non-UK tax relief. Subsection (1)(d) is drafted accordingly.

72.     Section 790(10B)(b) of ICTA refers to section 795(3) of that Act, which is rewritten to clauses 31(4) and 32(5). Subsection (2), which is based on section 790(10B)(b), refers to clause 31(4). But subsection (2) does not refer to clause 32(5), because section 790(10B) concerns the corporation tax liability of a UK resident company and clause 32 has no application for corporation tax purposes.

73.     The tail words of section 790(10C) of ICTA contain the proviso:

(notwithstanding any arrangements .. which have effect by virtue of section 788 and provide for a relief to which subsection (5) of that section applies).

74.     As noted in the commentary on subsection (1), a relief to which section 788(5) of ICTA applies is given under foreign law, not under a DTA. Accordingly, in the tail words of section 790(10C) of ICTA, “provide for” is elliptic drafting for “make provision with respect to”. Subsection (5) is drafted accordingly.