Taxation (International And Other Provisions) Bill - continued          House of Commons

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Chapter 2: Double taxation relief by way of credit

Overview

75.     This Chapter contains the main provisions concerning credit relief.

76.     This Chapter has the following structure.

  • Clauses 18 to 20 set out the effect to be given to credit for foreign tax allowed against United Kingdom tax.

  • Clause 21 defines some key terms used in the Chapter.

  • Clauses 22 to 24 concern the credits to be allowed where the same income is charged to income tax in more than one tax year.

  • Clauses 25 to 27 deal with cases in which credit is not allowed.

  • Clauses 28 to 30 are exceptions to the rule that relief is only available if the taxpayer is UK resident.

  • Clauses 31 and 32 are rules for calculating income and gains in respect of which credit is allowed.

  • Clauses 33 to 35 are general rules about limits on credit.

  • Clauses 36 to 39 limit and reduce credit against income tax.

  • Clause 40 limits credit against capital gains tax.

  • Clause 41 limits credit against income tax and capital gains tax.

  • Clauses 42 to 49 limit credit against corporation tax.

  • Clauses 50 and 51 are rules for calculating tax for the purposes of clause 42(2).

  • Clauses 52 to 56 allocate deductions etc to profits for the purposes of clause 42.

  • Clauses 57 to 62 concern foreign tax underlying dividends.

  • Clause 63 concerns tax underlying dividends which is not foreign tax.

  • Clause 64 to 66 concern tax underlying a dividend which is treated as underlying tax paid by the dividend’s recipient.

  • Clause 67 to 71 contain further rules about tax underlying dividends. Among other things, they provide for relief to be restricted in certain cases.

  • Clauses 72 to 78 deal with unrelieved foreign tax on the profits of an overseas permanent establishment.

  • Clauses 79 and 80 concern the action to be taken after adjustments of amounts payable by way of United Kingdom or foreign tax.

  • Clauses 81 to 95 are anti-avoidance rules which counter schemes and arrangements designed to increase relief.

  • Clauses 96 to 104 concern insurance companies.

Clause 18: Entitlement to credit for foreign tax reduces UK tax by amount of the credit

77.     This clause gives credit relief. It is based on sections 788(4), 790(1) and (3), 792(1) and (3) and 793(1) to (3) of ICTA and section 277(1) of TCGA.

78.     Section 793(1) of ICTA, in relation to income tax and corporation tax, refers to tax “chargeable in respect of any income or chargeable gain”. Subsection (1), in relation to income tax, corporation tax and capital gains tax, also refers to tax “chargeable in respect of any income or chargeable gain”. Taken literally, the substitution rule in section 277(1) of TCGA would require subsection (1) to refer to capital gains tax in respect of any “capital” gain.

79.     Section 15(2) of TCGA provides: “every gain shall, except as otherwise expressly provided, be a chargeable gain.” There is no indication that the gains excepted by section 15(2) of TCGA are not capital gains. It is, therefore, possible for a capital gain not to be a chargeable gain, and “capital” gains and “chargeable” gains are not synonymous.

80.     But capital gains tax in respect of a capital gain is tax in respect of a chargeable gain. Subsection (1) therefore refers to any “chargeable” gain in relation to both corporation tax and capital gains tax.

81.     Subsection (6) is confined to income tax because section 23 of ITA applies only in relation to income tax and so section 793(3) of ICTA can apply only in relation to income tax, notwithstanding section 277(1) of TCGA.

Clause 19: Time limits for claims for relief under section 18(2)

82.     This clause sets the time limits for claims for DTR under clause 18(2). It is based on section 806(1) of ICTA and section 277(1) of TCGA.

Clause 20: Foreign tax includes tax spared because of international development relief

83.     This clause concerns tax sparing relief. It is based on section 788(5) of ICTA and paragraph 2(2) of Schedule 30 to FA 2000.

84.     Clause 4 enables DTAs to make provision for tax sparing relief (as explained in the commentary on that clause). This clause ensures that credit relief can be given for spared tax.

Clause 21: Meaning of “the arrangements”, “the non-UK territory”, “foreign tax” etc

85.     This interpretative clause is based on section 792 of ICTA and section 107(5) of FA 2005.

Clause 22: Credit for foreign tax on overlap profit if credit for that tax already allowed

86.     This clause is the first of a group of three clauses which ensure that the DTR rules work consistently with the rules about overlap profits in Chapter 15 of Part 2 of ITTOIA. It is based on section 804(1) to (4) and (8) of ICTA.

87.     When a person starts trading, it can happen that the same amount of trading income is subject to income tax in more than one tax year. In such cases, this clause gives credit relief twice in respect of the income which is subject to income tax twice.

88.     It is relevant that, when section 804(2) of ICTA was enacted, “by virtue of this section” could only mean “by virtue of subsection (1)”. Subsection (3) reflects the view that “by virtue of this section” in section 804(2) retains that meaning, notwithstanding the insertion in 1994 of what is now section 804(5B)(b).

89.     Notwithstanding section 277(1) of TCGA, section 804 of ICTA is specific to income tax. The three clauses which are based on it therefore have no application to capital gains tax.

Clause 23: Time limits for claims for relief under section 22(2)

90.     This clause sets the time limits for claims for relief under clause 22(2). It is based on section 804(7) of ICTA.

91.     Subsection (1) expressly requires relief under clause 22(2) to be claimed. This requirement is implicit in section 804(7) of ICTA.

Clause 24: Claw-back of relief under section 22(2)

92.     This clause claws back, in certain cases, DTR given under clause 22(2). It is based on section 804(5) to (5C) and (8) of ICTA.

93.     If a person’s income has been subject to income tax in more than one tax year when the person starts trading, then, when the trade ceases, the rules about overlap profits give a measure of relief for the income which has been taxed twice. In such cases, this clause claws back DTR which has been given in respect of the income for which this relief is being given.

Clause 25: Credit not allowed if relief allowed against overseas tax

94.     This clause is a priority rule. It is based on section 793A(1) of ICTA.

95.     If tax is payable in a non-UK territory but, as a result of a DTA (or of the law of the territory giving effect to a DTA), relief is available in the territory against the tax then, whether or not the relief is in fact used, credit relief is not allowed under clause 18(2) in respect of the tax.

Clause 26: Credit not allowed under arrangements unless taxpayer is UK resident

96.     This clause lays down the general rule that relief under clause 18(2) is restricted to UK residents. It is based on sections 792(1), 794(1) and 831(5) of ICTA and section 277(1) of TCGA.

97.     In relation to income tax and corporation tax, section 794(1) of ICTA refers to “income or chargeable gains” in respect of which the tax is chargeable. On a literal interpretation, the substitution rule in section 277(1) of TCGA would require subsection (1) to refer to “capital” gains in relation to capital gains tax. But if capital gains tax is chargeable in respect of a gain, it must be a “chargeable” gain. Subsection (1) therefore refers to “chargeable gains” in relation both to corporation tax and to capital gains tax.

Clause 27: Credit not allowed if person elects against credit

98.     This clause allows the taxpayer to elect against credit. It is based on sections 792(1) and 805 of ICTA and section 277(1) of TCGA.

99.     In relation to income tax and corporation tax, section 805 of ICTA refers to “the United Kingdom taxes chargeable in respect of any income or chargeable gains”. On a literal interpretation, section 277(1) of TCGA could be taken as requiring this clause to refer to “capital” gains in relation to capital gains tax. But, if capital gains tax is chargeable in respect of gains, the gains are “chargeable” gains. This clause therefore refers to “chargeable” gains, in relation both to corporation tax and to capital gains tax.

Clause 28: Unilateral relief for Isle of Man or Channel Islands tax

100.     This clause is an exception to the rule that relief under clause 18(2) is restricted to UK residents. It is based on sections 792(1), 794(2) and 831(5) of ICTA and section 277(1) of TCGA.

101.     Clause 18(3) makes it clear that clause 18(2) only gives credit for tax paid under the law of the territory to which the arrangements relate. Accordingly, the credit mentioned in subsection (1) has to be credit for Manx tax within clause 9 in relation to the Isle of Man, and the credit mentioned in subsection (3) has to be credit for tax payable under the law of the Channel island or islands concerned and within clause 9 in relation to that island or those islands.

102.     In section 794(2) of ICTA, “the person in question” harks back to “the person in respect of whose income or chargeable gains the United Kingdom tax is chargeable” in section 794(1), in relation to income tax and corporation tax. On a literal interpretation, section 277(1) of TCGA could be taken as requiring subsections (1) and (2) to refer to “capital” gains in relation to capital gains tax. But, if capital gains tax is chargeable in respect of gains, the gains are “chargeable” gains. Subsections (1) and (2) therefore refer to “chargeable” gains, in relation both to corporation tax and to capital gains tax.

Clause 29: Unilateral relief for tax on income from employment or office

103.     This clause is another exception to the rule that relief under clause 18(2) is restricted to UK residents. It is based on sections 790(12) and 794(2) of ICTA.

104.     Section 794(2)(b) of ICTA refers to “income tax on employment income”. This expression was substituted by ITEPA for “income tax chargeable under Schedule E”. Section 277(1) of TCGA would not have been taken as requiring that expression to be read, in relation to capital gains tax, as “capital gains tax chargeable under Schedule E”. Accordingly, section 277(1) of TCGA does not apply to section 794(2)(b) of ICTA and this clause does not extend to capital gains tax.

Clause 30: Unilateral relief for non-UK tax on non-resident’s UK branch or agency etc

105.     This clause is concerned with unilateral relief for tax imposed on non-UK residents with branches, agencies or permanent establishments in the United Kingdom. It is based on sections 790(12), 792(1), 794(2) and 831(5) of ICTA, section 277(1) of TCGA and section 153(2) of FA 2003.

106.     Subsection (5) imposes a limit on relief rather than a condition for relief. This is a minor change in the law. See Change 3 in Annex 1.

Clause 31: Calculation of income or gain where remittance basis does not apply

107.     This clause lays down the general rule for the calculation of income or gains in respect of which credit is allowed. It is based on section 795(2) to (5) of ICTA, section 277(1) of TCGA and paragraph 1(4) of Schedule 27 to FA 2001.

Clause 32: Calculation of amount received where UK tax charged on remittance basis

108.     This clause is a special rule for the calculation of income or gains in respect of which credit is allowed. It applies if United Kingdom tax is charged on the remittance basis. It is based on section 795(1), (3) and (5) of ICTA and section 277(1) to (1C) of TCGA.

Clause 33: Limit on credit: minimisation of the foreign tax

109.     This clause requires the taxpayer desiring credit relief for foreign tax to take reasonable steps to minimise the amount of that tax. It is based on section 795A of ICTA.

Clause 34: Reduction in credit: payment by reference to foreign tax

110.     This clause reduces credit relief to the extent that the taxpayer (or a person connected with the taxpayer) receives a payment calculated by reference to the foreign tax. It is based on section 804G of ICTA.

Clause 35: Disallowed credit: use as a deduction

111.     This clause gives a deduction for a foreign tax credit which cannot be set against the taxpayer’s United Kingdom tax liability. It is based on section 798C of ICTA and section 277(1) of TCGA.

112.     Section 798C(2) of ICTA requires the taxpayer’s income to be treated as reduced. Section 277(1) of TCGA extends section 798C(2) to capital gains tax. Taken literally, the substitution rule in section 277(1) would require “income” to be translated as “capital gains”. But, if the subsection is to give effective relief from capital gains tax, as indicated by the opening words of section 277(1), then it should be the taxpayer’s chargeable gains that are reduced. Subsection (4) accordingly refers to the taxpayer’s “chargeable gains”.

Clause 36: Amount of limit

113.     This clause restricts the amount of credit which may be allowed against income tax. It is based on section 796 of ICTA.

114.     Where credit relief is allowed against income tax in respect of income from more than one source, subsection (3) requires the sources of income to be taken in the order which provides the greatest reduction in the liability to income tax for the tax year. This minor change brings the law into line with practice. See Change 4 in Annex 1. The corresponding change is proposed in relation to capital gains tax in clause 40(3).

Clause 37: Credit against tax on trade income: further rules

115.     This clause supplements clause 36 in its application to trade income. It is based on section 798 of ICTA and paragraph 49 of Schedule 7 to FA 2008.

116.     Subsection (6) requires apportionments to be not only reasonable but also just. This is a minor change in the law. See Change 5 in Annex 1. The same change is proposed in clause 44.

117.     Subsection (7) rewrites section 798(5) of ICTA. Paragraph 49 of Schedule 7 to FA 2008 repealed Chapter 11 of Part 3 of ITTOIA and therefore by implication also repealed the reference to that Chapter in section 798(5)(c) of ICTA. Section 798(5)(c) is therefore expressly repealed without replacement.

Clause 38: Credit against tax on royalties: further rules

118.     This clause supplements clause 36 in its application to royalties. It is based on section 798(4) of ICTA.

119.     If section 277(1) of TCGA applied to section 798(4) of ICTA, then “royalty income arising in different jurisdictions” would have to be read, in relation to capital gains tax, as “royalty capital gains arising in different jurisdictions”. Even if the expression “royalty capital gains” could have an application, it is not clear how royalty capital gains could “arise” (or even accrue) “in” a particular jurisdiction. Section 798(4) of ICTA therefore has no application to capital gains tax.

Clause 39: Credit reduced by reference to accrued income losses

120.     This clause provides for credit to be reduced by reference to accrued income losses. It is based on section 807(2) and (5) of ICTA.

Clause 40: Amount of limit

121.     This clause restricts the amount of credit which may be allowed against capital gains tax. It is based on section 796 of ICTA and section 277(1) of TCGA.

122.     Subsection (3) brings the law into line with practice. See Change 4 in Annex 1 and the commentary on clause 36(3).

123.     In subsection (4), the definition of TG is the result of applying section 796(1)(a) of ICTA in relation to capital gains tax in accordance with section 277(1) of TCGA.

124.     In section 796(1) of ICTA, the words “allowing for the making of any other income tax reduction under the Income Tax Acts” have no application to capital gains tax. They are therefore not rewritten in subsection (5).

Clause 41: Amount of limit

125.      This clause restricts the total credit which may be allowed against income tax and capital gains tax. It is based on sections 790(3) and 796(3) of ICTA and section 277(1) of TCGA.

126.     In applying the limit, subsection (2) takes the person’s income tax and capital gains tax liabilities together. This minor change brings the law into line with practice. See Change 6 in Annex 1.

127.     The reference to section 414 of ITA (gift aid) in the definition of “A” in subsection (2) includes by implication a reference to section 426 of that Act (election by donor: gift treated as made in previous tax year).

128.     Section 796(3) of ICTA refers to “total income tax” and, as applied by section 277(1) of TCGA, to “total capital gains tax”. Attempting to spell out the meaning of these expressions could change their scope, with repercussions which could be difficult to predict. Accordingly, subsection (2) retains these expressions.

129.     Also, persons other than individuals cannot make gift aid donations falling within section 414 of ITA. But the scope of “total income tax” and “total capital gains tax” in subsection (2) is not entirely clear. Accordingly, this clause follows the source legislation in using “person” rather than “individual”, to preserve the possibility that, in a case involving a person other than an individual, this clause may set a limit on the amount of credit that is allowed in addition to the limits on credit that are set by clauses 36 and 40.

Clause 42: Amount of limit

130.     This clause restricts the amount of credit which may be allowed against corporation tax. It is based on sections 797, 797A(3), (6) and (7) and 797B(3) of ICTA.

131.     Section 797(2) of ICTA is subject to subsections (2A) and (3) of that section (provisions about permanent establishments and general deductions). The rule in section 797(2) of ICTA is primarily rewritten in subsection (2).

132.     Subsection (3) clarifies the relationship between the rewritten rule and (among others) the provisions based on section 797(3) of ICTA.

133.     Subsection (4) then says that the rewritten rule is to be read with the provisions based on section 797(2A) of ICTA. In these ways, the clause rewrites the words “Subject to subsections (2A) and (3)” that appear in section 797(2) of ICTA. Subsection (4) also says that the rewritten rule is to be read with the provisions based on sections 798A and 798B of ICTA (which qualify the rule so far as relating to trade income) and with the provisions based on sections 797A(1) and (2) and 797B(1) and (2) of ICTA (assumptions for the purposes of the rule about how tax is charged on loan relationships and intangible fixed assets).

134.     The source legislation has the effect that the rule is to be read with those provisions, but does not expressly say that. The references in subsection (4) to the clauses based on those provisions are therefore included as a drafting clarification.

Clause 43: Profits attributable to permanent establishment for purposes of section 42(2)

135.     This clause supplements clause 42 in its application to UK resident companies with permanent establishments outside the United Kingdom. It is based on section 797(2A) of ICTA.

Clause 44: Credit against tax on trade income

136.     This clause supplements clause 42 in its application to trade income. It is based on section 798A of ICTA.

137.     Section 798A(2) of ICTA applies for the interpretation of “the relevant income or gain” in section 797(1) of that Act. Section 798A(2) refers to “income arising or gains accruing”, and section 798A(3) has “income or gain” (three times). But “the relevant income or gain” in section 797(1) harks back to “any income or chargeable gain”, and it follows from the definition of “trade income” in section 798A(4) that section 798A does not affect credit relief against corporation tax on chargeable gains. Subsections (2) and (3) therefore omit as otiose the references to gains in section 798A(2) and (3).

138.     In section 798A(3)(a) of ICTA, “deductions” is apt to include expenses. Subsection (3)(a) therefore omits “or expenses” as otiose.

139.     Subsection (4) requires apportionments to be not only reasonable but also just. See Change 5 in Annex 1 and the commentary on clause 37.

140.     Before its amendment by paragraph 249 of Schedule 1 to CTA 2009, section 798A(4) of ICTA referred to section 104 of that Act and not to section 103 of that Act. Sections 103 and 104 of ICTA were rewritten for the purposes of corporation tax and repealed by CTA 2009. Most post-cessation receipts are charged under what used to be section 103 of ICTA, leaving what used to be section 104 of ICTA to pick up the “change of basis” adjustments. See section 104(3) of ICTA (repealed), which made it clear that section 103 of ICTA (repealed) had priority. Subsection (7) is based on section 798A(5) of ICTA, which was inserted by paragraph 249 of Schedule 1 to CTA 2009 in order to preserve the distinction between post-cessation receipts charged to tax by section 103 (to which section 798A does not apply) and those charged to tax by section 104 (to which section 798A does apply).

Clause 45: Credit against tax on trade income: anti-avoidance rules

141.     This clause is directed against schemes and arrangements designed to divert income, for credit relief purposes, to other persons. It is based on section 798B(4) to (4C) of ICTA.

Clause 46: Applying section 44(2): asset in hedging relationship with derivative contract

142.     This clause supplements clause 44 in its application to assets in hedging relationships with derivative contracts. It is based on section 798B(1) and (2) of ICTA.

Clause 47: Applying section 44(2): royalty income

143.     This clause supplements clause 44 in its application to royalties. It is based on section 798B(3) of ICTA.

144.     This clause is a corporation tax provision, and subsection (2) therefore has “accounting period” where the source legislation has “year of assessment”. This is a minor change in the law. See Change 7 in Annex 1.

Clause 48: Applying section 44(2): “portfolio” of transactions, arrangements or assets

145.     This clause supplements clause 44 in its application to “portfolios” of transactions, arrangements or assets. It is based on section 798B(5) of ICTA.

146.     Section 798B(5) of ICTA uses the expression “fair and reasonable”. In rewriting this, subsection (5) follows the convention in this Bill that apportionments are to be “just and reasonable”. This is not a change in the law, because it is not possible for anything to be fair and reasonable without being just and reasonable or just and reasonable without being fair and reasonable.

 
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Prepared: 19 November 2009