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

back to previous text

Clause 100: First limitation for purposes of section 99(2)

227.     This clause specifies the first limitation on the amount of credit for foreign tax imposed by clause 99(2). It is based on section 804C(3) and (6) to (8) of ICTA.

228.     Subsection (4)(b) refers to “any .. unilateral relief arrangements for any territory outside the United Kingdom” (rather than “.. a territory outside the United Kingdom”), because the total may relate to several sets of arrangements.

Clause 101: Second limitation for purposes of section 99(2)

229.     This clause specifies the second limitation on the amount of credit for foreign tax imposed by clause 99(2). It is based on section 804C(4) and (9) of ICTA.

230.     Subsection (2)(b) refers to “any .. unilateral relief arrangements for any territory outside the United Kingdom” (rather than “.. a territory outside the United Kingdom”), because the total may relate to several sets of arrangements.

Clauses 102 to 104: Interpreting sections 99 to 101 for life assurance or gross roll-up business; interpreting sections 99 to 101 for other insurance business; interpreting sections 100 and 101: amounts referable to category of business

231.     These interpretative clauses are based on sections 804C(13) and (14), 804D and 804E of ICTA.

Chapter 3: Miscellaneous provisions

Overview

232.     This Chapter contains miscellaneous provisions relating to DTR. It has the following structure.

  • Clauses 105 and 106 concern the application of this Part to capital gains tax.

  • Clauses 107 to 110 provide for foreign tax to be disregarded in certain circumstances when this Part is applied for corporation tax purposes.

  • Clause 111 makes special rules for discretionary trusts.

  • Clauses 112 to 115 allow a deduction for foreign tax in cases in which no credit is allowed.

  • Clauses 116 to 123 concern the Mergers Directive.

  • Clauses 124 and 125 deal with cases about being taxed otherwise than in accordance with DTAs.

  • Clauses 126 to 128 deal with the Arbitration Convention.

  • Clause 129 concerns the disclosure of information.

  • Clauses 130 to 133 make provision about the interpretation of rules in DTAs.

  • Clause 134 concerns assessments.

Clause 105: Meaning of “chargeable gain”

233.     This interpretative clause is based on section 831(5) of ICTA and section 277(1) of TCGA.

Clause 106: Chapters 1 and 2 apply to capital gains tax separately from other taxes

234.     This clause ensures that, to the extent that DTR is available for foreign capital gains tax against United Kingdom capital gains tax under Chapters 1 and 2, DTR is not available for it against United Kingdom income tax or United Kingdom corporation tax. It is based on section 277(1) and (3) of TCGA.

Clause 107: Disregard of foreign tax referable to derivative contract

235.     This clause requires foreign tax referable to a derivative contract (such as an interest-rate swap) to be ignored to the extent that the foreign tax is attributable to a time when the taxpayer company was not a party to the derivative contract. It is based on section 807A(1), (2) and (7) of ICTA.

236.     Under the derivative contracts and loan relationships regimes, income is (broadly speaking) recognised for tax purposes in the periods in which gains are recognised in the accounts. By contrast, withholding taxes are generally imposed on cash flows. This clause is the first of a group of clauses which (to summarise) adjust DTR attributable to cash flows from derivative contracts and loan relationships in order to bring the DTR into line with the taxation of income.

Clause 108: Disregard of foreign tax attributable to interest under a loan relationship

237.     This clause requires foreign tax referable to a loan relationship to be ignored if the foreign tax is attributable to a time when the taxpayer company was not a party to the loan relationship. It is based on section 807A(1) to (2A) of ICTA.

Clauses 109 and 110: Repo cases in which no disregard under section 108; stock-lending cases in which no disregard under section 108

238.     These clauses make exceptions to clause 108 in cases involving repos and stock lending. They are based on section 807A(2A) and (6A) to (6C) of ICTA.

Clause 111: When payment to beneficiary treated as arising from foreign source

239.     This clause lays down special rules for discretionary trusts. It is based on section 809 of ICTA.

240.     A body of trustees is treated for income tax purposes as a separate person from the settlor and the beneficiaries of the trust. In certain circumstances, a payment by discretionary trustees is (a) treated as income in the hands of the recipient and (b) treated as received under deduction of income tax. See sections 493 and 494 of ITA. Broadly speaking, for income tax purposes such a payment effectively transfers income from the trustees to the recipient. And income tax suffered by the trustees on such income is credited to the recipient.

241.     In such circumstances, this clause enables credit relief to be transferred from the trustees to the recipient.

Clauses 112 and 113 Deduction from income for foreign tax (instead of credit against UK tax); deduction from capital gain for foreign tax (instead of credit against UK tax)

242.     These clauses give deductions for foreign tax in circumstances in which no credit is allowed. They are based on, respectively, (a) sections 807(4) and 811 of ICTA and (b) sections 8(3) and 278(1) of TCGA.

Clause 114: Time limits for action if tax adjustment makes reduction too large or too small

243.     This clause permits assessments or claims to be made after the normal time limits, if the reduction given under clause 112(1) or 113(2) is found to be excessive or insufficient by reason of an adjustment of the amount of tax payable. It is based on section 811(4) of ICTA and section 278(2) of TCGA.

Clause 115: Duty to give notice that adjustment has rendered reduction too large

244.     This clause requires the taxpayer to give notice that an adjustment of the amount of tax payable has rendered the reduction excessive. It is based on section 811(5) to (10) and 832(1) of ICTA, sections 278(3) to (7) and 288(1) of TCGA and section 989 of ITA.

Clause 116: Introduction to section 117

245.     This clause is the first of a series of clauses dealing with European cross-border transfers of business and mergers under the Mergers Directive; introducing clause 117, it concerns cross-border transfers of business. It is based on section 807B of ICTA.

246.     This clause and clauses 117 to 121 and 123 rewrite sections 807B to 807G of ICTA; they largely replicate the source legislation, which was inserted by CTA 2009. The need for DTR provisions to take account of the Mergers Directive is discussed in the commentary on clause 122, which rewrites section 815A of ICTA.

Clause 117: Tax treated as chargeable in respect of transfer of loan relationship, derivative contract or intangible fixed assets

247.     This clause provides for tax to be treated as chargeable, for DTR purposes, in respect of the transfer of loan relationships, derivative contracts or intangible fixed assets if tax would have been chargeable but for the Mergers Directive. It is based on section 807C of ICTA.

Clause 118: Introduction to section 119

248.     This clause, which concerns cross-border mergers, introduces clause 119. It is based on section 807D of ICTA.

Clause 119: Tax treated as chargeable in respect of transfer of loan relationship, derivative contract or intangible fixed assets

249.     This clause provides for tax to be treated as chargeable, for DTR purposes, in respect of the transfer of loan relationships, derivative contracts or intangible fixed assets if tax would have been chargeable but for the Mergers Directive. It is based on sections 807D(12) and 807E of ICTA.

Clause 120: Introduction to section 121

250.     This clause, which concerns transparent entities involved in cross-border transfers and mergers, introduces clause 121. It is based on section 807F of ICTA.

Clause 121: Tax treated as chargeable in respect of relevant transactions

251.     This clause provides for tax to be treated as chargeable, for DTR purposes, in respect of the transfer of loan relationships, derivative contracts or intangible fixed assets if tax would have been chargeable but for the Mergers Directive. It is based on section 807G of ICTA.

Clause 122: Tax treated as chargeable in respect of gains on transfer of non-UK business

252.     This clause provides for tax to be treated as chargeable, for DTR purposes, in respect of certain (a) transfers of non-UK businesses, (b) transfers of parts of non-UK businesses and (c) mergers if tax would have been chargeable but for the Mergers Directive. It is based on section 815A of ICTA.

253.     Suppose that a non-UK business is transferred. The Mergers Directive applies if (to summarise the main conditions):

  • company A has a permanent establishment in another member State (the host State);

  • company A transfers the assets it uses for the purposes of the business it carries on through the permanent establishment to a company (the transferee) resident in a member State other than company A’s home State; and

  • the transfer is in exchange for shares or debentures in the transferee.

254.     If the Mergers Directive applies, the general rule is that neither company A’s home State, nor the host State, is permitted to tax any capital gain arising on the transfer. But there is an exception if company A’s home State operates, as the United Kingdom does, a system of taxing worldwide profits. If the exception applies, company A’s home State may tax the gain, but only if it allows relief for the tax that would have been charged in the host State but for the Directive. This clause gives relief for the notional tax in cases where the United Kingdom is company A’s home State.

255.     The legislation needs:

  • to specify when the relief is to be given;

  • to say how to calculate the relief; and

  • to lay down rules determining the corporation tax against which the notional tax can be credited.

256.     Sections 140C and 140F of TCGA specify when the relief applies. Section 140C(1) of TCGA deals with the transfer of a non-UK business (as in the example above) or part of a non-UK business, but only if the transferee is resident in an EU member State other than the United Kingdom. Section 140C(1A) of TCGA deals with the transfer of part of a non-UK business. Section 140F of TCGA deals with cross-border mergers of companies etc each resident in an EU member State (but not all resident in the same State). Under subsection (1)(a), section 140C or 140F needs to apply if relief is to be given under subsection (3).

257.     Subsection (1)(b) lays down the other condition for relief to be given under subsection (3), namely that (to summarise) the Mergers Directive has sheltered gains from foreign tax.

258.     Subsection (3) enables credit relief to be given for notional foreign tax. This clause is, however, located in Chapter 3 rather than Chapter 2 of this Part, because its potential application is not limited to credit relief.

259.     Subsections (4) and (5) say how the notional foreign tax is to be calculated.

260.     Section 140C(3) or, as the case may be, section 140F(3) of TCGA has two consequences. First, the allowable losses accruing to the UK-resident transferor company on the transfer are set off against the chargeable gains so accruing. Second, the transfer is treated as giving rise to a single chargeable gain equal to the aggregate of those gains after deducting the aggregate of those losses. These provisions enable credit relief for the notional foreign tax to be capped by clause 42.

261.     The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 1 amended section 140C of TCGA and substituted new section 140F of TCGA. They did not, however, amend section 815A of ICTA. But each of sections 140C and 140F continues to say that if it applies then section 815A of ICTA also applies. Accordingly, this clause rewrites section 815A of ICTA in a way which gives effect to that legislative intention.


    1   SI 2007/3186

262.     Two verbal changes have been made. First, the definition of “host State” in subsection (2) follows sections 140C and 140F of TCGA in referring to the company’s “business” rather than section 815A of ICTA, which refers to the company’s “trade”. As it happens, section 140F of TCGA always referred to a “business” rather than a “trade”, and both “trade” and “business” on the one hand, and the Mergers Directive’s “branch of activity” on the other, refer to the same thing. Second, subsection (2) refers expressly to section 140C(1A) of TCGA, which was inserted in 2007 and, as noted above, deals with certain transfers of part of a non-UK business. These are drafting clarifications which do not change the law.

263.     In the parenthetical descriptions in the definition of “the transfer subsections” in subsection (2), the word “company” appears in inverted commas because it is used in an extended sense. See section 140L of TCGA.

Clause 123: Interpretation of sections 116 to 122

264.     This interpretative clause is based on sections 807B(9), 807D(11), 807F(6) and 815A(6) of ICTA.

Clause 124: Giving effect to solutions to cases and mutual agreements resolving cases

265.     This clause is a machinery provision for resolving disputes under DTAs. It is based on section 815AA(1) to (3) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.

266.     Subsection (4) extends the scope of the clause to include the enactments relating to capital gains tax and the enactments relating to PRT. This brings the law into line with practice. See Change 8 in Annex 1. The same change is made in clause 125.

Clause 125: Effect of, and deadline for, presenting a case

267.     This clause supplements clause 124. It is based on section 815AA(4) to (6) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.

268.     Subsection (2)(a) includes a minor change in the law. See the commentary on clause 124(4) and Change 8 in Annex 1.

Clause 126: Meaning of “the Arbitration Convention”

269.     This interpretative clause is based on sections 815B(4) and 816(2A) of ICTA.

Clause 127: Giving effect to agreements, decisions and opinions under the Convention

270.     This clause is a machinery provision relating to the Arbitration Convention. It is based on section 815B(1) to (3) of ICTA.

271.     Subsection (4) specifically refers to “the allowance of credit against tax payable in the United Kingdom” for the sake of consistency with clause 124(3). This does not change the law, because the added words are implicit in “or otherwise”.

Clause 128: Disclosure under the Convention

272.     This clause supplements clause 127. It is based on section 816(2A) and (5) of ICTA.

Clause 129: Disclosure where relief given overseas for tax paid in the United Kingdom

273.     This clause permits Revenue and Customs officials to disclose information in cases in which other jurisdictions give relief for United Kingdom tax. It is based on sections 790(12) and 816(1) and (5) of ICTA, section 277(1) and (4) of TCGA and section 194(5) of FA 1993.

Clause 130: Interpreting provision about UK taxation of profits of foreign enterprises

274.     This clause ensures that a specific provision commonly found in DTAs (that is designed largely to limit the rights of the States to tax the business profits of residents of the other State) cannot be read as preventing the income of UK residents being charged to United Kingdom tax. It is based on section 815AZA of ICTA.

Clause 131: Interpreting provision about interest influenced by special relationship

275.     This clause explains how the provisions of certain DTAs about amounts of interest are to be interpreted. It is based on section 808A of ICTA.

Clause 132: Interpreting provision about royalties influenced by special relationship

276.     This clause explains how the royalties provisions of certain DTAs are to be interpreted. It is based on section 808B(1) to (4), (8) and (9) of ICTA.

Clause 133: Special relationship rule for royalties: matters to be shown by taxpayer

277.     This clause supplements clause 132. It is based on section 808B(5) to (7) of ICTA.

Clause 134: Correcting assessments where relief is available

278.     This clause allows correcting assessments to be made in DTR cases. It is based on sections 788(7) and 790(11) of ICTA, section 277(1) of TCGA and section 195(2) of FA 1993.

279.     In relation to income tax and corporation tax, sections 788(7)(a) and 790(11) of ICTA refer to “any income or chargeable gain”. At first sight, in relation to capital gains tax, the substitution rule in section 277(1) of TCGA would seem to require references to “capital” gains in subsections (1)(a) and (2)(a), since it is possible that a DTA might provide for relief in the non-UK territory to be given in respect of tax in respect of a capital gain that is not a chargeable gain.

280.     But the references to capital gains tax in conditions A and B in this clause are necessarily references to UK capital gains tax. The gain therefore has to be a “chargeable” gain. Subsections (1)(a) and (2)(a) therefore refer to “any chargeable gain” in relation both to corporation tax and to capital gains tax.

281.     The tail words of section 790(11) of ICTA refer to a “chargeable gain” being “entrusted to .. [a person] .. for payment”. It is not clear how a chargeable gain can be entrusted to a person for payment, and subsection (6) omits these words.

282.     Subsection (7) reflects administrative reality by giving the function of making PRT amendments to officers of Revenue and Customs. This is a minor change in the law. See Change 2 in Annex 1.

Part 3: Double taxation relief for special withholding tax

Overview

283.     This Part allows DTR for special withholding tax. It is based on sections 107 to 111, 113 and 114 of FA 2004. It has the following structure.

  • Clauses 135 and 136 are introductory.

  • Clauses 137 to 141 concern credit etc for special withholding tax.

  • Clauses 142 and 143 are rules for calculating the income or gain on the remittance basis in cases in which special withholding tax is withheld.

  • Clauses 144 and 145 concern certificates to avoid the levy of special withholding tax.

Clause 135: Relief under this Part: introductory

284.     This clause introduces this Part and explains how relief under this Part is to be given. It is based on section 107 of FA 2004.

285.     Subsection (1) refers to clauses 144 and 145. Clause 144 concerns the issue of certificates by officers of Revenue and Customs to avoid a levy of special withholding tax in a non-UK territory. Clause 145 concerns (i) officers’ refusal to issue such certificates and (ii) appeals against such refusal.

Clause 136: Interpretation of Part

286.     This interpretative clause is based on section 107 of FA 2004.

Clause 137: Income tax credit etc for special withholding tax

287.     This clause deems an income tax credit to be given for special withholding tax. It is based on section 108 of FA 2004.

Clause 138: Amount and application of the deemed tax under section 137

288.     This clause quantifies the deemed tax under clause 137 and specifies how it is to be treated. It is based on section 108 of FA 2004.

Clause 139: Capital gains tax credit etc for special withholding tax

289.     This clause deems a capital gains tax credit to be given for special withholding tax. It is based on section 109 of FA 2004 and paragraph 5 of Schedule 2 to FA 2008.

Clause 140: Provisions about the deemed tax under section 139

290.     This clause quantifies the deemed tax under clause 139 and specifies how it is to be treated. It is based on section 109 of FA 2004.

Clause 141: Credit under Chapter 2 of Part 2 to be allowed first

291.     This clause is a priority rule. It is based on section 110 of FA 2004.

Clause 142: Conditions for purposes of section 143

292.     This clause is the first of two clauses about special withholding tax and income and chargeable gains charged on the remittance basis. It is based on section 111 of FA 2004.

Clause 143: Taking account of special withholding tax in calculating income or gains

293.     This clause quantifies the deemed income tax credit or, as the case may be, deemed capital gains tax credit for special withholding tax on income or chargeable gains charged on the remittance basis. It is based on section 111 of FA 2004.

Clause 144: Issue of certificate

294.     This clause enables officers of Revenue and Customs to issue certificates to enable income to be paid without the levy (under the law of a non-UK territory) of special withholding tax. It is based on section 113 of FA 2004.

Clause 145: Refusal to issue certificate and appeal against refusal

295.     This clause supplements clause 144. It is based on sections 113(6) and 114 of FA 2004.

296.     Paragraph 422 of Schedule 1 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (SI 2009/56) substituted “the tribunal” for “the Special Commissioners” in section 114 of FA 2004, but did not expressly define “the tribunal” in that context. Subsection (8) gives “the tribunal” its usual meaning in the taxing Acts. See, for example, section 47C of TMA, the definition of “tribunal” in TMA inserted by paragraph 27 of that Schedule.

Part 4: Transfer pricing

Overview

297.     This Part provides the rules on transfer pricing. The transfer pricing provisions apply where “provision” is made between two persons by means of a transaction and, broadly, one of the persons controls the other or both are controlled by the same person or persons. The actual provision is compared to the arm’s length provision (that is to say the provision that would have been made between independent enterprises) and, if the actual provision confers a potential United Kingdom tax advantage, the taxable profits of the person receiving that tax advantage are adjusted to what they would have been if the persons had been at arm’s length.

298.     This basic rule is also applied where “provision” is made between the ring-fence trade of an oil company and other activities carried on by the same company.

299.     The Part also provides for claims and adjustments to be made between a person whose profits are increased as a result of a non-arm’s length transaction and a person whose profits have been reduced. These either eliminate double counting of profits or restore the cash position of the companies involved to its original state.

300.     The Part rewrites Schedule 28AA to ICTA (provision not at arm’s length) and sections 110 and 111 of FA 1998 (notice to potential claimants, and determinations requiring the sanction of the Commissioners for HMRC).

301.     Schedule 28AA was inserted into ICTA by section 108 of and Schedule 16 to FA 1998, replacing the transfer pricing legislation in sections 770 to 773 of ICTA. Schedule 28AA was then substantially amended by FA 2004 and F(No 2)A 2005.

302.     Chapter 1 gives the basic transfer-pricing rule and Chapter 2 gives the meaning of important terms used in that Chapter.

303.     Chapter 3 gives the exemptions from the basic rule.

304.     Chapters 4 and 5 deal with claims to prevent double taxation following an uplift in profits and Chapter 6 with balancing payments made by the disadvantaged to the advantaged person.

305.     Chapter 7 deals with oil-related matters and finally Chapter 8 contains supplementary provisions and definitions.

 
previous Section Bill Home page continue
 
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries ordering index

© Parliamentary copyright 2009
Prepared: 19 November 2009