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

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Chapter 9: “Available amount”

Overview

613.     This Chapter deals with the computation of the “available amount”, which in broad terms is the external gross finance expense of the worldwide group of companies. This Chapter sets out the basic rules for computing that amount and provides for the external financing expense arising from certain activities to be disregarded in the calculation.

Clause 332: The available amount

614.     This clause provides that the “available amount” for a period of account of the worldwide group is derived from amounts disclosed in the group’s income statement for that period. It is based on paragraph 73 of Schedule 15 to FA 2009.

Clause 333: Group members with income from oil extraction subject to particular tax treatment in UK

615.     This clause excludes from the available amount financing costs arising from oil extraction activities. It is based on paragraph 74 of Schedule 15 to FA 2009.

Clause 334: Group members with income from shipping subject to particular tax treatment in UK

616.     This clause excludes from the available amount financing costs relating to profits which are dealt with under the tonnage tax regime. It is based on paragraph 75 of Schedule 15 to FA 2009.

Clause 335: Group members with income from property rental subject to particular tax treatment in UK

617.     This clause excludes from the available amount financing costs relating to profits exempted from corporation tax by virtue of the special rules applying to real estate investment trusts. It is based on paragraph 76 of Schedule 15 to FA 2009.

Clause 336: Meaning of accounting expressions used in this Chapter

618.     This clause confirms that in the absence of any contrary provision, expressions used in this Chapter have the meaning given by international accounting standards. It is based on paragraph 77 of Schedule 15 to FA 2009.

Chapter 10: Other interpretative provisions

Overview

619.     This Chapter defines a number of terms used in the Part.

Clause 337: The worldwide group

620.     This clause defines “the worldwide group” for the purposes of this Part as any group of entities that is “large” (defined in clause 344). It is based on paragraph 78 of Schedule 15 to FA 2009.

Clause 338: Meaning of “group”

621.     This clause provides that the term “group” for the purposes of this Part takes it meaning from international accounting standards, thus establishing that “the worldwide group” defined in clause 337 will, in the majority of cases, be the group of companies whose results are included in the consolidated accounts of the group headed by the ultimate parent. It is based on paragraph 79 of Schedule 15 to FA 2009.

Clause 339: Meaning of “ultimate parent”

622.     This clause defines “ultimate parent” for the purposes of this Part and is based on paragraph 80 of Schedule 15 to FA 2009.

Clause 340: Meaning of “corporate entity”

623.     This clause defines “corporate entity” for the purposes of this Part and is based on paragraph 81 of Schedule 15 to FA 2009.

Clause 341: Meaning of “relevant non-corporate entity”

624.     This clause defines “relevant non-corporate entity” for the purposes of this Part and is based on paragraph 82 of Schedule 15 to FA 2009.

Clause 342: Treatment of entities stapled to corporate, or relevant non-corporate, entities

625.     This clause provides that where interests in a corporate or relevant non-corporate entity are stapled to another entity they will be treated as a single corporate or non-corporate entity for the purposes of the Part, thus providing that the stapled entities and their respective subsidiaries will together be treated as one worldwide group. The clause is based on paragraph 83 of Schedule 15 to FA 2009.

Clause 343: Treatment of business combinations

626.     This clause treats entities as one corporate entity for the purposes of the Part if international accounting standards treat them as a single economic entity by reason of being a business combination achieved by contract. It is based on paragraph 84 of Schedule 15 to FA 2009.

Clause 344: Meaning of “large” in relation to a group

627.     This clause defines large groups by excluding micro, small and medium-sized enterprises as defined in the Annex to European Commission Recommendation 2003/361/EC of 6 May 2003. It is based on paragraph 85 of Schedule 15 to FA 2009.

Clause 345: Meaning of “UK group company” and “relevant group company”

628.     This clause defines “UK group company” and “relevant group company” for the purposes of this Part and is based on paragraph 86 of Schedule 15 to FA 2009.

Clause 346: Financial statements of the worldwide group

629.     This clause explains which consolidated financial statements of the worldwide group are to be used in applying this Part. It is based on paragraph 87 of Schedule 15 to FA 2009.

Clause 347: Non-compliant financial statements of the worldwide group

630.     This clause provides that where a group has not prepared consolidated financial statements of the worldwide group in accordance with acceptable accounting standards, the Part applies as if the group had prepared consolidated financial statements for the period in accordance with international accounting standards. It is based on paragraph 88 of Schedule 15 to FA 2009.

Clause 348: Non-existent financial statements of the worldwide group

631.     This clause provides that where consolidated financial statements of an ultimate parent and its subsidiaries are not prepared, the Part will apply as if financial statements had been drawn up under international accounting standards. It is based on paragraph 89 of Schedule 15 to FA 2009.

Clause 349: References to amounts disclosed in financial statements

632.     This clause sets out what is meant by “amounts disclosed in financial statements”. It is based on paragraph 90 of Schedule 15 to FA 2009.

Clause 350: Translation of amounts disclosed in financial statements

633.     This clause provides that amounts disclosed in financial statements for a period which are expressed in a currency other than sterling must be converted at the average rate of exchange for that period. It is based on paragraph 91 of Schedule 15 to FA 2009.

Clause 351: Expressions taking their meaning from international accounting standards

634.     This clause provides for specified terms within the Part to take their meaning for the purposes of the Part from the definition given to them, for the time being, by international accounting standards. It is based on paragraph 92 of Schedule 15 to FA 2009.

Clause 352: Meaning of “relevant accounting period”

635.     This clause defines a “relevant accounting period” for the purposes of this Part. It is based on paragraph 93 of Schedule 15 to FA 2009.

Clause 353: Other expressions

636.     This clause defines various terms for the purposes of this Part. It is based on paragraph 94 of Schedule 15 to FA 2009.

Part 8: Offshore funds

Overview

637.     This Part deals with the tax treatment of participants in offshore funds.

Clause 354: Power to make regulations about tax treatment of participants

638.     This clause enables the Treasury to make regulations governing the tax treatment of participants in offshore funds. It is based on sections 41 and 42 of FA 2008.

Clause 355: Meaning of “offshore fund”

639.     This clause sets out the main definition of the expression “offshore fund”. It is based on section 40A of FA 2008.

640.     The definition is in turn dependent on the definition of “mutual fund” to be found in clause 356.

641.     Subsection (3) defines “co-ownership” for the purposes of the section. The meaning is not restricted to the definition of the term in the law of any part of the United Kingdom. It takes its meaning from the law of the territory in which the arrangements take effect.

Clause 356: Meaning of “mutual fund”

642.     This clause defines “mutual fund”. It is based on sections 40B and 42A(2) of FA 2008.

643.     To qualify as a mutual fund arrangements must meet conditions A, B and C.

644.     Condition C requires that an investor in the arrangements would expect to be able to realise the investment on a basis calculated entirely, or almost entirely, by reference to net asset value (“NAV”) or by reference to an index of any description.

Clause 357: Exceptions to definition of “mutual fund”

645.     This clause provides some exceptions to the definition of “mutual fund” set out in clause 356. It is based on section 40E of FA 2008.

646.     Arrangements are not a mutual fund if condition D is met and either condition E or condition F is also met.

647.     Condition D qualifies condition C in clause 356. An investor in a company would normally only reasonably expect to be able to realise NAV on the liquidation of the company. So condition D potentially excludes from the mutual fund definition any case where a reasonable investor would only be able to realise the investment in arrangements in the event of a winding-up, dissolution or termination of the arrangements.

648.     Condition E is that the arrangements are not designed to terminate on a fixed date.

649.     Condition F comprises three parts.

  • The first is that the arrangements are designed to terminate on a fixed date.

  • The second is that subsection (5), (6) or (7) applies.

    • —     Subsection (5) applies if none of the assets are chargeable income-producing assets.

    • —     Subsection (6) applies if the participants in the arrangements have no entitlement to benefit from the income arising on the assets that are the subject of the arrangements.

    • —     Subsection (7) applies if all of the income arising is required to be paid or credited to participants in such a manner that a UK resident individual would be charged to income tax on the amounts paid or credited.

  • The third is that the arrangements are designed to produce a return that is, in substance, equivalent to interest.

Clause 358: Meaning of “relevant income-producing asset”

650.     This clause defines “relevant income-producing asset” for the purposes of clause 357. It is based on section 40F of FA 2008.

Clause 359: Power to make regulations about exceptions to definition of “mutual fund”

651.     This clause allows the Treasury to amend or repeal any provision of clause 357 or clause 358 by regulation. It is based on sections 40G and 42A(2) of FA 2008.

Clause 360: Treatment of umbrella arrangements

652.     This clause sets out the treatment of umbrella arrangements (as defined in clause 363). It is based on section 40A(1) and 40C(1) of FA 2008.

653.     Subsection (2) provides that where there are such arrangements, each separate part (usually known as a “sub-fund”) is to be treated as a separate arrangement and the overall arrangements are disregarded. In such a case the overall arrangements themselves do not constitute a mutual fund or an offshore fund.

Clause 361: Treatment of arrangements comprising more than one class of interest

654.     This clause sets out the treatment of arrangements where there is more than one class of interest. It is based on sections 40A(1) and 40D of FA 2008.

655.     Each class of arrangements is looked at separately for the purposes of determining whether the arrangements constitute a mutual fund, and the main arrangements are disregarded.

Clause 362: Meaning of “participant” and “participation”

656.     This clause defines “participant” and “participation”. It is based on section 40A(5) of FA 2008.

Clause 363: Meaning of “umbrella arrangements” and “part of umbrella arrangements”

657.     This clause defines “umbrella arrangements” and “part of umbrella arrangements”. It is based on section 40C(2) and (3) of FA 2008.

Part 9: Amendments to relocate provisions of tax legislation

Overview

658.     This Part contains clauses introducing Schedules which relocate various provisions of tax legislation.

Clause 364: Oil activities

659.     This clause introduces Schedule 1 (oil activities: new Chapter 16A of Part 2 of ITTOIA). See the commentary on that Schedule.

Clause 365: Alternative finance arrangements

660.     This clause introduces Schedule 2 which inserts new sections into ITA and TCGA dealing with the income tax and capital gains tax rules for alternative finance arrangements. See the commentary on that Schedule.

Clause 366: Power to amend the alternative finance provisions

661.     This clause provides a regulatory power to amend the legislation about alternative finance arrangements including power to extend it to cover other forms of alternative finance that may be developed in the future. It is based on section 98(1), (1A), (2), (4) and (6) of FA 2006 and sections 521 and 1310(4) and (5) of CTA 2009.

662.     The clause provides a regulatory power for income tax, corporation tax and capital gains tax. The single power is clearer in its scope than would be the case with separate powers. Section 521 of CTA 2009 is repealed and the specific procedural rules relevant to this power, currently in section 1310(5) of CTA 2009, are brought into this clause.

Clause 367: Leasing arrangements: finance leases and loans

663.     This clause introduces Schedule 3 which inserts new Part 11A of ITA and new section 37A of TCGA. See the commentary on that Schedule.

Clause 368: Sale and lease-back etc

664.     This clause introduces Schedule 4 which inserts new Part 12A of ITA. See the commentary on that Schedule.

Clause 369: Factoring of income etc

665.     This clause introduces Schedule 5 which inserts new Chapters 5B and 5C of Part 13 of ITA. See the commentary on that Schedule.

Clause 370: UK representatives of non-UK residents

666.     This clause introduces Schedule 6 which inserts new Chapters 2B and 2C of Part 14 of ITA and new Part 7A of TCGA. See the commentary on that Schedule.

Clause 371: Miscellaneous relocations

667.     This clause introduces Schedule 7 which makes amendments to relocate some miscellaneous tax enactments. See the commentary on that Schedule.

Part 10: General provisions

Overview

668.     This Part contains general provisions.

Clause 372: Orders and regulations

669.     This clause rewrites the procedural provisions which are to apply in relation to the making of orders and regulations under powers rewritten in the clauses of this Bill. Also, it provides for the negative procedure to apply, in the House of Commons only, to instruments containing orders under clauses 375 and 376 (powers to make consequential provision, or to undo changes). It is based on section 828(1), (3) and (4) of ICTA, section 98(3) and (5) of FA 2006, section 42A(1) and (3) of FA 2008 and section 1310(1) to (3) and (5) of CTA 2009.

670.     Subsection (3) lists the powers to which, exceptionally, the negative procedure is not to apply. Regulations under clause 7 and orders under clause 377(2) are mentioned because no parliamentary procedure applies to them. Regulations under clauses 354(1) and 359(2) are mentioned in order to give a choice between the negative and affirmative procedures.

671.     Subsection (3)(d) refers to cases where other parliamentary procedure is expressly provided for. This refers to Orders in Council under clause 2, to regulations under clauses 173, 321(4), 356(7) and 359(1), to orders under clauses 261(3), 262(5) and 331(2) and to some orders under clause 366. In these listed cases, express provision is made for the affirmative procedure to apply, in the House of Commons only.

672.     The clause needs to be read with the amendments which are made by Part 13 of Schedule 8 to this Bill for the purpose of ensuring that the clause does not overlap the procedural rules in section 287 of TCGA and section 1014 of ITA. Clause 1171 of CTB2 contains provision to ensure that there is no overlap between the two clauses.

Clause 373: Abbreviated references to Acts

673.     This clause provides details of abbreviations used in this Bill.

Clause 374: Minor and consequential amendments

674.     This clause introduces Schedule 8.

Clause 375: Power to make consequential provision

675.     This clause provides a power for the Treasury to make by order consequential amendments additional to those contained in Schedule 8. It is new.

676.     The power is in substance the same as that in section 1323 of CTA 2009. As with that power, it will not be exercised without the agreement of the Tax Law Rewrite Project’s Consultative and Steering Committees to the proposed modifications.

677.     Subsection (2) provides that the power may not be used after 31 March 2013. It is sensible to enable additional consequential amendments to be made in this way only over a limited period, and it would in any case become progressively more difficult to do so accurately as subsequent Finance Bills are enacted. The date of 31 March 2013 takes account of this while giving a reasonable amount of time for missed consequential amendments to come to light.

678.     Subsection (4) provides that the power may be used to make provision having retrospective effect. Whether that would be appropriate would need to be considered on a case-by-case basis. As the power can be used only to make provision in consequence of this Act, any retrospective effect is limited to provision having effect from the date the Act comes into force.

Clause 376: Power to undo changes

679.     This clause provides a power for the Treasury to undo changes in the law made by the Bill for the purpose of restoring the effect of the law to what it was immediately before 1 April 2010. It is new. A corresponding provision is in section 1324 of CTA 2009.

680.     The power will not be exercised without the agreement of the Tax Law Rewrite Project’s Consultative and Steering Committees to the proposed modifications. It will make it possible for any errors made in rewriting the source legislation, or in making consequential amendments, to be corrected without recourse to a Finance Bill.

681.     Subsection (2) provides that the power may not be exercised after 31 March 2013. As with section 1324 of CTA 2009, it is considered sensible to time-limit the power in this way, especially as successive Finance Acts may make it progressively more difficult to make such amendments. The time limit will provide a reasonable period for missed consequential amendments to come to light.

682.     Subsection (4) provides that the power may be used to make provision having retrospective effect. Whether that would be appropriate would need to be considered on a case-by-case basis.

Clause 377: Transitional provisions and savings

683.     This clause introduces Schedule 9 and provides for the Treasury to make transitional or savings provisions additional to those contained within the Schedule. It is new. A corresponding provision is in section 1325 of CTA 2009.

684.     The power will not be exercised without the agreement of the Tax Law Rewrite Project’s Consultative and Steering Committees.

685.     Subsection (3) provides that the power may be used to make provision having retrospective effect.

Clause 378: Repeals and revocations

686.     This clause introduces Schedule 10.

Clause 379: Index of defined expressions

687.     This clause introduces Schedule 11.

Clause 380: Extent

688.     This clause provides for the Bill to form part of the law of each part of the United Kingdom.

Clause 381: Commencement

689.     This clause provides for the commencement of the Bill.

Clause 382: Short title

690.     This clause specifies the short title for the Bill.

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

Overview

691.     This Schedule contains provisions relating to the income tax charge on profits from oil extraction and related activities. It rewrites Chapter 5 of Part 12 of ICTA and sections 62 to 65 of FA 1991 by inserting the rules for income tax into ITTOIA after section 225 of that Act.

692.     The provisions are inserted at this point because they are, in essence, variations of the general rules relating to trading income in Part 2 of ITTOIA. The starting point is that all normal trading income rules apply unless they are modified by a provision of this Chapter.

693.     Some parts of the source legislation apply only for corporation tax - for example, the ring fence expenditure supplement - and are therefore not reproduced for income tax. There is, therefore, no income tax equivalent of the following clauses in CTB2: 271, 276, 280, 286 to 288, and 299 to 332. Section 492(2) of ICTA (restriction of relief for trading losses) was rewritten for income tax purposes in section 80 of ITA.

694.     A number of PRT definitions are used in the income tax rules, and some parts of the legislation depend on calculations made for PRT purposes. In particular the legislation uses the PRT term “participator” (see section 12(1) of OTA 1975). The legislation for PRT is not itself being rewritten.

695.     The rewritten definitions of “exploration and exploitation activities”, “exploration and exploitation rights” and “designated area” are in section 874 of ITTOIA. The extension of the United Kingdom to its territorial sea for the purposes of income tax is in section 1013 of ITA.

696.     Oil is used as a shorthand throughout the commentary on these new sections, but unless specifically mentioned the same rules and considerations apply to gas and other associated products.

 
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Prepared: 19 November 2009