Taxation (International and Other Provisions) Bill

House of Commons

Session 2009 - 10
Internet Publications
Other Bills before Parliament

Taxation (International and Other Provisions) Bill

Taxation (International and Other Provisions) Bill
Part 2 — Double taxation relief
Chapter 2 — Double taxation relief by way of credit
25

Limit on credit against corporation tax
42
Amount of limit
(1)
Subsection (2) is about the amount of credit allowed under section 18(2) against
corporation tax to which a company is liable in respect of any income or
chargeable gain.
5
(2)
The credit must not exceed—


where—
R is the rate of corporation tax payable by the company, before any credit
under this Part, on the company’s income or chargeable gains for the
accounting period in which the income arises or the gain accrues, and
10
IG is the amount of the income or gain (but see subsection (3)).
(3)
For the purposes of applying subsection (2), IG is reduced (or extinguished) by
any amount allocated to it under—
section 52(2) (general deductions),
section 53(2) (earlier years’ deficits on loan relationships),
15
section 54(2) or (4) (debits on loan relationships),
section 55(5) (current year’s deficits on loan relationships), or
section 56(2) (debits on intangible fixed assets).
(4)
Subsection (2) is to be read with—
section 43, which, if the company has a permanent establishment outside
20
the United Kingdom, is about attributing profits to the establishment
for the purposes of applying subsection (2),
sections 44 to 49, which modify how subsection (2) applies in connection
with allowing credit against tax on trade income (as defined in section
44), and
25
sections 50 and 51, which require subsection (2) to be applied as if
corporation tax were charged in a modified way on profits of the
company for the period from loan relationships and intangible fixed
assets.
43
Profits attributable to permanent establishment for purposes of section 42(2)
30
(1)
The permanent-establishment provisions apply with the necessary
modifications in determining for the purposes of section 42(2) how much of a
UK resident company’s chargeable profits is attributable to a permanent
establishment of the company outside the United Kingdom.
(2)
In subsection (1)—
35
“chargeable profits” means profits on which corporation tax is chargeable,
and
“the permanent-establishment provisions” means—
(a)
Chapter 4 of Part 2 of CTA 2009 (profits attributable to
permanent establishment), and
40
(b)
any regulations made under section 24 of CTA 2009 (application
to insurance companies).

Taxation (International and Other Provisions) Bill
Part 2 — Double taxation relief
Chapter 2 — Double taxation relief by way of credit
26

44
Credit against tax on trade income
(1)
Apply section 42(2) in accordance with subsections (2) and (3) if the tax against
which the credit is to be allowed is corporation tax on income that is trade
income.
(2)
The amount of the credit must not exceed the corporation tax attributable to the
5
income arising out of the transaction, arrangement or asset in connection with
which the credit arises.
(3)
In calculating the amount of corporation tax attributable to any income, take
into account—
(a)
deductions which would be allowed in calculating the company’s
10
liability, and
(b)
expenses of a company connected with the company, so far as
reasonably attributable to the income,

but see section 49 (restriction if company is a bank or is connected with a bank).
(4)
In subsection (3)(a) “deductions” includes a just and reasonable apportionment
15
of deductions that relate—
(a)
partly to the transaction, arrangement or asset from which the income
arises, and
(b)
partly to other matters.
(5)
Section 1122 of CTA 2010 (meaning of “connected”) applies for the purposes of
20
subsection (3)(b).
(6)
In this section “trade income” means—
(a)
income chargeable to tax under Chapter 2 or 15 of Part 3 of CTA 2009
(trade profits and post-cessation receipts),
(b)
income chargeable to tax under Chapter 3 or 9 of Part 4 of CTA 2009
25
(profits of property businesses and post-cessation receipts),
(c)
income which arises from a source outside the United Kingdom and is
chargeable to tax under section 979 of CTA 2009 (charge to tax on
income not otherwise charged), and
(d)
any other income or profits which by a provision of ICTA is or are—
30
(i)
chargeable to tax under Chapter 2 of Part 3 of CTA 2009, or
(ii)
calculated in the same way as the profits of a trade,

but does not include income to which section 99 of this Act (insurance
companies) applies.
(7)
In subsection (6) the references—
35
(a)
to income chargeable under Chapter 15 of Part 3 of CTA 2009, and
(b)
to income chargeable under Chapter 9 of Part 4 of CTA 2009,

do not include income that would, but for the repeal by CTA 2009 of section
103 of ICTA (post-cessation receipts where pre-cessation profits calculated on
an earnings basis and other post-cessation receipts that become due or are
40
ascertained after cessation), have been chargeable to corporation tax under that
section.
45
Credit against tax on trade income: anti-avoidance rules
(1)
If a company (“A”) carrying on a trade giving rise to trade income enters into
a scheme or arrangement with another person (“B”) a main purpose of which
45
is to alter the effect of section 44(2) and (3) in relation to A, income received in

Taxation (International and Other Provisions) Bill
Part 2 — Double taxation relief
Chapter 2 — Double taxation relief by way of credit
27

pursuance of the scheme or arrangement is to be treated for the purposes of
section 44(2) and (3) as trade income of B (and not as income of A).
(2)
Income of a person (“D”) is to be treated for the purposes of section 44 as trade
income (if it is not otherwise trade income) of D if—
(a)
the income is received by D as part of a scheme or arrangement entered
5
into by D and a connected person (“C”),
(b)
had C received the income, it would be reasonable to assume that it
would be trade income of C, and
(c)
a main purpose of the scheme or arrangement is to produce the result
that section 44(2) and (3) will not have effect in relation to the income
10
because it is received by D.
(3)
For the purposes of subsection (2)(b) it is to be assumed that, in the case of any
relevant transaction to which a relevant person is a party, C were that party to
the transaction.
(4)
In subsection (3)—
15
“relevant person” means—
(a)
D, or
(b)
any other connected person who is a party to the scheme or
arrangement mentioned in subsection (2), and
“relevant transaction” means any of the transactions giving rise to the
20
income mentioned in subsection (2)(b).
(5)
In subsections (2) to (4) “connected person” means a person with whom D is
connected.
(6)
Section 1122 of CTA 2010 (meaning of “connected”) applies for the purposes of
subsection (5).
25
(7)
In this section “trade income” has the same meaning as in section 44.
46
Applying section 44(2): asset in hedging relationship with derivative contract
(1)
If an asset is in a hedging relationship with a derivative contract, section 44(2)
applies in relation to the asset as if the income arising from the asset is the
income arising from the asset and the contract taken together, subject to
30
subsection (2).
(2)
Take account of the income or loss from the derivative contract only so far as
reasonably attributable to the hedging relationship.
(3)
For the purposes of subsection (1), an asset is in a hedging relationship with a
derivative contract if—
35
(a)
the asset is acquired as a hedge of risk in connection with the contract,
or
(b)
the contract is entered into as a hedge of risk in connection with the
asset.
(4)
If an asset or a contract is wholly or partly designated as a hedge for the
40
purposes of a person’s accounts, that is conclusive for the purposes of
subsection (3).

Taxation (International and Other Provisions) Bill
Part 2 — Double taxation relief
Chapter 2 — Double taxation relief by way of credit
28

47
Applying section 44(2): royalty income
(1)
Subsection (2) applies if—
(a)
the arrangements are double taxation arrangements, and
(b)
royalties, as defined in the arrangements, are paid in respect of an asset
in more than one foreign jurisdiction.
5
(2)
For the purposes of section 44(2)—
(a)
royalty income arising in more than one foreign jurisdiction in an
accounting period in respect of the asset is to be treated as income
arising from a single asset, and
(b)
credits available for foreign tax in respect of the royalty income are to
10
be aggregated accordingly.
(3)
In this section “foreign jurisdiction” means a jurisdiction outside the United
Kingdom.
48
Applying section 44(2): “portfolio” of transactions, arrangements or assets
(1)
Subsection (5) applies if each of conditions A to C is met.
15
(2)
Condition A is that transactions, arrangements or assets are treated by a
taxpayer as a series or group (“the portfolio”).
(3)
Condition B is that credits for foreign tax arise in respect of the portfolio.
(4)
Condition C is that—
(a)
it is not reasonably practicable to prepare a separate calculation of
20
income for the purposes of section 44(2) in respect of each transaction,
arrangement or asset, or
(b)
a separate calculation of income in respect of each transaction,
arrangement or asset for the purposes of section 44(2) would not,
compared with an aggregated calculation, make a material difference
25
to the amount of credit for foreign tax which is allowable.
(5)
The income arising from the portfolio, or part of the portfolio, may be
aggregated and apportioned for the purposes of section 44(2) in a just and
reasonable manner.
49
Restricting section 44(3) if company is a bank or connected with a bank
30
(1)
Section 44(3) is subject to subsection (2) of this section if—
(a)
the company is a bank or is connected with a bank, and
(b)
the amount of the included funding costs is significantly less than the
amount of the notional funding costs.
(2)
The amount of the notional funding costs is to be included in the amount to be
35
taken into account under section 44(3), but only so far as it exceeds the amount
of the included funding costs.
(3)
In this section—
“the company” means the company mentioned in section 44(3)(a),
“included funding costs” means the total of the funding costs that are—
40
(a)
incurred by the company, or any company connected with the
company, in respect of capital used to fund the relevant
transaction, and

Taxation (International and Other Provisions) Bill
Part 2 — Double taxation relief
Chapter 2 — Double taxation relief by way of credit
29

(b)
included in the amount to be taken into account under section
44(3) before the application of subsection (2) of this section,
“notional funding costs” means the funding costs that the relevant bank
would incur (on the basis of its average funding costs) in respect of the
capital that would be needed to wholly fund the relevant transaction if
5
that transaction were funded in that way,
“the relevant bank” means the bank that is the company, or with which
the company is connected, and
“the relevant transaction” means the transaction, arrangement or asset
from which the income mentioned in section 44(1) arises.
10
(4)
The following provisions apply for the purposes of this section—
section 1120 of CTA 2010 (meaning of “bank”), and
section 1122 of CTA 2010 (meaning of “connected”).
Calculating tax for purposes of section 42(2)
50
Tax for period on loan relationships
15
(1)
Subsection (2) applies for the purposes of section 42(2) if the company has at
least one non-trading credit for the period that is eligible for double taxation
relief.
(2)
Assume that the charge to corporation tax on income, as applied by section 299
of CTA 2009, is charged on TNTC, not on the non-trading profits that the
20
company has for the period in respect of its loan relationships.
(3)
For the purposes of subsection (1), a non-trading credit relating to an item is
“eligible for double taxation relief” if there is in respect of that item an amount
of foreign tax for which, under the arrangements, credit is allowable against
United Kingdom tax calculated by reference to that item.
25
(4)
In this section—
“non-trading credit” means a non-trading credit for the purposes of Part
5 of CTA 2009 (loan relationships), and
“TNTC” is the total amount of the company’s non-trading credits for the
period.
30
51
Tax for period on intangible fixed assets
(1)
Subsection (2) applies for the purposes of section 42(2) if the company has at
least one non-trading credit for the period that is eligible for double taxation
relief.
(2)
Assume that the charge to corporation tax on income, as applied by section 752
35
of CTA 2009, is charged on TNTC, not on the non-trading gains arising to the
company in the period on intangible fixed assets.
(3)
For the purposes of subsection (1), a non-trading credit relating to an item is
“eligible for double taxation relief” if there is in respect of that item an amount
of foreign tax for which, under the arrangements, credit is allowable against
40
United Kingdom tax calculated by reference to that item.
(4)
In this section—
“non-trading credit” means a non-trading credit for the purposes of Part 8

Taxation (International and Other Provisions) Bill
Part 2 — Double taxation relief
Chapter 2 — Double taxation relief by way of credit
30

of CTA 2009 (intangible fixed assets), and
“TNTC” is the total amount of the company’s non-trading credits for the
period.
Allocation of deductions etc to profits for purposes of section 42
52
General deductions
5
(1)
Subsection (2) applies for the purposes of section 42 if in the accounting period
there is any amount (“the deduction”) that for corporation tax purposes is
deductible from, or otherwise allowable against, profits of more than one
description.
(2)
The company may allocate the deduction in such amounts, and to such of its
10
profits for the period, as it thinks fit.
53
Earlier years’ non-trading deficits on loan relationships
(1)
Subsection (2) applies for the purposes of section 42 if an amount (“the deficit”)
is carried forward to the period under section 457(1) of CTA 2009 (non-trading
deficits on loan relationships set against profits of subsequent years).
15
(2)
The deficit can be allocated only to the company’s non-trading profits for the
period, but the company may allocate the deficit to such of those profits, and
in such amounts, as the company thinks fit.
(3)
In this section “non-trading profits” has the meaning given by section 457(5) of
CTA 2009.
20
54
Non-trading debits on loan relationships
(1)
Subsection (2) applies for the purposes of section 42 if the company has at least
one non-trading credit for the period that is eligible for double taxation relief.
(2)
That much of the company’s non-trading debits for the period as is given by
the formula—

25

may be allocated by the company to such of its profits for the period, and in
such amounts, as the company thinks fit, but this is subject to subsection (4).
(3)
Subsection (4) applies for the purposes of section 42 if—
(a)
the company has at least one non-trading credit for the period that is
eligible for double taxation relief, and
30
(b)
the company sets the whole or part of XS against profits of the period
in pursuance of a current-year provision or claim.
(4)
So much of the company’s non-trading debits as is equal to that amount of XS
must be allocated to the profits against which that amount of XS is set in
pursuance of the current-year provision or claim.
35
(5)
In this section, if the company has a non-trading deficit (“D”) on its loan
relationships for the period—
CB is so much of D as is the subject of a carry-back claim,
CF is so much of D as is carried forward to a subsequent accounting
period in accordance with a carry-forward provision,
40

Taxation (International and Other Provisions) Bill
Part 2 — Double taxation relief
Chapter 2 — Double taxation relief by way of credit
31

GR is so much of D as is surrendered as group relief under section 99 of
CTA 2010, and
if

then XS is so much of D as is given by the formula—

(6)
For the purposes of subsections (1) and (3), a non-trading credit relating to an
5
item is “eligible for double taxation relief” if there is in respect of that item an
amount of foreign tax for which, under the arrangements, credit is allowable
against United Kingdom tax calculated by reference to that item.
(7)
In this section—
“carry-back claim” means a claim—
10
(a)
under section 389(1) of CTA 2009 (insurance companies: carry-
back, to earlier accounting periods, of non-trading deficit on
loan relationships), or
(b)
under section 459(1)(b) of CTA 2009 (carry-back: other
companies),
15
“carry-forward provision” means—
(a)
section 391 of CTA 2009 (insurance companies), or
(b)
section 457(1) of CTA 2009 (other companies),
“current-year provision or claim” means—
(a)
section 388(1) of CTA 2009 (insurance companies: non-trading
20
deficit on loan relationships set against current year’s profits),
or
(b)
a claim under section 459(1)(a) of CTA 2009 (other companies:
setting of deficit against current year’s profits),
“non-trading credit” means a non-trading credit for the purposes of Part
25
5 of CTA 2009 (loan relationships),
“non-trading debit” means a non-trading debit for the purposes of that
Part, and
“TNTD” is the total amount of the company’s non-trading debits for the
period.
30
55
Current year’s non-trading deficits on loan relationships
(1)
Subsection (5) applies for the purposes of section 42 if conditions A and B are
met.
(2)
Condition A is that the company—
(a)
has no non-trading credits for the period, or
35
(b)
has non-trading credits for the period but none of those credits is
eligible for double taxation relief.
(3)
For the purposes of subsection (2)(b), a non-trading credit relating to an item is
“eligible for double taxation relief” if there is in respect of that item an amount
of foreign tax for which, under the arrangements, credit is allowable against
40
United Kingdom tax calculated by reference to that item.
(4)
Condition B is that an amount (“the deficit”) is set against any of the company’s
profits for the period—
(a)
under section 388(1) of CTA 2009 (insurance company’s non-trading
deficit on loan relationships set against current year’s profits), or
45