Session 2010 - 11
Internet Publications
Other Bills before Parliament

Finance (No. 3) Bill


Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009

196

 

has been used for the purposes of the business carried on by the

company through the permanent establishment in the territory (to

such extent as is appropriate having regard to the extent to which it

has been so used); and the references to losses in section 18A(7) are

to be construed accordingly.

5

(3)   

The references in section 18A(6) to profits which would be taken, in

the case of a company in relation to which an election under section

18A has effect, to be attributable to the permanent establishment of

the company in a territory (including as extended by subsection (2))

do not include any gains which would be taken to be so attributable

10

for the purposes of ascertaining credit to be allowed in respect of tax

payable under the law of the territory before the election has effect;

and the references to losses in section 18A(7) are to be construed

accordingly.

18C     

 Capital allowances etc

15

(1)   

Any allowance under Part 2 of CAA 2001 which, but for section 18A

and for section 15(2A)(b) of CAA 2001, could be claimed under

section 3(1) of that Act in respect of assets provided for the purposes

of a permanent establishment in a territory outside the United

Kingdom through which business is or has been carried on by a

20

company in relation to which an election under section 18A has effect

(and any charge in connection with any such allowance) is to be

made automatically and reflected in any calculation for any relevant

accounting period of the company of the profits or losses attributable

to business carried on by the company through such a permanent

25

establishment.

(2)   

In the application of section 13 of CAA 2001 by virtue of subsection

(1) on the taking effect of the election under section 18A, references

to “market value” have effect as references to “transition value”

within the meaning of section 62A of that Act in relation to any plant

30

or machinery in the case of which that is the disposal value under

section 61 of that Act.

(3)   

In determining any relevant profits amount or relevant losses

amount under section 18A(6) or (7) in relation to a company there are

to be left out of account any profits or losses arising from a plant or

35

machinery lease under which the company is a lessor if an allowance

under CAA 2001 has been made to the company or a connected

company in respect of expenditure on the provision of any plant or

machinery subject to the lease (otherwise than in accordance with

this section).

40

(4)   

Section 70K of that Act (meaning of “plant or machinery lease” and

“lessor”) applies for the purposes of subsection (3).

(5)   

In determining for the purposes of section 18A the amount of any

credit to be allowed under TIOPA 2010 in respect of tax under the

law of a relevant foreign territory in the case of a company it is to be

45

assumed that the company made any claim or election (other than a

claim for allowances under Part 2 of CAA 2001) which would reduce

any relevant profits amount, or increase the relevant losses amount,

by any means, and within any time limit, applicable to it.

 
 

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009

197

 

18D     

 Payments subject to deduction

(1)   

In determining any relevant profits amount or relevant losses

amount under section 18A(6) or (7) in relation to a company there are

to be left out of account profits or losses referable to any transaction

between a person who is UK resident and a permanent

5

establishment in a territory outside the United Kingdom through

which the company carries on (or has carried on) business (“the

foreign territory in question”) if the condition in subsection (2) is met.

(2)   

That condition is that the UK resident would be obliged under Part

15 of ITA 2007 to deduct income tax that is not repayable from

10

payments in respect of the transaction if the payments were made to

a company resident in the foreign territory in question (taking

account of any double taxation arrangements having effect in

relation to the foreign territory in question).

(3)   

But subsection (1) does not apply if the company is a bank unless the

15

transaction forms part of arrangements the main purpose, or one of

the main purposes, of which is the avoidance of an obligation under

Part 15 of ITA 2007 to deduct income tax from any payments.

(4)   

Section 1120 of CTA 2010 (meaning of “bank”) applies for the

purposes of subsection (3).

20

18E     

Employee share acquisitions

(1)   

Any relief which would be given under Chapter 2 or 3 of Part 12 is to

be taken into account in determining any relevant profits amount or

relevant losses amount in the case of a company under section 18A(6)

or (7) in relation to a relevant territory in so far as it is linked to the

25

business carried on by the company through a permanent

establishment in the territory.

(2)   

The extent to which any such relief is so linked is to be determined

on a just and reasonable basis having regard to the extent to which

the work of the employees concerned contributes to the purposes of

30

the business so carried on.

18F     

Effect of election

(1)   

An election made by a company under section 18A—

(a)   

(subject to subsection (2)) is irrevocable, and

(b)   

applies to all accounting periods of the company following

35

that in which it is made.

(2)   

The election can be revoked at any time before the first accounting

period of the company for which the election would have effect.

Anti-diversion rule

18G     

Anti-diversion rule

40

(1)   

This section applies for the purposes of this Chapter if the lower level

of tax test is met for any relevant accounting period of a company in

relation to any permanent establishment through which the

company carries on, or has carried on, business in a territory outside

the United Kingdom.

45

 
 

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009

198

 

(2)   

If there is an adjusted relevant profits amount in relation to the

territory for the relevant accounting period, the relevant profits

amount is to be taken to be nil (but this is subject to section 18I).

(3)   

For the purposes of this Chapter “adjusted”, in relation to a relevant

profits amount, is what the relevant profits amount would be if it

5

were determined without reference to gains and losses which are

chargeable gains or allowable losses for the purposes of corporation

tax.

(4)   

The lower level of tax test is met for a relevant accounting period in

relation to a permanent establishment in a territory if—

10

(a)   

the amount of tax paid under the law of that territory in

respect of the adjusted relevant profits amount in accordance

with a relevant treaty provision, is less than

(b)   

75% of the amount of corporation tax that would be payable

in respect of that amount if it were subject in full to

15

corporation tax, ignoring any credit which would be allowed

against it under section 18(3) of TIOPA 2010 and assuming,

where there is more than one rate of corporation tax

applicable to the relevant accounting period, that it were

chargeable at the average rate over the accounting period.

20

(5)   

In subsection (4)(a) “a relevant treaty provision” means—

(a)   

provision in double taxation arrangements having effect in

relation to the territory, or

(b)   

if no double taxation arrangements have effect in relation to

the territory, provision in the terms of the OECD model.

25

(6)   

This section does not apply if—

(a)   

the adjusted relevant profits amount in relation to the

territory for the relevant accounting period would (apart

from subsection (2)) be less than the entry limit (as to which

see subsection (7)), or

30

(b)   

the motive test is met (as to which see section 18H).

(7)   

“The entry limit” is—

(a)   

£200,000, or

(b)   

if the relevant accounting period is less than 12 months, a

proportionately reduced amount.

35

18H     

The motive test

(1)   

The motive test is met if conditions A and B are met.

(2)   

Condition A is that in so far as any relevant transaction, or two or

more transactions at least one of which was a relevant transaction

(taken together), achieved a reduction in United Kingdom tax

40

either—

(a)   

the reduction was minimal, or

(b)   

it was not the main purpose, or one of the main purposes, of

the transaction, or of those transactions taken together, to

achieve the reduction.

45

(3)   

In subsection (2) “relevant transaction” means a transaction the

results of which are reflected in such of the company’s profits in the

 
 

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009

199

 

accounting period as are attributable to the permanent

establishment.

(4)   

For the purposes of subsection (2) a transaction achieves (or

transactions achieve) a reduction in United Kingdom tax if, had the

transaction (or transactions) not been effected, any person—

5

(a)   

would (disregarding section 18G(2)) have been liable for

United Kingdom tax or for a greater amount of United

Kingdom tax, or

(b)   

would (disregarding that provision) not have been entitled to

a relief from, or repayment of, United Kingdom tax or would

10

have been entitled to a smaller relief from, or repayment of,

United Kingdom tax.

(5)   

For the purposes of subsection (2) it is the main purpose, or one of

the main purposes, of a transaction (or of transactions taken

together) to achieve a reduction in United Kingdom tax if that is the

15

main purpose, or one of the main purposes, of—

(a)   

the company, or

(b)   

a person who has an interest in the company at any time

during the relevant accounting period;

   

and section 749B of ICTA (persons who have an interest in a

20

company) applies for the purposes of paragraph (b) as for the

purposes of Chapter 4 of Part 17 of that Act.

(6)   

Condition B is that it was not the main reason, or one of the main

reasons, for the company carrying on business through the

permanent establishment to achieve a reduction in United Kingdom

25

tax by a diversion of profits from the United Kingdom.

(7)   

For the purposes of subsection (6) the fact that the company carries

on the business through the permanent establishment achieves a

reduction in United Kingdom tax by a diversion of profits from the

United Kingdom if it is reasonable to make the supposition in

30

subsection (8).

(8)   

That supposition is that, if the company did not carry on business

through any permanent establishment and there were no related

companies—

(a)   

the whole or a substantial part of the receipts which are

35

reflected in the profits attributable to the permanent

establishment would have been received by the company

otherwise than through the permanent establishment or by

another UK resident company which is a non-electing

company or an individual resident in the United Kingdom,

40

and

(b)   

the company, that other UK resident company, that

individual resident in the United Kingdom or any other

person resident in the United Kingdom either—

(i)   

would (disregarding section 18G(2)) have been liable

45

for United Kingdom tax or for a greater amount of

United Kingdom tax, or

(ii)   

would (disregarding that provision) not have been

entitled to a relief from, or repayment of, United

 
 

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009

200

 

Kingdom tax or would have been entitled to a smaller

relief from, or repayment of, United Kingdom tax.

(9)   

For the purposes of subsection (8) a company is “related” to the

company if—

(a)   

either it is a UK resident company in relation to which an

5

election under section 18A has effect or it is not a UK resident

company,

(b)   

it is connected with, or an associate of, the company, and

(c)   

it fulfils or could fulfil, directly or indirectly, the same

functions as those of the permanent establishment.

10

(10)   

Companies are associates for the purposes of subsection (9) if they

are associated for the purposes of Chapter 4 of Part 19 of CTA 2010

(see section 882).

(11)   

References in subsection (8) to a UK resident company include a

company which it is reasonable to assume would have been

15

established if the permanent establishment did not exist.

(12)   

For the purposes of subsection (8) a UK resident company is a non-

electing company if no election under section 18A has effect in

relation to the company.

(13)   

In this section “United Kingdom tax” means corporation tax, income

20

tax or capital gains tax.

18I     

Proportionate reduction in certain cases

(1)   

This section applies if—

(a)   

condition A in section 18H is not met, but

(b)   

condition B in that section is met.

25

(2)   

If there is an adjusted relevant profits amount in relation to the

territory for the relevant accounting period, section 18G(2) has effect

to cause it to be reduced by only any such amount as it is just and

reasonable to regard as referable to tainted relevant transactions.

(3)   

In subsection (2) “tainted relevant transactions” means relevant

30

transactions which achieve a reduction in United Kingdom tax, other

than any in relation to which the condition in section 18H(2)(b) is

met.

Companies with total opening negative amount

18J     

Companies with total opening negative amount

35

(1)   

The following sections make provision about a company in relation

to which an election under section 18A has effect if there is a total

opening negative amount in the case of the company at the

beginning of the company’s first relevant accounting period.

(2)   

To determine for the purposes of this Chapter whether there is a total

40

opening negative amount at the beginning of the company’s first

relevant accounting period, take the following steps.

   

Step 1

 
 

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009

201

 

   

Take the adjusted foreign permanent establishments amount in

relation to the earliest affected prior accounting period in relation to

which that amount is negative.

   

Step 2

   

Add to the amount arrived at under step 1 the adjusted foreign

5

permanent establishments amount in relation to the next affected

prior accounting period (but not so as to cause the result to exceed

nil).

   

Step 3

   

Add to the amount arrived at under step 2 the adjusted foreign

10

permanent establishments amount in relation to each remaining

affected prior accounting period, starting with the earliest (but not so

as to cause the result to exceed nil).

   

If after the application of the preceding steps there is a negative

amount for the last affected prior accounting period there is a total

15

opening negative amount at the beginning of the company’s first

relevant accounting period of an amount equal to that negative

amount.

(3)   

In subsection (2) “affected prior accounting period” means—

(a)   

the accounting period of the company in which the election

20

under section 18A is made, and

(b)   

any earlier accounting period of the company ending less

than 6 years before the end of that accounting period.

(4)   

For the purposes of subsection (2) the “adjusted” foreign permanent

establishments amount is what the foreign permanent

25

establishments amount would be if it were determined without

reference to gains or losses which are chargeable gains or allowable

losses for the purposes of corporation tax.

18K     

Total opening negative amount: “matching”

(1)   

At the end of each relevant accounting period of the company

30

(starting with the first) the total opening negative amount is to be

reduced (or further reduced) by the amount of any aggregate

relevant profits amount of the company for the accounting period

(but not to below nil).

(2)   

In any relevant accounting period of the company for which there is

35

a reduction under subsection (1), section 18A(1) does not apply in

relation to the aggregate relevant profits amount of the company for

the accounting period.

(3)   

But in the case of the last relevant accounting period of the company

for which there is a reduction under subsection (1), section 18A(1) is

40

disapplied by subsection (2) only in relation to so much of the

aggregate relevant profits amount of the company for the accounting

period as is equal to the total opening negative amount of the

company at the beginning of the accounting period.

(4)   

The company may, in its company tax return for that relevant

45

accounting period, specify to which part of the aggregate relevant

profits amount of the company for the accounting period section

18A(1) is to apply by virtue of subsection (3).

 
 

Finance (No. 3) Bill
Schedule 13 — Profits of foreign permanent establishments etc
Part 1 — Amendments of CTA 2009

202

 

(5)   

In this Chapter “aggregate relevant profits amount”, in relation to an

accounting period, means the aggregate of the relevant profits

amount in the case of each relevant foreign territory in relation to

which there is a relevant profits amount for the accounting period.

(6)   

This section is subject to section 18L.

5

18L     

Streaming

(1)   

If a streaming election has effect in relation to the company sections

18M and 18N apply (instead of section 18K).

(2)   

For the purposes of this section “streaming election” means an

election, made at the same time as the company’s election under

10

section 18A, which—

(a)   

states that sections 18M and 18N are to have effect in relation

to the company (instead of section 18K), and

(b)   

specifies which of the territories that are relevant foreign

territories in relation to the company are to be streamed

15

territories for the purposes of the operation of sections 18M

and 18N in relation to the company.

(3)   

Subject to subsection (4), a streaming election is irrevocable.

(4)   

A streaming election can be revoked at any time before the first

relevant accounting period of the company.

20

(5)   

A streaming election does not have effect unless the company, in the

company tax return for the first relevant accounting period of the

company, specifies how much of the amount eligible to be streamed

to each streamed territory is to constitute for the purposes of sections

18M and 18N the streamed opening negative amount at the

25

beginning of that relevant accounting period.

(6)   

For the purposes of subsection (5) the amount eligible to be streamed

to a territory by the company is the amount that would be the total

opening negative amount of the company at the beginning of the first

relevant accounting period of the company if at all material times the

30

territory were the only relevant foreign territory in relation to the

company.

18M     

Streamed opening negative amounts: “matching”

(1)   

At the end of each relevant accounting period of the company

(starting with the first) the streamed opening negative amount in

35

relation to a territory is to be reduced (or further reduced) by the

amount of any relevant profits amount of the company for the

territory for the accounting period (but not to below nil).

(2)   

In any relevant accounting period of the company for which there is

a reduction under subsection (1) in relation to a territory, section

40

18A(1) does not apply in relation to the relevant profits amount of

the company for the territory for the accounting period.

(3)   

But in the case of the last relevant accounting period of the company

for which there is a reduction under subsection (1) in relation to a

territory, section 18A(1) is disapplied by subsection (2) only in

45

relation to so much of the relevant profits amount of the company for

the territory for the accounting period as is equal to the streamed

 
 

 
previous section contents continue
 

© Parliamentary copyright
Revised 31 March 2011