Finance (No. 3) Bill

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