REV 19
DOUBLE TAXATION RELIEF: ANTI-AVOIDANCE: BOUGHT-IN FOREIGN TAX
Changes announced in the Budget will prevent United Kingdom based
companies using artificial schemes involving overseas companies to
reduce their tax bills. Under these schemes a United Kingdom
company claims credit for foreign tax paid by an unconnected
overseas company to reduce its own United Kingdom corporation tax
liability. The proposal will limit the amount of credit relief
available in such cases. It applies to dividends paid to United
Kingdom companies on or after today.
The revenue yield of this measure is estimated at around Pounds
50 million per year. And it safeguards the Exchequer from a
potentially much greater loss of tax.
The text of the draft clause is attached as an annex to this Press
Release.
DETAILS
1. A United Kingdom company is taxed on dividends which it receives
from an overseas company. Under double taxation agreements or
United Kingdom domestic law it can claim relief for foreign tax
deducted from the dividend. If it controls at least 10 per cent
of the voting power in the overseas company, it can also claim
relief for underlying tax. This is tax which the overseas company
has paid on its profits out of which it pays the dividend.
2. The United Kingdom company can also claim relief for
underlying tax paid by other companies in a chain where the 10 per
cent control test is met at each stage in the chain and dividends
are paid by one company to another.
3. Some United Kingdom based groups have entered into schemes
under which they acquire for a specified period a stream of
highly taxed foreign income (such as dividends paid by a
previously unconnected company out of its highly taxed profits).
This is then mixed with other income on which much less tax, if
any, has been paid. The separate sources of income are used to fund
payment of a dividend to a United Kingdom company. Relief is then
claimed in the United Kingdom for all the underlying tax. The tax
that has been bought-in with the acquired income in effect shelters
from United Kingdom tax the lowly taxed income that has been brought
into the United Kingdom as part of the dividend. The schemes
provide for the United Kingdom company to share the benefit of the
relief given by the United Kingdom Exchequer with the company
from which the stream of highly taxed income was bought.
4. The Inland Revenue have not agreed that the schemes which
they have seen are effective in obtaining relief from United Kingdom
tax. Meanwhile the legislation which is now proposed provides that
relief for underlying tax in respect of dividends paid by an
overseas company to a United Kingdom company on or after today will
be limited where there is a scheme the purpose, or one of the main
purposes, of which is to obtain relief for an amount of underlying
tax.
5. Where the legislation applies, relief for the bought-in foreign
tax will be limited by reference to the rate of corporation tax
payable by the United Kingdom company on the dividend which it
receives.
NOTES FOR EDITORS
This legislation reflects the importance which the
Government attaches to fighting the attempts of the tax
avoidance industry to design schemes which allow the
companies which use them artificially to reduce their tax bills.
Such schemes disadvantage the general body of taxpayers who
must make good the resulting shortfall of tax.
Media enquiries to: 0171 438 6706/6692/7327
(Out of hours: 0860 359544)
Double taxation relief
Restriction of relief for underlying tax.
(1) After section 801 of the Taxes Act 1988 there shall
be inserted the following section-
"Restriction of relief for underlying tax.
801A.- (1) This section applies where-
(a) a company resident in the United Kingdom
(''the United Kingdom company'') makes a claim for
an allowance by way of credit in accordance with
this Part;
(b) the claim relates to underlying tax on a
dividend paid to that company by a company
resident outside the United Kingdom (''the
overseas company'');
(c) that underlying tax is or includes an
amount in respect of tax (''the high rate tax'')
payable by-
(i) the overseas company, or
(ii) such a third, fourth or
successive company as is mentioned in section
801, at a rate in excess of the relievable
rate; and
(d) the whole or any part of the amount in
respect of the high rate tax which is or is
included in the underlying tax would not be, or be
included in, that underlying tax but for the
existence of, or for there having been, an
avoidance scheme.
(2) Where this section applies, the amount of the
credit to which the United Kingdom company is entitled
on the claim shall be determined as if the high rate
tax had been tax at the relievable rate, instead of at
a rate in excess of that rate.
(3) For the purposes of this section tax shall be
taken to be payable at a rate in excess of the
relievable rate if, and to the extent that, the amount
of that tax exceeds the amount that would represent tax
on the relevant profits at the relievable rate.
(4) In subsection (3) above ''the relevant
profits'', in relation to any tax, means the profits of
the overseas company or, as the case may be, of the
third, fourth or successive company which, for the
purposes of this Part, are taken to bear that tax.
(5) In this section ''the relievable rate'' means
the rate of corporation tax in force when the dividend
mentioned in subsection (1)(b) above was paid.
(6) In this section ''an avoidance scheme''
means any scheme or arrangement which-
(a) falls within subsection (7) below; and
(b) is a scheme or arrangement the purpose,
or one of the main purposes, of which is to have
an amount of underlying tax taken into account on
a claim for an allowance by way of credit in
accordance with this Part.
(7) A scheme or arrangement falls within this
subsection if the parties to it include both-
(a) the United Kingdom company, a company
related to that company or a person connected with
the United Kingdom company; and
(b) a person who was not under the control of
the United Kingdom company at any time before the
doing of anything as part of, or in pursuance of,
the scheme or arrangement.
(8) In this section ''arrangement'' means an
arrangement of any kind, whether in writing or
not.
(9) Section 839 (meaning of ''connected
persons'') applies for the purposes of this section.
(10) Subsection (5) of section 801 (meaning of
''related company'') shall apply for the purposes of
this section as it applies for the purposes of that
section.
(11) For the purposes of this section a person
who is a party to a scheme or arrangement shall be taken
to have been under the control of the United Kingdom
company at all the following times, namely-
(a) any time when that company would have
been taken (in accordance with section 416) to
have had control of that person for the purposes
of Part XI;
(b) any time when that company would have
been so taken if that section applied (with the
necessary modifications) in the case of
partnerships and unincorporated associations as it
applies in the case of companies; and
(c) any time when that person acted in
relation to that scheme or arrangement, or any
proposal for it, either directly or indirectly
under the direction of that company."
(12) This section has effect in relation to
dividends paid to a company resident in the United
Kingdom at any time on or after 26th November 1996.