REV BN 19: Double Taxation Relief For Trade Receipts
Who is likely to be affected?1. As announced at PBR in a Technical Note, and in the Paymaster General's Statement of 10 February, legislation will clarify the amount of double taxation relief (DTR) that is to be given when foreign tax is paid on income that is a trade receipt for UK tax purposes or on other income that is computed in a similar way for UK tax purposes (such as rents from foreign properties). 2. The legislation will therefore mainly affect those companies, individuals and partnerships who receive such income and who have previously calculated their DTR claims on a basis contrary to the Inland Revenue's published view. General description of the measure3. The purpose of DTR is to prevent the imposition of UK taxes resulting in double taxation on the same income, so credit should never exceed the amount of UK tax due in respect of the income that gave rise to the foreign tax payment. 4. Where tax is charged on the basis of a calculation of profits, it is necessary to determine the proportion of those profits that is properly attributable to the transactions that gave rise to the foreign tax, while excluding profits from other transactions that are independent of the foreign tax. 5. In practice, this means attributing expenses and profits or losses from related transactions to an item or items of income that represent trade receipts, in order to arrive at a figure of profit or loss attributable to the income in question. The proposed legislation determines the expenses and related transactions that should be taken into account, and those which should be excluded. Expenses 6. The expenses to be taken into account are those incurred directly in earning an item of income, for example, brokerage fees on a share transaction by a financial trader, and indirect expenses such as general overheads. Direct expenses should be deducted from the income to which they relate, but indirect expenses are to be allocated on a just and reasonable basis. 7. In some trades where income is derived from an asset, changes in value of the asset are taken into account in calculating trade profits. In such a case income derived from the asset should be aggregated with gains or losses from the asset for the purposes of calculating the limit on DTR. For example, dividend income received in the context of a financial trade should be aggregated with gains or losses (whether realised or unrealised) from the same shareholding. The guidance published today gives more detail of how this works and addresses the issue of income earned in the course of derivatives trading. 8. Where arrangements are set up to place the expenses incurred in earning the income into other companies so as to avoid a restriction on DTR under this legislation, then it may be necessary to consider the expenses incurred in those other companies. Aggregation of Financial Transactions 9. In practice it will not usually be possible to subdivide trade profits between each class of share, bond or other income bearing asset, including derivatives, held as part of a financial trade. 10. Therefore, the legislation will allow results
to be aggregated, so that for example more than one
class of shareholding is considered together. Any approximate
result based upon aggregation will be acceptable only
if all information that is available, or that can reasonably
be made available, is used. However, if it can be shown
that any given method of approximation is not likely
to be materially Transitional Rule 11. There is a transitional rule for the period from 16 March 2005 to 31 December 2005, which applies to foreign tax paid in respect of dividend income. For this type of foreign tax payment, nothing in this legislation will deny credit relief for more than half of the foreign tax paid by any person in respect of dividends received in this period. Manufactured Overseas Dividends (MODs) 12. MOD set-off rules should be applied wholly independently of the limitation on DTR determined by the profit arising from a transaction. Royalties 13. All foreign royalties derived from the same intangible asset are treated as a single item of foreign income with a single tax payment. Operative date14. All the above changes will be effective from today for companies and from 6 April for individuals. Guidance15. Detailed guidance on this measure is published today on the Inland Revenue website. Further advice6.If you have any questions about this change, please contact Andrew Page on 020 7147 2680. Information about Budget measures is available on the Inland Revenue website Inland Revenue website |
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