In some cases, Brazilian tax may be calculated not by reference
to profits but on a percentage of the gross receipts of a business.
Claims to tax credit relief in respect of Brazilian tax imposed on
this basis should be considered critically.
In particular, the possibility of extraterritorial taxation,
that is taxation in Brazil of income which by reference to UK
principles would be regarded as having its source in the United
Kingdom or in a third country, should beconsidered. Consequently,
in cases where significant amounts of tax are paid in Brazil, it is
important to ascertain what work was actually performed in Brazil
and what profit, by reference to UK tax principles, was derived
from that work. Only that part of the income from a contract which
is derived from the performance of services in Brazil will be
regarded as arising from trading in Brazil, as opposed to trading
with Brazil.
The distinction is demonstrated for tax credit relief
purposes in the case of Yates v GCA International Ltd (`the GCA
case' - INTM 161120 last sub- paragraph). The GCA case also shows
the extent to which tax credit relief should be restricted where
taxation is imposed extraterritorially on a gross basis even where
the tax as such is, in principle, admissible for the purposes of
unilateral relief.
The general rule derived from the terms of section 790(4)
ICTA 1988 is that credit for foreign tax on foreign income must not
exceed the lesser of the foreign tax and the UK tax charged on that
income. This will frequently result, when the foreign tax is
imposed on gross receipts, in a limitation of credit (as in the GCA
case) to the amount of UK tax charged on the foreign income. Hence
the importance, in the case of significant claims, of establishing
the UK tax measure of the foreign income (see INTM163010 onwards
and especially INTM163100 concerning management and technical
fees).
