GIM12270 - Double taxation relief: foreign tax on investment income: accounting periods beginning on or after 1 April 2000: section 804C ICTA 1988: the second limitation: section 804C(4) calculation
ICTA88/S804C (4) applies a second limitation on the calculation
of the credit relief for foreign tax. The purpose is to restrict
the credit for all items of foreign tax to the corporation tax
actually charged on the Case I profit after relief for losses
brought forward. The losses concerned will be Case I losses brought
forward under ICTA88/S393 (1) against the profits of non-life
business.
Strictly, section 804C(4) also applies on an item by item
basis, so that the credit relief in respect of any item of relevant
income is limited to the corporation tax on the proportion (the
relevant fraction) of the Case I that the item bears to the total
of all the items in the computation that have borne foreign tax.
The relevant fraction to be applied to the profit - section
804C(9) is:
| the amount of the relevant income before the reduction for expenses |
| the total of all the amounts of relevant income of general business |
The relevant income means the whole or part of any item of
income or gain in respect of which foreign tax falls to be allowed
as credit which is referable to general business. The denominator
is the sum of all such items or parts of income and gains.
While the section 804C(3) limitation can safely be applied to
the aggregate amounts of foreign income, this is not necessarily
true for the section 804C(4) limitation. Items of income taxed at
the same rate of foreign tax can always be aggregated and there
should be no problem where the Case I profit is significantly
larger than the total foreign income attributable to the business
as limited by the section 804C(3). In other cases care will be
required.
Any restriction under section 804C(4) will increase the
amount of foreign tax deductible as an expense in the Case I
computation. This will reduce the profit and hence increase the
section 804C(4) restriction. To avoid iteration the section 804C(4)
limitation, C, can be calculated as follows:
C = [(P-Y)/(1-R)]
where
- R is the rate of corporation tax
- P is the Case I profit (or the relevant fraction of the profit) before any deduction for foreign tax other than that which can only be expensed
- Y is the foreign tax on the relevant income
GIM12280 gives an example of the second limitation.
