GIM7340 - Equalisation reserves: the tax rules: example of apportionment for Double Taxation Relief

Double taxation relief before equalisation reserve movements

Attribution of transfer into the equalisation reserve to each branch

Waiver of part of deduction for equalisation reserves

Determine the tax credits to be set against UK profits

Double taxation relief before equalisation reserve movements

A UK resident company has branch operations in Italy, Spain and France. All of its business is marine, aviation and transport business. The premiums arise from business which falls within the scope of the equalisation reserves regulations. Double tax credits and profits (before taking into account movements in the equalisation reserve) are as follows:

There is a net transfer into the equalisation reserve of £3m.

Attribution of transfer into the equalisation reserve to each branch

In order to compute the profits arising from each branch we need to apportion this transfer in between the various territories as described above using the formula in regulation 10(1)-(4):

(A x B)/C

In this example

A, the amount transferred into the reserve, is £3m

B, the net premiums of the branch relating to business for which equalisation reserves are maintained, is different for each branch.

C, the total net premiums relating to business for which equalisation reserves are maintained, is £55m:

Using this information, we can calculate how much of the transfer into the equalisation reserve of £3m should be allocated to each branch.

We can now complete the attribution of profits to each branch and determine how much of the various tax credits may be set against UK profits.

The tax computation would be:

Waiver of part of deduction for equalisation reserves

Because the company is unable to use all of its Italian tax credits, it may wish to waive part of the equalisation reserves deduction which has been attributed to Italian branch profits. It would want to waive enough of the deduction to generate an extra tax charge of £31k i.e. extra profits of £103k, and it would want to exercise the right to choose to allocate the whole waived amount to the Italian branch.

The tax computation would then look like this:

The unused equalisation reserves deduction of £103k will be carried forward to be set off against transfers out of the reserve in future years. To illustrate this, suppose that the following year a net transfer out of the equalisation reserve is made of £1003k. The profits (before taking equalisation reserves transfers into account), claims relating to equalisation reserves business and tax credits are:

Before we start the process of apportioning the equalisation reserves addition between branches, we need to take the unused relief from the previous year into account.

Then, in order to compute the profits arising from each branch we need to apportion this balance between the various territories using the formula in regulation 10 of the tax regulations: D x E/F

In this example

D, the balance of the amount transferred out of the reserve, is £1m

F, the total net claims branch used in determining whether a transfer out of the equalisation reserve is due, is £27.5m

E, the net claims of the branch used in determining whether a transfer out of the equalisation reserve is due, is different for each branch:

Using this information, we can calculate how much of the balance of the transfer out of the equalisation reserve of £1m should be allocated to each branch:

Determine the tax credits to be set against UK profits

In contrast to a deduction from profits arising from a transfer into an equalisation reserve, there is no element of choice in the allocation of an addition to profits as a result of a transfer out of an equalisation reserves.