INTM216040 - Controlled Foreign Companies: Reviews

Large groups - arrangements for handling Controlled Foreign Company Returns

Because the range and nature of overseas companies varies significantly from group to group, it is not possible to be prescriptive about how to handle controlled foreign companies returns. The Large Business Office has published its own guidance in response to Recommendation 33 of the 2001 Review of Links with Business which describes a range of approaches that have worked for some groups that others may want to draw on in agreeing arrangements for their groups. The main points arising from that note are included below.

Pre-filing discussions
Using current circumstances to inform previous years
Systems reviews
Risk assessment and controlled foreign companies
Factors affecting risk
‘Group’ returns

Recommendation 33 advocates discussion between Inspectors and groups on appropriate approaches to handling a group’s exposure to potentially significant numbers of controlled foreign companies, tailored to that group’s particular circumstances. However, the Inspector should not agree to any form of arrangement which relaxes the statutory filing obligations of each company in the group. Depending on the circumstances of the group, arrangements not explicitly covered in these examples may be appropriate provided that companies are aware that the responsibility for filing complete and accurate returns of their controlled foreign companies remains with them.

Pre-filing discussions

If the group is seeking agreement about whether an overseas company falls within one of the controlled foreign companies exemptions prior to the submission of the CTSA return, the Inspector can discuss the Revenue’s interpretation and application of the controlled foreign companies legislation with the group. But if the group is seeking the degree of certainty in connection with controlled foreign companies for future accounting periods provided by advance clearance, the Inspector should consult CT & VAT, International CT at an early stage. The responsibility for advance clearance for controlled foreign companies is the responsibility of CT & VAT, International CT.

In many cases, discussions with the group may result in an analysis of the principles underlying application of the controlled foreign companies exemptions which both sides are content with. In this situation, the Inspector can conclude the discussion by referring to the treatment or figures he or she would expect to see included in the return when submitted. But they will need to make it clear to the group that this kind of understanding is not binding on the Revenue.

Using current circumstances to inform previous years

If the underlying circumstances have remained substantially unchanged, a real-time review of current circumstances may give a sensible alternative to a review of the past period. This can only be done on a voluntary basis as the Revenue does not have the power to compel the production of current records.

Systems reviews

As well as discussing the application of the legislation to the circumstances of a particular company, the Inspector may also want to consider discussing the type of system the group operates to ensure that information about controlled foreign companies within the group is returned correctly. One relatively straightforward system that has proved useful in some cases in reducing the number of enquiries about controlled foreign companies is for the company to supplement the bare detail on the CT600B by brief details about each overseas company. This could be a simple spreadsheet listing the companies, with columns showing for instance the nature of activities and why or how any exemption is met.

If the Inspector and the group can agree on a system, it can significantly reduce the need to make further enquiries into existing controlled foreign companies in the following few years, unless there are changes in the controlled foreign companies or CTSA legislation, or the group’s systems themselves change, for example following a company take-over. As with any system, it is appropriate to review its operation, to check the various procedures that underpin the system are being operated properly.

Risk assessment and controlled foreign companies

The requirements under CTSA are for a company to list on its supplementary pages CT600B all controlled foreign companies in which it has a relevant interest of 25% or more and which do not meet the requirements of the Excluded Countries Regulations. The company also needs to complete the relevant columns regarding residence, exemptions etc. To meet these obligations and not face penalties if enquiries show entries to be incorrect, the group needs to do sufficient work on the overseas companies to establish the facts necessary to support the entries.

There may be scope to agree a structured approach to the risk assessment of the group’s controlled foreign companies over a period of more than one year which enables both sides to plan and manage the work needed to ensure compliance with the legislation. Such arrangements are likely to be most appropriate for groups with large numbers of controlled foreign companies. This could involve looking in detail at any new controlled foreign companies the group acquires in a period, and reviewing existing controlled foreign companies on a sample basis each year. How the sample is chosen will depend very much on the nature, extent and location of the group’s commercial interests.

Any pragmatic arrangements of this nature must preserve the Revenue’s right to make a discovery in the event that additional liabilities are later found to have arisen for a year covered by those arrangements.

Factors affecting risk

When considering the risks presented by controlled foreign companies, the Inspector's view for any particular overseas company will be influenced by a number of factors. Some of these will be evident from entries on the CT600B (such as territory of residence or which of the various exemptions is claimed). The Inspector's view of the level of risk may be allayed by details provided about the overseas company in addition to the basic requirements on the CT600B or by knowledge of the group.

In some cases, once the facts are established, it will be clear that the controlled foreign company meets one of the exemptions. Provided the Inspector is satisfied that the group has systems in place to establish these facts prior to submitting the return, and sample checks are made from time to time, risks for that controlled foreign company are likely to be low.

‘Group’ returns

The CTSA legislation requires each company filing a return to list its controlled foreign companies, and the return includes form CT600B for them to do this. As with other aspects of CTSA, there are no provisions for controlled foreign companies returns to be made on a group- wide basis, although there will be circumstances where it is appropriate to handle detail across a group using a spreadsheet. If the group adopts this kind of system, the Inspector may be faced with a long list of controlled foreign companies, either at group or individual company level. The flowchart at INTM216050 may help the Inspector in the review of that list.