Background Note
20.The current MOD rules and regulations aim to give the recipient of a MOD (or any payment deemed to be a MOD) the same relief for foreign tax as the recipient of the real dividend.
21.Sections 81 and 82 of TIOPA reduce or eliminate claims to double tax relief where there is an avoidance scheme or arrangement. The scheme must fall within one of the prescribed schemes in sections 84 to 88 of TIOPA. Section 85 of TIOPA prescribes a scheme where the person claiming credit for foreign tax has not suffered the full economic cost of the foreign tax for which it is claiming relief. The amendment to section 85 removes the condition that the person claiming the credit has paid the foreign tax.
22.Section 85 does not work effectively where the claim is for foreign tax which is treated by tax law (for example the MOD rules) as having been paid. The new measure will insert a new section 85A into TIOPA so that sections 81 and 82 will apply to deemed overseas tax deducted from MODs in the same way that they apply to real overseas dividends. The amendment will ensure that the provision can also apply in other circumstances where the UK Tax Acts deem income to be received under deduction of overseas tax. These changes will prevent credits for notional overseas tax from being treated more favourably than tax credits on real dividends.
23.This will not result in the automatic denial of DTR in relation to deemed overseas tax, since it will still be necessary for that tax to arise as part of a scheme or arrangement one of the main purposes of which is to cause that tax to be taken into account for double tax relief purposes.
24.Section 86 of TIOPA prescribes a scheme where a person who is a party to a scheme takes a step, or omits a step, and the effect is to increase a double tax relief claim. The amendment ensures that the provision can apply to any steps taken, or not taken, before the scheme is implemented which have the effect of increasing a credit claim.
25.Section 112 of TIOPA provides that, where foreign tax is paid and no credit is claimed, double tax relief may be given as a deduction to reduce the foreign income assessable to UK tax. The amendment ensures that a person may only deduct foreign tax where that person has not already reduced his income by reference to the foreign tax, so ensuring the foreign tax is only deducted once.