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Taxation (International and Other Provisions) Act 2010

Chapter 1: Double taxation arrangements and unilateral relief arrangements
Overview

28.This Chapter contains the main general provisions concerning DTAs and unilateral relief arrangements.

29.In Part 18 of ICTA, DTAs are given the colourless label “arrangements” (see section 792(1) of ICTA) and unilateral relief is presented as a relief which is given under hypothetical “arrangements” (see section 790(1) of ICTA). But tax professionals commonly refer to “arrangements” having effect by virtue of section 788 of ICTA as, specifically, “double taxation arrangements”, and this convenient usage has been adopted in this Act. This Part rewrites the unilateral relief provisions as provisions for relief under “unilateral relief arrangements”. Accordingly, in Chapter 2 of this Part “the arrangements” is used without qualification to refer to a DTA or, as the case may be, unilateral relief arrangements for a territory outside the United Kingdom. This approach means that there is no need to rewrite section 790(2) of ICTA (definition of “unilateral relief”). It is repealed without replacement.

30.Sections 2 to 7 deal with DTAs. Sections 8 to 17 deal with unilateral relief arrangements.

Section 2: Giving effect to arrangements made in relation to other territories

31.This section gives effect to DTAs made in relation to other territories. It is based on section 788(1) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.

Section 3: Arrangements may include retrospective or supplementary provision

32.This section supplements section 2. It is based on section 788(8) of ICTA, section 277(1) of TCGA and section 194(1) of FA 1993.

33.Subsection (2) includes a minor change in the law to clarify how section 277(1) of TCGA applies section 788(8) of ICTA. See Change 1 in Annex 1.

Section 4: Meaning of “double taxation” in sections 2 and 3

34.This section deems tax spared because of international development relief to have been payable for the purposes of sections 2 and 3. It is based on section 788(5) of ICTA.

35.Sections 2 and 3 refer to “double taxation” in general terms. Broadly speaking, there is double taxation if the same (for example) income is taxed in more than one territory. But that will not be the case if the income (in this example) is not in fact taxed in one of the territories concerned as a result of a relief. This section supplements sections 2 and 3. It requires certain reliefs to be ignored, with the result that one is to assume in certain cases that tax has been paid even though it has in fact not been paid. This deemed tax (in the territory giving the relief), taken with the actual tax (in the other territory), then means that there is “double taxation”. As a result of this section, therefore, statutory effect can be given to provisions in arrangements which are about such cases.

36.See also section 20 (foreign tax includes tax spared because of international development relief).

Section 5: Orders under section 2: contents and procedure

37.This section supplements section 2. It is based on section 788(9) and (10) of ICTA.

Section 6: The effect given by section 2 to double taxation arrangements

38.This section delimits the scope of the effect given by section 2 to DTAs. It is based on section 788(3) and (6) of ICTA, section 277(1) of TCGA, section 194(1) and (3) of FA 1993 and section 107(5) of FA 2004.

39.Subsections (2)(b) and (3)(b) reflect the view that section 788(3)(b) of ICTA is:

  • about taxing non-UK residents on (a) income arising in the United Kingdom or (b) gains accruing on the disposal of assets in the United Kingdom; and

  • not about taxing persons generally on (a) income arising in the United Kingdom that is received by non-UK residents or (b) gains accruing where assets are disposed of to non-UK residents.

40.Subsection (3) expands section 788(3) of ICTA in relation to capital gains tax with the modifications directed by section 277(1) of TCGA. Section 788(3)(b) refers to income “arising from sources”, but this income tax terminology is not used in the legislation on capital gains tax. Accordingly, subsection (3)(b) refers to gains “accruing on the disposal of assets”, as does subsection (2)(c), the corresponding provision in relation to corporation tax on chargeable gains.

41.Subsection (4) expands section 788(3) of ICTA in relation to PRT with the modifications directed by section 194(1) and (3) of FA 1993. On a literal interpretation, section 788(3) of ICTA, as thus modified, would enable DTAs to make provision about PRT generally. But this would run counter to the purpose expressed in section 194(1) of FA 1993. Accordingly, subsection (4) limits the effect of DTAs on PRT to the charge under section 12 of the Oil Taxation Act 1983. Furthermore, the requirement under section 194(1)(b) of FA 1993 to translate “income” in section 788 of ICTA as “consideration” is to be read in the context of section 194(1)(a) of FA 1993 and therefore does not extend to “income” in the phrase “corporation tax in respect of income or chargeable gains” in section 788(3)(a) of ICTA.

42.Subsections (5) and (8) refer to the provisions concerning special withholding tax. These provisions are rewritten in Part 3.

43.Subsection (6) expressly requires relief under subsection (2)(a), (3)(a) or (4) to be claimed. This requirement is implicit in section 788(6) of ICTA.

44.Unlike section 788(6) of ICTA, on which it is based, subsection (6) does not expressly state to whom a claim should be made. A claim must, therefore, be made in (or by amending) a return, or to an officer of Revenue and Customs. This is a minor change in the law, reflecting administrative reality. See Change 2 in Annex 1.

Section 7: General regulations

45.This section is a general regulation-making power. It is based on section 791 of ICTA.

46.DTAs are colloquially known as tax treaties, and subsections (1) and (5) reflect this usage in the newly defined term “the treaty sections”.

Section 8: Interpretation: “unilateral relief arrangements” means rules 1 to 9, etc

47.This interpretative section is based on section 790(3) and (12) of ICTA and section 277(1) of TCGA.

Section 9: Rule 1: the unilateral entitlement to credit for non-UK tax

48.This section unilaterally gives DTR by way of credit (“credit relief”). It is based on sections 790(4), (5) and (12) and 793A(2) and (3) of ICTA and section 277(1) of TCGA.

49.As directed by section 277(1) of TCGA, subsection (2)(b) extends “income arising or any chargeable gain accruing” in section 790(4) of ICTA beyond income tax and corporation tax to capital gains tax. On a literal interpretation, section 790(4) would have to be read, in relation to capital gains tax, as referring to gains “arising”. But this terminology is not used in the enactments relating to capital gains tax. Subsection (2)(b) therefore refers to gains “accruing”, as this terminology is used both in section 790(4) of ICTA and in the enactments relating to capital gains tax.

50.Subsection (3) rewrites the words in brackets in section 790(4) of ICTA. Section 277(1) of TCGA has not been applied in subsection (3), as this would have produced a meaningless reference to capital gains.

Section 10: Rule 2: accrued income profits

51.This section gives credit relief in certain cases involving accrued income profits. It is based on sections 790(5), 793A(2) and (3) and 807(1) and (5) of ICTA.

52.Although this relief is not so termed in the source legislation, it is unilateral relief and is therefore rewritten in this group of sections.

Section 11: Rule 3: interaction between double taxation arrangements and rules 1 and 2

53.This section concerns the relationship between treaty relief and unilateral relief. It is based on sections 790(5) and 793A(2) and (3) of ICTA.

Section 12: Rule 4: cases in which, and calculation of, credit allowed for tax on dividends

54.This section concerns unilateral credit relief for tax on dividends. It is based on section 790(5), (6) and (10) of ICTA.

55.Subsection (3) reflects the view that, in section 790(10) of ICTA, “if the company paying the dividend and the company receiving it were related to each other within the meaning of section 801(5)” means “if the company paying the dividend was related (within the meaning of section 801(5)) to the company receiving it”.

Section 13: Rule 5: credit for tax charged directly on dividend

56.This section specifies when, in principle, unilateral credit relief is allowed for tax charged directly on a foreign dividend. It is based on section 790(5) of ICTA.

Section 14: Rule 6: credit for underlying tax on dividend paid to 10% associate of payer

57.This section specifies when, in principle, unilateral credit relief is allowed for underlying tax on a dividend paid to a substantial investor. It is based on section 790(5) to (6A) of ICTA.

58.The title of this section gives an indication of its contents. The title uses the expression “10% associate” by analogy with the use of that expression in section 64. Note, however, that the definition of “10% associate” in section 64(6) and (7) refers to control of at least 10% of the ordinary share capital, whereas the similar provision in subsections (4) and (5) does not.

Section 15: Rule 7: credit for underlying tax on dividend paid to sub-10% associateSection 16: Rule 8: credit for underlying tax on dividend paid by exchanged associate

59.These sections specify when, in principle, unilateral credit relief is allowed for underlying tax on a dividend paid in certain cases in which section 14 does not apply. They are based on section 790(5) to (9) of ICTA, and are identical in every respect except for condition C (and the subsections which insert that condition).

60.Subsection (2) provides that three conditions must all be met if the section under review is to enable credit to be given under section 9.

61.Condition A in subsection (3) is the same as condition A in section 14(3).

62.Condition B in subsection (4) is met if condition B in section 14(4) is not.

63.Subsection (5) follows on from subsection (4). To lead into subsection (6), it defines “the held percentage” in that subsection.

64.Condition C, in subsection (6), sets out the circumstances in which credit can in principle be given under the section under review even though section 14 does not apply.

65.Subsections (7) to (10) are interpretative.

Section 17: Rule 9: credit in relation to dividends for spared tax

66.This section specifies when, in principle, unilateral credit relief is allowed in relation to dividends for spared tax. It is based on section 790(10A) to (10C) of ICTA.

67.Section 790(10A) of ICTA gives unilateral relief in cases in which:

  • a UK resident company (company C) would have been entitled under a DTA to credit relief in relation to dividends for spared tax if it had invested directly in a non-UK resident company (company A); but

  • instead company C invests in company A through a holding company resident in the same non-UK territory (company B).

68.Subsection (1) is based on section 790(10A) of ICTA. Section 790(10A)(d) reads:

the circumstances are such that, had company B been resident in the United Kingdom, it would have been entitled, under arrangements made in relation to the territory outside the United Kingdom and having effect by virtue of section 788, to a relief to which subsection (5) of that section applies in respect of the spared tax.

69.A relief to which section 788(5) of ICTA applies is a tax relief, given for development purposes, under the law of the non-UK territory to which the DTA under review relates. See the second sentence of section 788(5). Accordingly, a relief to which section 788(5) applies is not a UK tax relief to which a person is entitled under a DTA. It is a foreign tax relief with respect to which provision is made in a DTA for DTR.

70.Accordingly, if company B had been resident in the United Kingdom, it would not have been entitled to a relief to which section 788(5) of ICTA applies. Rather, it would have been entitled to treat the spared tax as having been payable for the purposes of DTR by way of credit. Foreign tax is spared as a result of a relief to which section 788(5) applies. But entitlement to treat the spared tax as having been payable arises under the first sentence of section 788(5).

71.Section 790(10A)(a) to (d) of ICTA therefore address the following case. Company A receives a tax relief under the law of the non-UK territory in which it is resident. It pays a dividend out of the relieved profits to company B, which is resident in the same non-UK territory. Company B, out of the dividend received from company A, pays a dividend to UK resident company C. There is a DTA in relation to the non-UK territory the effect of which, when read with section 788(5) of ICTA, is that if company B was UK resident it would be entitled, for the purposes of DTR by way of credit to treat as payable the non-UK tax which company A would have paid but for the non-UK tax relief. Subsection (1)(d) is drafted accordingly.

72.Section 790(10B)(b) of ICTA refers to section 795(3) of that Act, which is rewritten to sections 31(4) and 32(5). Subsection (2), which is based on section 790(10B)(b), refers to section 31(4). But subsection (2) does not refer to section 32(5), because section 790(10B) concerns the corporation tax liability of a UK resident company and section 32 has no application for corporation tax purposes.

73.The tail words of section 790(10C) of ICTA contain the proviso:

(notwithstanding any arrangements … which have effect by virtue of section 788 and provide for a relief to which subsection (5) of that section applies).

74.As noted in the commentary on subsection (1), a relief to which section 788(5) of ICTA applies is given under foreign law, not under a DTA. Accordingly, in the tail words of section 790(10C) of ICTA, “provide for” is elliptic drafting for “make provision with respect to”. Subsection (5) is drafted accordingly.

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