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Finance Act 2012

Chapter 14 - The tax exemption

278.Chapter 14, introduced by new section 371NA, provides “the tax exemption”, an exemption which applies to the CFC as a whole. This exemption applies to a CFC that pays an amount of local tax on its chargeable profits of at least 75 per cent of the corresponding UK tax, provided certain conditions are met.

279.New section 371NB(1) sets out the three steps required to determine if the tax exemption applies for a CFC’s accounting period.

  • Step 1 requires the CFC’s territory of residence for the accounting period to be determined in accordance with the rules at new section 371TB. If the CFC has no territory of residence under these rules, the tax exemption cannot apply.

  • Step 2 requires a calculation of the tax paid (the “local tax amount”) by the CFC for the accounting period in its territory of residence as established in Step 1. The local tax amount is the tax paid in the CFC’s territory for that accounting period in respect of the CFC’s local chargeable profits, subject to any necessary reduction determined in accordance with new section 371NC. If however the local tax amount is calculated under designer rate tax provisions defined in new section 371ND then the tax exemption cannot apply.

  • Step 3 requires the calculation of the amount of corresponding UK tax for the accounting period based on the provisions contained in new section 371NE. The tax exemption applies if the local tax amount is at least 75 per cent of the amount of the corresponding UK tax.

280.New subsections (2) and (3) provide that where an amount of tax is paid which includes amounts other than the local tax amount, for example where a group of companies pays its tax and files accounts on a consolidated group basis, then an amount is allocated to the local chargeable profits in question on a just and reasonable basis.

281.New subsection (4) defines a CFC’s local chargeable profits as the profits calculated on the basis of the tax law of the CFC’s territory of residence ignoring any capital gains or losses.

282.New section 371NC(1) provides for reductions in computing the local tax amount for step 2 in section 371NB.

283.New subsections (2) to (4) provide for the local tax amount to be reduced in two circumstances.

  • The first is where the CFC has net income that is taken into account when determining the CFC’s local chargeable profits, but that would not be taken into account in determining the assumed taxable total profits (essentially under UK tax rules) for the same accounting period.

  • The second circumstance is where the CFC has net expenditure which is not brought into account in determining the CFC’s local chargeable profits, but would be brought into account in determining the assumed taxable total profits.

284.In these circumstances, the local tax amount is reduced by the amount referable either to the additional net income or the reduced expenditure. The effect is to put the local and UK measures of tax on a more comparable basis for the purposes of Step 3.

285.New subsection (5) sets out three conditions, all of which must be met if the local tax amount is to be reduced by virtue of new subsection (6). The conditions are that:

  • the CFC has paid local tax on its local chargeable profits for the accounting period;

  • a repayment of tax, or a payment in respect of a credit for tax, is made to a person other than the CFC under the law of the CFC’s territory; and

  • the repayment or payment is directly or indirectly in respect of the whole or part of that local tax.

286.If subsection (6) applies, then the local tax amount is reduced (or further reduced after any reduction under subsection (2)) by the amount of the repayment or payment referred to in subsection (5).

287.New section 371ND covers the “designer rate tax provisions”.

288.New section 371ND(1) applies for the purposes of step 2 in section 371NB(1). It defines “designer rate tax provisions” as provisions which appear to be designed to enable companies to exercise significant control over the amount of tax which they pay and which are specified as such in Regulations made by the HMRC Commissioners.

289.New subsection (2) explains that the Regulations may make different provision for different cases or with respect to different territories.

290.New section 371NE(1) provides how to determine “the corresponding UK tax” for the purposes of step 3 of section 371NB(1).

291.New subsection (1) defines “the corresponding UK tax” as the amount of corporation tax which would be charged in respect of the CFC’s assumed taxable total profits for the accounting period. The CFC’s assumed taxable total profits are calculated in accordance with new section 371SB taking into account the corporation tax assumptions provided for by new sections 371SD to 371SR.

292.New subsection (2) explains that for the purposes of calculating the amount of corporation tax referred to in the previous sub-section:

  • any double taxation relief in respect of the local tax paid by the CFC in its territory of residence is to be ignored; and

  • there must be deducted from what would otherwise be the amount of corporation tax:

    • any amount which, after applying the corporation tax assumptions, would be set off by virtue of section 967 of CTA 2010 (cases in which a company receives a payment bearing income tax); and

    • any amount of income tax or corporation tax actually charged in respect of any income included in the CFC’s assumed taxable total profits.

293.New subsection (3) provides that in the section (2)(b) the references to an amount set off or actually charged do not include any such amount (or so much of any such amount) as has been or will be repaid to the CFC.

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