Background Note
8.Financial traders and other participants in the financial markets commonly transfer shares on a temporary basis from one party to another as a form of secured loan or to gain access to specific securities. Payments known as MODs are often made by the temporary holder of shares to the original owner as compensation for the dividends arising on the shares which are received by the temporary holder.
9.Where a MOD is paid, the payer must deduct a sum representing income tax equal to the relevant withholding tax on the MOD. A company receiving a MOD from which tax has been deducted is treated as if it had received an overseas dividend paid after withholding a certain amount of overseas tax. The amount of overseas tax treated as withheld can vary between nil and a maximum of the amount deducted.
10.Where the amount treated as overseas tax is less than the amount deducted, it has been suggested that the difference between the two amounts should be treated as income tax, available for set-off or repayment. HM Revenue and Customs does not agree that this is the effect of the legislation but subsection (2) of the amendment introduced by this section puts it beyond doubt that it is not treated as income tax.
11.Subsection (3) applies to certain deemed manufactured overseas dividends under stocklending arrangements, and has a similar effect to subsection (2), clarifying that withheld tax is not to be treated as income tax.
