CFM95680 - Interest restriction: tax-interest: double taxation relief

TIOPA10/S388

When income arises in a foreign jurisdiction to a UK resident company, and that income is taxed in that foreign jurisdiction, the UK may give relief for the foreign tax suffered by crediting the foreign tax against the UK tax charged on that income. Where a credit is given under TIOPA10/S18, an adjustment should be made to the amount included in tax-interest to take account of the foreign tax suffered.

This adjustment is calculated by dividing the TIOPA10/S18 credit amount by the appropriate rate of corporation tax. This gives the notional untaxed income amount which is then excluded from tax-interest.

Further guidance on Double Taxation Relief can be found at INTM160000+.

Example

Anadux Ltd earns interest of £10 million in Country X with withholding tax of £1 million (10%) levied on this by the Country X Revenue Agency in the year ended 31 March 2018. Anadux Ltd pays UK corporation tax at 19%,which would normally mean a UK tax charge of £1.9 million but the tax payable is reduced by credit for the foreign tax of £1 million by virtue of TIOPA10/S18.

In applying S388(3), the reduction in UK tax due to the credit for the Country X tax, amount A, is £1 million. The rate of corporation tax, before the credit, is 19% (B). The notional untaxed income is therefore £5,263,158 (£1,000,000 divided by 19%). Accordingly, the amount of tax-interest income, after adjustment for S388 is £4,736,842 (£10,000,000 less £5,263,158).

As a result, the CIR computations reflect that £5,263,158 of income is effectively exempt from UK corporation tax as a result of double tax relief for the withholding tax.

What this calculation does, in effect, is divide the tax-interest income into two tranches. One tranche (£4,736,842) is fully subject to corporation tax: no withholding tax is attributed to it. The other tranche (£5,263,158) is the notional untaxed income. All of the withholding tax is attributed to that tranche, so that withholding tax must equal the amount of the notional untaxed income multiplied by the applicable rate of corporation tax, that is the entire £1,000,000 of withholding tax suffered.

Interaction with tax-EBITDA

S407(1)(a) clarifies that the amount treated by S388(2) as notional untaxed income is an excluded amount under S407 in computing tax-EBITDA[CA(BA&I1] .

Example (continued)

Continuing the example above, it is assumed the Anadux Ltd has no taxable income for the period apart from £4,736,842 of tax-interest income.

As regards the calculation of tax-EBITDA, both £4,736,842 and £5,263,158 are excluded amounts within S407(1)(a). £4,736,842 is excluded due to it being tax-interest income whereas £5,263,158 is excluded as it is the notional untaxed amount under S388(2).