CFM95850 - Interest restriction: tax-EBITDA: Double Taxation Relief

TIOPA10/S409

Where income is not or only partially subject to UK taxation as a result of double taxation relief, the amount on which corporation tax has not been payable is excluded from the calculation of tax-EBITDA.

When income arises in a foreign jurisdiction to a UK resident, and that income is taxable in the foreign jurisdiction, the UK may grant its resident double taxation relief for the foreign tax by crediting the foreign tax against the UK tax charged on the income. This may be given in accordance with the terms of a double taxation agreement between the UK and the foreign country in question, or it may be given unilaterally under the UK tax provisions.

The amount of foreign tax that can be credited against UK corporation tax is typically capped at the amount of the UK corporation tax that would arise on the profits chargeable in the foreign country.

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

Effect for tax-EBITDA purposes

The inclusion of income which is, due to the receipt of double taxation relief, in effect not subject to UK taxation, or only partly so, would inflate the tax-EBITDA above the amount of income that is actually liable to corporation tax.

Consequently, TIOPA10/S409 has the effect of reducing the tax–EBITDA by the amount of foreign tax actually credited in the UK, divided by the rate of corporation tax applicable to that income. This sum gives the implicit amount of profits on which corporation tax has not been payable.

Example

If £100,000 is the foreign tax suffered on income of £1 million, the amount of profits on which corporation tax would, in effect, be charged has reduced by £100,000 divided by 19% (i.e. reversing the normal calculation to arrive at the profits which would correspond to that amount of corporation tax).

The reduction based on £100,000 represents corporation tax at 19% on profits of £526,316. This has the effect of grossing up the foreign tax amount to give a figure for the amount of profits which are covered by the foreign tax and therefore not actually taxed in the UK.

Normal calculation (before Corporate Interest Restriction):

  • Gross income - £1,000,000

  • Foreign tax - 10% = £100,000

  • Gross Income £1,000,000
  • Corporation tax (before DTR) - 19% = £190,000
  • Double tax relief = - £100,000
  • Net corporation tax liability - £90,000

Calculation for tax-EBITDA under Corporate Interest Restriction:

  • Taxable profits - £1,000,000
  • Reduced by profits effectively sheltered by DTR - £100,000 divided by 0.19 = -£526,316
  • Amount remaining - £473,684

So only the £473,684 would be included in tax-EBITDA, not the full £1 million.

It does not matter what type of income the foreign tax relates to, so long as it is a type included in tax-EBITDA, since this calculation operates purely by reference to the amount of credit relief given.

Interaction with TIOPA10/S388

Where an amount that would otherwise be tax-interest income is treated as “notional untaxed income” by S388, Ss388, 406, 407 and 409 interact in such a way that the amount will also be “notional untaxed income” under S409 and therefore not included in tax-EBITDA.

For detail and an example, see CFM95680.