INTM558040 - Hybrids: dual territory double deduction (Chapter 10): conditions to be satisfied: condition B

Condition B of s259JA asks if it is reasonable to suppose that there is an amount which could, by reason of the company being either a dual resident or a multinational company, be deducted from the income of the company for corporation tax purposes and also deducted for the purposes of a tax charged under the law of an overseas territory.

Reasonable to suppose

There is no definition of the term reasonable to suppose in Part 6A, so the phrase will take its ordinary meaning. Generally, this does not require either party to know how the transaction has been treated by the counterparty but only that, given the facts and circumstances, it would be reasonable to suppose that a double deduction mismatch arises.

US Dual Consolidated Loss (DCL) rules

The dual consolidated loss (DCL) provisions of the US Internal Revenue Code (IRC) and regulations are intended to prevent an entity from using a loss to offset income of a domestic affiliate in the US while using the same loss to offset income of a foreign affiliate which is not subject to US tax. The DCL rules are not ‘equivalent’ to the rules in Part 6A TIOPA 2010, because they were enacted before the OECD BEPS Action 2 report was published and so do not satisfy the requirement to be ‘based on’ those rules in s.259BA(2)(b) TIOPA 2010. They are however in some respects similar in their impact. When considering Condition B they may therefore be relevant.

Where an expense could be deducted in both the US and the UK, then Condition B will ordinarily be met. However, if the deduction in the UK is utilised against single inclusion income, it should be disallowed in that period in the US under the DCL rules, which would mean condition B is not met. We therefore accept that the UK deduction can be set against single inclusion income as long as the consequence of that is that the equivalent US deduction is denied. If on the other hand the deduction in the UK is utilised against DII only, there should be no counteraction in the US, meaning Condition B is met. But the resulting counteraction is of no consequence since by definition the UK relief is being used to shelter dual inclusion income.

The DCL rules do though contain provision for a Dual Use Election (DUE). Whereas normally under the DCL rules a deduction that is denied in a period is carried forward to use against DII in the future, if a DUE is made the loss can be utilised to offset any income in the US, including non DII income. When a DUE is made, condition B will be met in all circumstances and so a counteraction will arise if the other conditions are met.