INTM558070 - Hybrids: dual territory double deduction (Chapter 10): counteraction: relevant multinational and the UK is the parent jurisdiction

The counteraction where the UK is the parent jurisdiction of a relevant multinational company is set out at s259JC.

Where the UK is the parent jurisdiction of a relevant multinational company, the dual territory double deduction amount is reduced by any impermissible overseas deduction. If there is no impermissible overseas deduction, then the deduction is allowed in full (subject to other UK tax provisions).

Where the dual territory double deduction requires to be reduced - just and reasonable adjustments, including by assessment, are to be made.

The example at INTM558210 illustrates the counteraction involving an impermissible overseas deduction and group relief.

Impermissible overseas deduction

An impermissible overseas deduction is defined at s259JC(2) as all or part of the dual territory double deduction amount that

  • is in substance deducted
  • under the tax law of a territory outside the UK
  • from the income of any person for any taxable period, and
  • that income is not dual inclusion income of the company

Dual inclusion income

Dual inclusion income of the company means an amount that is ordinary income of both

  • the company for an accounting period for corporation tax purposes, and
  • the company for a permitted taxable period for the purposes of a tax charged under the law of a territory outside the UK {#} {#}

Effective use of a loss in PE territory

Where a loss arises in the PE territory, that may be utilised, for example, in a consolidation regime or similar. When establishing the extent of the double deduction available in the UK parent company, the amount of the effective PE loss should be apportioned between the relevant entities on a pro rata basis in the absence of facts to suggest otherwise.

For example

  • Relevant multinational and UK is parent jurisdiction
  • Foreign PE with deduction creating loss 500
  • Within consolidation regime with PE
    • Co. A – profit 1000
    • Co. B – loss 1000

In order to determine what proportion of the PE loss is utilised by Co. A apply a pro rata approach. Such that Co. A uses 1/3 PE loss /double deduction (333) and 2/3 Co. B loss (667). The UK company could utilise the remaining 167 PE double deduction subject to dual inclusion income. The 333 used by Co. A would be an impermissible overseas deduction.

Ordinary income

Ordinary income means income that is brought into account when calculating taxable profits on which tax is charged. The full definition, including restrictions on what may be regarded as ordinary income and where specific reliefs may be treated as reducing the amount of ordinary income, is at s259BC and the concept is discussed further at INTM550560.

There are special recognition rules at s259BD covering instances of non-inclusion which treat an amount of income (where it has been subjected to another territory’s controlled foreign companies (CFC) charge) as if it had been included. This is discussed at INTM550570.

If there is an ‘impermissible overseas deduction’ then as the deduction equal to that amount is denied entirely so any relief that relies on the existence of a deduction, for example R&D tax relief, will not be available.

Permitted taxable period

A taxable period of a hybrid entity is ‘permitted’ if the period

  • begins at any time before the end of 12 months after the end of the accounting period within which the amount is deducted by the company, or
  • begins in a later period if a claim is made and it is just and reasonable that the ordinary income arises in that period instead of the earlier period