INTM558080 - Hybrids: dual territory double deduction (Chapter 10): counteraction: relevant multinational and the UK is the PE jurisdiction

The counteraction where the UK is the PE jurisdiction of a relevant multinational company is set out at s259JD. The counteraction applies where there is no provision in the parent jurisdiction equivalent to this legislation which counteracts the mismatch.

Where the UK is the PE jurisdiction of a relevant multinational company, the dual territory double deduction amount is allowed only to the extent that

• it is not reduced by an illegitimate overseas deduction, and
• it is deducted from dual inclusion income of the company for that period

Where there is insufficient dual inclusion income in the period, the amount of the dual territory double deduction amount denied may be carried forward and deducted from dual inclusion income of the company in subsequent accounting periods.

It is important to note that the counteraction does not deny a deduction but restricts how it is used, unless there is an illegitimate overseas deduction. So, reliefs that rely on the existence of a deduction may still be available despite the deduction being subject to a counteraction under Chapter 10. For example, Research and Development tax relief, which provides for additional relief for expenditure (that additional leg of relief itself not being doubly deductible), is not prevented by the restricted use of a deduction under Chapter 10.

However, if it is reasonable to suppose there is an ‘Illegitimate overseas deduction’ then the deduction equal to that amount is denied entirely rather than restricted to use against dual inclusion income. In those circumstances any relief that relies on the existence of a deduction will not be available.

Illegitimate overseas deduction

The dual territory double deduction amount that may be set against dual inclusion income of the company must be reduced by the amount of any illegitimate overseas deduction.

An illegitimate overseas deduction is defined at s259JD(6) as all or part of the dual territory double deduction where it is reasonable to suppose that

• the amount is in substance deducted
• under the law of a territory outside the UK
• from the income of any person (other than the company, with effect from 10 June 2021) for a taxable period, and
• the income from which it is deducted is not dual inclusion income of the company

This may occur, for example, where the deduction creates a loss in the parent jurisdiction which is subsequently surrendered as group relief to a company outside the UK. The example at INTM558210 illustrates the counteraction and impact on group relief.

The illegitimate overseas deduction is treated as if it had already been deducted in a previous accounting period. This means that this part of the deduction is permanently denied, and it should not be included in the amount of any unused dual territory double deduction carried forward.

Permitted taxable period

A taxable period of a company is a permitted taxable period if it

• 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

Dual inclusion income

Dual inclusion income of the company for an accounting period means an amount is both ordinary income of the company

• for that period for corporation tax purposes, and
• for a permitted taxable period for the purposes of a tax charged under the law of a territory outside the UK

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.

Excessive PE Inclusion Income

Finance Act 2021 introduced the concept of ‘excessive PE Inclusion Income’ in section 259JE TIOPA 2010. Companies had until 31 December 2021 to elect to deem that the rules in 259JE had retrospective effect and so would be deemed to have always been in place in relation to them the since the hybrid’s rules came into effect on 1 January 2017.

The rule operates such that the second limb of the test (above) for dual inclusion income can also be satisfied if rather than being ordinary income of for the purposes of a tax charged outside the UK, there is an amount that is excessive PE inclusion income.

To be excessive PE inclusion income, the income must first meet the conditions for being ‘PE Inclusion Income’. Those conditions are

• Condition A: the amount is in respect of a transfer of money or money’s worth from a company in the parent jurisdiction to the UK PE that is actually made or treated as being made for CT purposes
• Condition B: it is reasonable to suppose that the circumstances giving rise to the amount will not result in a reduction in taxable profits or an increase in a loss, for the purposes of tax charged under the laws of the parent jurisdiction
• Condition B can alternatively be fulfilled if there is a reduction in profits or an increase in losses, but that the amount (that is brought into account for UK CT purposes) {#}exceeds the aggregate effect on taxable profits. The aggregate effect on the taxable profits is the sum of any reduction in profits charged to tax in the parent jurisdiction (that has been caused by the circumstances that give rise to the amount of the transfer of money/money’s worth) and any increase in the company’s losses to tax in the parent jurisdiction

When calculating the reduction in taxable profits, or the increase in taxable losses the amount is to be ignored if tax is charged at a nil rate in the parent jurisdiction,

Determining whether the amount of PE inclusion income is excessive PE inclusion income, depends on how the conditions for PE inclusion income were met.

If Condition B is met above simply by the amount not resulting in reduction in taxable profits or an increase in losses in the parent jurisdiction, the whole amount of that PE inclusion income will be excessive PE inclusion income

If condition B is met where there is a reduction in profits, or an increase in losses charged to tax in the parent jurisdiction, but the amount that is brought into account for UK CT purposes exceeds the aggregate effect on taxable profits in the parent jurisdiction, the excessive PE inclusion income is the amount that it is reasonable to assume is the excess of the amount that is brought into account for CT purposes over the sum of the reduction in profit/increase in losses in the parent jurisdiction.

Assume there is a multinational company with a headquarters in Jurisdiction A, and a permanent establishment in the UK. If a transfer of 100 is made from the company in the parent jurisdiction to the UK PE that is not deductible for tax in the parent jurisdiction but is brought into account for corporation tax purposes by the UK PE, then the amount of that payment would be treated as excessive PE income, and so would meet the criteria for being regarded as dual inclusion income. It would then be available to shelter any counteraction under 259JD TIOPA 2010.

If that payment was deductible for tax purposes in the parent jurisdiction, the amount would only qualify as excessive PE income to the extent that the amount brought into account for CT purposes exceeded the deduction (the reduction in profit/increase in loss) in the parent jurisdiction.