Finance Bill - Changes to Double Tax Relief Provisions
The Inland Revenue has announced that amendments are to be made at Report Stage of the Finance Bill to the double tax relief provisions which attack the use of overseas 'mixer companies'. These rules, as they currently appear in the Bill, severely limit the ability of a UK group to maximise its UK relief for overseas tax by routing income from subsidiaries in high-tax and low-tax countries through such a company.
The key changes are as follows.
- Underlying tax (ie, overseas tax on the profits out of which dividends are paid) which arises in relation to foreign dividends paid up through overseas subsidiaries will still be capped at 30% but (as announced earlier) with a start date of 31 March 2001.
- Under a new system of 'onshore pooling', underlying tax on dividends paid to mixer companies (or, indeed, any overseas subsidiary) which is above the 30% cap imposed by the Bill will 'within certain limits' be able to be credited against UK tax payable on other dividends, other than dividends paid by controlled foreign companies (CFCs). Similar relief will be allowed for some overseas tax above the 30% limit which is paid on dividends received by UK companies direct from overseas subsidiaries.
- Dividends paid by CFCs to satisfy an 'acceptable distribution policy' (ADP) - ie, to avoid the apportionment of their profits to UK parents - will, however, not be able to be mixed with any other dividends. (It is unclear whether an ADP dividend could be mixed with forms of profit other than dividends - eg, trading profits - but presumably not.)
The main implications for UK taxpayers are as follows.
- Groups with normal trading operations carried out through overseas subsidiaries should stand to benefit from the changes. Underlying tax exceeding the 30% cap will now normally be available for credit against UK tax payable on foreign dividends paid into the UK (apart from ADP dividends). There will be limits on this extra measure of relief, but the announcement does not make it clear what these will be. (The detailed amendments have not yet been published.) One possible interpretation is that it is the intention that there should always be some residual UK tax to pay.
- Another point which remains to be clarified is whether the extra credit will be available to offset against UK tax payable on a dividend paid up a chain of foreign companies where the 30% cap has applied to at least one stage in the chain. If it is intended to deny relief in these circumstances then, depending on the precise detail of the eventual legislation, it may be possible to circumvent this restriction by careful timing of dividend payments or by transferring subsidiaries into direct ownership from the UK.
- To put small groups that hold other overseas subsidiaries direct from the UK onto an equal footing with large multinationals that have historically used mixers, unrelieved overseas tax on dividends from directly held high-tax companies will be available for credit against UK tax payable on non-ADP dividends from directly held low-tax subsidiaries. Again, it is possible that this measure will be restricted so that some residual UK tax always remains payable.
- Group with CFCs satisfying an ADP will now be in a worse position than under the original proposals in the Finance Bill, as those dividends are excluded from relief under the new rules. On the positive side, the announcement indicates that the new stricter definition of control introduced in the Finance Bill for use in determining whether a company is a CFC, incorporating a '40% test', will not apply as stringently as in the original wording.
EU withholding tax
The long-running dispute over the proposed EU withholding tax on the savings income of non-resident individuals was resolved at the EU summit in Feira, Portugal, on Wednesday. The original proposal was for Member States to have the choice of imposing a withholding tax or passing information to the tax authorities in the non-resident's home state. The UK has been pressing for a system of information exchange without a withholding tax alternative, but this was opposed by Austria and Luxembourg - who would be unable to comply without making modifications to their banking secrecy laws. Those two Member States have now dropped their objections in return for the right for a number of states to operate a withholding tax instead of exchanging information for a seven-year transitional period. Other special arrangements apply for Austria, which will need to change its constitution before it can amend its bank secrecy laws.
The agreed measures will not take effect unless key non-EU states such as the US and Switzerland consent to introduce similar régimes. There is a target date of 31 December 2002 for the EU to reach agreement with such countries - but initial reaction from Switzerland was not encouraging.
Press releases - w/e 16.6.00
12 June 2000 - Inland Revenue - Finance Bill: improving the tax system - international companies
Various amendments have been tabled by the Government to the Finance Bill clauses on the tax treatment of companies which draw up their accounts in foreign currency.
13 June 2000 - Inland Revenue - Disabled Person's Tax Credit and Disability Working Allowance
Detailed quarterly statistics on awards of Disabled Person's Tax Credit (and its predecessor, Disability Working Allowance).
13 June 2000 - Inland Revenue - Unpaid tax on gains: alternative collection provisions revised
The Finance Bill includes changes to the current rules for recovery of tax on chargeable gains from other group companies or controlling directors. These are being amended to align them more closely with the current rules; ie, to limit the circumstances in which liability can arise.
14 June 2000 - Customs & Excise - Customs & Excise welcomes tougher action on asset seizures
Customs have welcomed a Government proposal for wider civil forfeiture powers in respect of funds derived from, or used to finance, drug trafficking.
14 June 2000 - Inland Revenue - Corporation tax on chargeable gains: indexation allowance - May 2000
A table of figures to be used in calculating indexation allowance for capital gains disposals made by companies in May 2000.
16 June 2000 - Inland Revenue - Finance Bill: double taxation relief and controlled foreign companies
See article above.
16 June 2000 - Inland Revenue - New codes of practice for enforcement of National Minimum Wage
Two new codes of practice committing the Inland Revenue to 'thorough and sympathetic enforcement' of the NMW.
For further information, or assistance, please speak to your usual KPMG tax contact.
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