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HMRC internal manual

Business Income Manual

Specific deductions: overseas taxes: summary

In most cases, tax charged by an overseas territory on the profits arising in that territory to a person resident in the UK will be available for tax credit relief, either under an agreement or unilaterally under S18 Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). As to the position where a taxpayer chooses to receive relief by way of a reduction from the overseas income rather than to have credit relief, see INTM161050.

A deduction may be allowed from trading profits for other annual taxes charged on a person resident in the UK in respect of his overseas trading, such as taxes on trade purchases or turnover and social security taxes in respect of employees.

Exceptional cases (for example, where excessive overseas tax seems to have been suffered or where some right of deferred refund of part of the overseas tax exists) should be submitted to CTISA before a deduction is agreed.

Overseas capital taxes

A deduction may in certain circumstances be due for taxes of a capital nature (see Harrods (Buenos Aires) Ltd v Taylor-Gooby [1964] 41 TC 450 which is discussed in BIM37300). A deduction should be given for annual capital taxes imposed in an overseas country on a UK resident trading there through a permanent establishment and charged on assets situated in that territory and used for the purposes of the trade. No deduction should be given for:

  1. capital taxes attributable to assets held as investments
  2. non-recurring capital taxes imposed by reason of a change in the ownership of the trade or of the assets (for example estate duty and share transfer taxes)

The following should be submitted to CTISA:

i) Claims other than in (a) above for a deduction for annual capital taxes where there is no permanent establishment in the overseas territory

ii) Claims other than in (b) above involving one-for-all capital taxes, such as voluntary revaluation taxes

iii) Any other points of difficulty

Overseas tax that is allowable in accordance with the preceding sub-paragraphs should normally be treated as an expense of the year or period on the basis of which it is levied. Any other satisfactory basis, which has been consistently adopted, need not, however, be disturbed.

Deductions where the UK has the primary taxing rights

Any case where an overseas country charges tax on a person resident in the UK in respect of income which, according to UK principles, arises in the UK (for example, where the overseas country regards the income as arising within its own boundaries) should be submitted to CTISA. See, however, DT9558 as regards certain Indian instances where cases should be referred to Business DTR Technical Support Group, Barkley House, Castle Meadow Road, Nottingham, NG2 1BA.

No deduction should be allowed for taxes imposed in the country in which a person trading in the UK is resident (CIR v Dowdall O’Mahoney & Co Ltd [1952] 33 TC 259). Any case in which a deduction is claimed against UK branch profits for tax imposed on such a person in a third country should be submitted to CTISA.

Limitations on credit for international money-lenders

As regards the application of S36 Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) (Income Tax) and S42 TIOPA 2010 (Corporation Tax) to banks and others lending by way of trade, see INTM168000 onwards.

Interest on late paid overseas tax

Interest payable on overseas tax may be regarded as an administrative penalty and is not therefore, in the way that tax is, an application of profits. Such interest may be admitted as a deduction. There are exceptions to this general rule. If the interest arises on a tax which is not itself deductible (for example a capital tax) then we would not allow it and if the interest is connected to overseas tax penalties it should be disallowed in accordance with the principle outlined in the CIR v Alexander von Glehn and Company Ltd [1920] 12 TC 232 (see BIM38520).

Deductions from UK trading profits for overseas taxes - country-by-country

For a country-by-country guide, see BIM45905.