INTM161040 - UK residents with foreign income or gains: double taxation relief: Same income

The credit relief provisions of a double taxation agreement and the corresponding provision for unilateral relief in TIOPA10/S9 provide that double taxation relief will only be given for foreign taxes incurred on the same profits, income or gains that are taxed in the UK.

As held by the Supreme Court in Anson v HMRC [2015] UKSC 44, the approach to take when considering whether the same profits, income or gains have been taxed in both countries is to:

1. Identify the profits, income or gains by reference to which the UK tax liabilities are computed. As confirmed by the Supreme Court, this is primarily a question of UK tax law. How the person is taxed in the foreign country is not relevant to this part of the analysis.

Where relief is claimed in respect of income derived from an interest in a foreign entity, see INTM180000 for guidance as to how to identify the profits, income or gains by reference to which the UK tax liabilities are computed. INTM180050 provides HMRC’s view in relation to what profits, income or gains members of Delaware LLCs are liable to UK tax on following Anson.

2. Identify the profits, income or gains by reference to which the foreign tax liabilities are computed. This is primarily a question of foreign tax law. Officers should seek copies of the foreign tax returns and computations to evidence this.

3. Compare whether the profits, income and gains identified as above are the “same”.

As held by the Supreme Court, a degree of pragmatism may need to be applied when deciding whether the tax in both countries has been computed by reference to the same profits, income or gains (for example where differences between UK and foreign accounting and tax rules prevent a precise matching of income). However, HMRC does not believe this degree of pragmatism extends to treating profits and distributions of profits as the same income. In this regard, note that the Supreme Court rejected Mr Anson’s first ground of appeal that even if he was liable to tax in the US on his share of the profits and in the UK only on any distributions, the US and UK tax were nevertheless charged on the same profits or income. 

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

In Anson v HMRC [2013] EWCA Civ 63, Mr Anson raised a new argument, based on the exchange of notes dated 24 July 2001 in relation to Article 24 (and Articles 1(4) and 1(8)) of the 2001 UK/US Double Taxation Convention (DTC), that it was no longer necessary to show that the UK and US tax was paid on the same profits for credit to be due under that DTC. However, the Court of Appeal refused Mr Anson permission to appeal and HMRC continue to believe that this does not override the requirement for the UK and US tax to be computed by reference to the same profits, income or gains.

Note that for credit to be allowed, it is not a requirement that the foreign tax has to be borne by the same person who is liable to UK tax on the same profits, income or gains. For example, if the foreign country taxes a settlor on the income of a UK resident beneficiary, who is chargeable to UK tax on that income, credit may be given to the beneficiary for the foreign tax paid by the settlor. However, it must be the same income which is being taxed in both countries. See also Statement of Practice 6/88 and INTM169040 in the capital gains context.

Where directors’ fees are treated as income of a partnership or of a company under ESC/A37 (or the relevant enactment in legislation from 6 April 2018, see (EIM02500) credit relief is available to the partnership or company, regardless of the fact that the foreign tax may have been suffered by the director.

In addition to checking whether the foreign tax has been computed by reference to the same profits, income or gains, Officers should also check that all other relevant conditions for relief have been met (for example that a valid claim has been made on time, that the profits, income or gains have a foreign source and that only the minimum amount of foreign tax chargeable under the laws of the foreign country and the provisions of any relevant double taxation arrangement has been claimed – see INTM161100 for a summary of the basic principles).