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HMRC internal manual

International Manual

HM Revenue & Customs
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UK residents with foreign income or gains: dividends: Underlying tax - minimising foreign tax paid

TIOPA10/S33 states that all reasonable steps must be taken to minimise the amount of foreign tax paid.

We expect companies to claim the normal relief’s and allowances available to all entities under the standard tax regime for the territory concerned. Some guidance was published in the March 2000 paper ‘Double Taxation Relief for Companies: Outcome of the Review’. The following examples were given of situations where HMRC considers the provision would apply:

  • Acceptance of an estimated tax assessment in the other country which is likely to be excessive;
  • Not claiming an allowance or relief (e.g. capital allowances or losses) which is generally known to be available;
  • Where the other country’s domestic law or the relevant double taxation agreement provides for alternative bases of taxation, not choosing the basis which would produce the lowest tax bill.

At Committee Stage for Finance Bill 2000 some further guidance was given by the Paymaster General regarding the precursor to S33, (ICTA88/S795A):

“Subsection (3) of the new section refers to what a taxpayer might reasonably be expected to have done if he had not been able to obtain credit for the tax in the UK. In such cases, the taxpayer might have tried to keep his foreign tax bill down, having regard to the amount of time, effort and expense involved in discussing his case with the foreign tax authorities on the one hand and the amount of the expected reduction on the other.

Examples of situations in which the provision would not apply include not claiming a relief, the availability of which is uncertain, when disproportionate expenditure would have to be incurred in researching the other country’s laws to pursue the claim … claiming that a loss incurred in another country should be carried forwards and not backwards or vice versa, and the case of underlying tax paid by a subsidiary company when the UK company, which claims the relief for that tax, is not in a position to influence the amount of tax paid.”

In some countries there are regimes which are wholly or partly ring-fenced from residents, or from transactions with residents, and which provide for lower tax rates than those which are generally applying. A case in point is the ‘designer rate’ regimes in some territories. This provision does not compel or even encourage companies to exploit such special niches, as we consider this is outside the compass of ‘reasonable steps’. We will therefore give relief, subject to any other provisions, for normal rate tax suffered in these territories.

Local tax offices have responsibility for ensuring all reasonable steps have been taken to minimise foreign tax on withholding taxes and other direct taxes, e.g. on branches. CTIAA Underlying Tax Group, Yorke House, Nottingham has responsibility where underlying tax is claimed (INTM164440).

See also INTM161250 for more guidance on minimising withholding taxes.

Any case where it is claimed foreign tax need not be minimised before 21 March 2000 should be referred to CTIAA Business International, Outward Investment team.