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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: Combined results

In some cases, the trades of more than one company may be linked to a payment of foreign tax. There are two possible approaches where this is the case:

  • One approach relies on transfer pricing to ensure that when there is a link between two trades, a suitable price is paid for any service provided by one for the other. This approach allows the attribution of income and expenses to the foreign source to remain within the legal entity, but may include amounts imputed under transfer pricing rules. This approach will be appropriate for provision of services such as marketing, back office services and so on.
  • In other cases, trades may be managed centrally by a group to ensure they are complementary in ways that cannot wholly be described in terms of provision of service. For example, risks taken on by derivatives and equities traders may be chosen partly to cancel each other, so that the group’s aggregate risk is minimised. In these cases, it may be necessary to include expenses, gains or losses from a different company from the one that incurred the foreign tax payment when calculating the limit on credit relief, as if the two trades were carried on in a single company.

Where the above does not apply, it will generally be necessary to consider only expenses incurred by the company receiving the taxed income. However, where there has been manipulation with a view to reducing the expenses of that company, it may be necessary to consider expenses incurred in related companies. For instance, if the company receiving foreign income has a significantly lower proportion of debt funding than the group as a whole, and the difference cannot be explained on commercial grounds, then it may be necessary to include some of the interest expense incurred in an associated company. For individuals, only expenses incurred by the individual [or exceptionally their spouse] need to be considered.