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HMRC internal manual

International Manual

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HM Revenue & Customs
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Controlled Foreign Companies: Entity Exemptions: Chapter 14 - The Tax Exemption: The Local Tax Amount

The local tax amount is the tax paid in the CFC’s territory in respect of the local chargeable profits arising in the accounting period subject to any reductions required by TIOPA/S371NC. Chargeable gains and losses are excluded from the local tax amount.

The local tax amount includes taxes levied by political subdivisions of a country, for example Swiss cantonal taxes, where these qualify for double taxation relief against UK taxes on income under the normal rules. Details of the foreign taxes regarded as qualifying for relief can be found under the relevant country heading in the Double Taxation Relief manual at DT2140 onwards. However taxes on capital profits, or taxes computed on some basis other than profits such as indirect taxes or taxes on insurance premiums are therefore excluded from the local tax amount. Accordingly, the local tax amount is restricted to taxes which would qualify for tax credit relief against UK taxes on income under normal double taxation rules.

Determining whether reductions to the local tax amount are required under TIOPA10/S371NC

For the purposes of determining the local tax amount a reduction will be required where there is an inconsistency between income and expenditure brought into account in computing the local tax amount and income and expenditure brought into account in computing the corresponding UK tax. This could arise when a sum transferred to a reserve is brought into account in computing the local tax amount that would not be brought into account in computing the corresponding UK tax.

TIOPA10/S371NC(3) does this by excluding local tax arising on income or income and expenditure of the CFC which is brought into account in the calculation of its local chargeable profits in its territory of residence but which would not be brought into account in determining the assumed taxable total profits of the CFC after applying the corporation tax assumptions in chapter 19 (see INTM239300). This effectively allows a comparison with Local Tax and UK Tax where the same rules are applied to computing the profits to be brought into account.

TIOPA10/371NC(4) provides a similar adjustment to the local tax amount where expenditure is not brought into account for determining the local chargeable profits of the CFC but is recognised in determining the CFC’s assumed taxable total profits for the accounting period. This could arise where a deduction for interest would not be brought into account in computing the local tax amount but would be brought into account in computing the corresponding UK tax on the assumed taxable total profits of the CFC.

Exclusion of repaid tax

As well as reductions necessary under TIOPA10/S371NC(3) and (4), a further reduction of the local tax amount is required if local tax is repaid, or if it gives rise to a payment in respect of a tax credit to any person.

TIOPA10/S371NC(5) and (6) provides for this by excluding from the local tax amount any repayment of tax, or any payment in respect of a credit for tax, that arises directly or indirectly from tax payable in the territory of residence either in part or in whole. The repayment or payment will give rise to a reduction in the local tax amount irrespective of who the recipient is, providing it is done so under the law of the territory in which the CFC is resident.