Summary of measures

Major changes to the United Kingdom’s system of double taxation relief for companies, in order to improve its effectiveness and its fairness, were announced today. Overall the changes will lead to a reduction in business’ compliance costs.

The object is to secure a fairer share of tax from global profits for the United Kingdom.

The changes will mainly affect multinational companies which earn income overseas, although some of the changes will apply also to individuals.

Business will benefit from improved communications with the Inland Revenue when the specialist group which calculates underlying tax rates moves from their Financial Intermediaries and Claims Office to International Division. This will happen on 1 April. It will help to ensure that the changes which concern relief for underlying tax are implemented effectively.

Further details

1. The changes follow a review of the current system of double taxation relief that started two years ago and has involved extensive consultation with business.

2. The most significant of the decisions taken by the Government are as follows
– the credit method of relieving double taxation should be retained and an exemption method should not be introduced
– the rate of underlying tax attributable to a dividend paid from one company to another will be capped at a rate equal to the United Kingdom corporation tax rate
– a provision that allows a company to specify the particular profits out of which it pays a dividend will be repealed
– a number of other changes will be made to the way in which relief for underlying tax is calculated
– companies will be able to carry back one year, or to carry forward indefinitely, foreign tax on dividends and on the profits of foreign branches which cannot be relieved immediately
– relief will be allowed to all non-residents for foreign tax paid on the income of their United Kingdom branches or agencies
– clear rules will be introduced for insurance companies receiving foreign taxed income as part of the receipts of insurance business
– taxpayers will be required to take reasonable steps to keep their foreign tax bills down if they claim relief for that tax (this will apply to all taxpayers, not just to companies)
– it will be made clear that if relief for foreign tax can be claimed under a double taxation agreement it cannot also be claimed under domestic law (this will apply to all taxpayers, not just to companies)
– the time limits for claiming relief for foreign tax will be extended where the tax is not paid until after the current time limits have expired (this will apply to all taxpayers, not just to companies)
– legislation will make clear that the royalties Article of some double taxation agreements will deny relief from source state taxation, in cases where there is a special relationship between the payer and the recipient of royalties, not only where the royalty rate is excessive, but also where the agreement under which the royalties are paid would not have been made in the absence of the special relationship (a similar provision already exists in relation to interest)
– the operation of the mutual agreement procedure (whereby the Inland Revenue may discuss with another country double taxation issues relating to a particular taxpayer) will be improved by legislation which clarifies how effect may be given to an agreement reached under the procedure and what time limits apply.

3. Full details of all the changes, together with draft legislation and a regulatory impact assessment, can be found in a paper which the Inland Revenue is publishing today called “Double taxation relief for companies: outcome of the review”. Comments are invited on the draft legislation by Wednesday 19 April.

Copies of the paper can be obtained from:

Inland Revenue Visitor Information Centre
Ground Floor
South West Wing
Bush House

Telephone 020 7438 6420/6425 Personal callers can obtain copies between 9.00am and 5.00pm, Monday to Friday.

The paper is also available on the internet at

Background notes

1. Double taxation occurs when income is taxed both by the taxpayer’s country of residence and in another country where the income arises. The purpose of double taxation relief is to remove or reduce the disincentive that double taxation represents to outward investment. It is estimated that in the tax year 1999/2000 5.5 billion pounds of relief will be allowed against income tax and corporation tax. A key part in that is played by double taxation agreements that the United Kingdom has entered into with other countries. More than 100 of these are now in force.

2. Most of the double taxation relief that is allowed relates to underlying tax. This is the tax paid by subsidiary companies on the profits out of which they pay dividends.

3. In March 1998 the Chancellor announced a review of double taxation relief for companies. The review covered the functioning and the fairness of the existing system, its effectiveness in meeting the objectives of the relief and business’ compliance costs, while having regard to the overall cost of the relief.

4. In March 1999 the Inland Revenue published a discussion paper “Double taxation relief for companies”. Twenty-five sets of responses were received from business and others.

5. The changes announced today are expected to have a yield of around 100m pounds in a full year.

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