Double taxation relief avoidance - credit abuse
The measure
Measures were introduced in 2005 to limit the amount of UK double taxation relief available to UK banks for overseas tax suffered on trading receipts. These restricted the UK relief to the amount of UK corporation tax on the relevant trading profits. The new measure aims to close specific structured transactions whereby the trading profits are either diverted to another group (investment) company in such a way as to avoid this restriction, or where specified low-cost funding has been allocated against the trading income by the bank thus reducing the amount of relief subject to the restriction.
In the first instance the assumption will be that the income will be treated as trading income when received by a member of a banking group, unless that assumption is not reasonable. The second point is addressed by ensuring that a proportion of the bank's average cost of funds across all transactions is deducted in calculating the available relief rather than that on a specific source of funding.
Who will be affected?
UK banks that have entered into the targeted structured transactions.
When?
The measure takes effect from 22 April 2009.
Whilst HMRC may maintain that the new measure merely clarifies the existing rules, in our view there is doubt that this is the case, and only in light of this measure is the position put beyond doubt.
