Chapter INTM163030
| Published date | 09 April 2016 |
| Record Number | INTM163030 |
A UK enterprise trading abroad may carry on the trade through a branch which is a permanent establishment in the foreign country. The foreign country is entitled to tax the profits of the UK enterprise attributable to that branch in accordance with the business profits Article of the agreement (see INTM153080).
Under the standard elimination of double taxation Article in UK treaties, the UK is obliged to give credit for foreign tax payable on profits, income or chargeable gains from sources within the other state against any UK tax computed by reference to the same profits, income or chargeable gains by reference to which the foreign tax is computed.
HMRC gives credit relief for the lesser of the foreign tax and the UK tax on the branch profits. But is this limiting factor the UK tax on the foreign tax measure of the branch, or the UK tax on the foreign commercial measure of the branch profits or the UK tax on the UK tax measure of the branch profits?
Following the cases of George Wimpey International Ltd v Rolfe, 62 TC 597 and Yates v CGA International Ltd, 64 TC 37, one must look to UK law when determining the amount of the overseas income that will be taxed in the UK. Credit relief will be due for the lesser of the foreign tax and the UK tax computed by reference to the UK tax measure of the foreign source income, not the notional UK tax based on either the foreign tax measure or the foreign commercial measure.
In considering tax credit relief in these cases, there are three steps to be taken in matching these foreign branch profits with the UK measure of those profits. The following example shows these steps. It assumes that the UK enterprise is a company and that all the amounts are expressed in sterling.
- Start with the foreign commercial measure of the profits. This will be the profit shown by the branch accounts, for example
| £ | £ | ||
| Expenses | 900 | Earnings | 1,000 |
| Depreciation | 20 | ||
| Profit | 80 | ||
| 1,000 | 1,000 |
- Get the foreign tax calculation
| £ | |
| Profit | 80 |
| Disallowable expenses | 100 |
| Depreciation | 20 |
| 200 | |
| Less foreign capital allowances | 50 |
| Foreign tax measure of the profits | 150 |
| Foreign tax at, say, 40% | 60 |
It is not normally necessary to explore the precise details of the computations of the foreign taxable profits. It is sufficient to be satisfied that the foreign tax is a tax on profits and represents the...
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