International Tax Planning and Transfer Pricing Planning: United Kingdom from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country United Kingdom in the OECD context
    • 2.3 Transfer pricing rules of the United Kingdom
      • 2.3.1 Arm's length principle
      • 2.3.2 Transfer pricing methods
      • 2.3.3 Country-by-Country reporting
      • 2.3.4 Documentation requirements
      • 2.3.5 Cost sharing
      • 2.3.6 Business restructuring
      • 2.3.7 Interaction between customs valuation and transfer pricing
      • 2.3.8 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between the United Kingdom and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty UK-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 The United Kingdom in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from the United Kingdom to the US
      • 2.4.8 Case study 2: Intesests from the United Kingdom to the US
      • 2.4.9 Case study 3: Royalties from the United Kingdom to the US
      • 2.4.10 Case study 4: Management and technical service fees from the United Kingdom to the US
      • 2.4.11 Case study 5: Capital gains with the United Kingdom as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to the United Kingdom
      • 2.4.13 Case study 7: Interests from the US to the United Kingdom
      • 2.4.14 Case study 8: Royalties from the US to the United Kingdom
      • 2.4.15 Case study 9: Management and technical service fees from the US to the United Kingdom
      • 2.4.16 Case study 10: Capital gains with the US as asset country and the United Kingdom as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetory Fund the UK confirms in 2016 with a gross domestic product (GDP) of US$ 2,649,890 million the second-highest GDP of Europe. In the UK the corporation tax rate has fallen to 20.00% from 1 April 2015. For UK resident companies with taxable profits of below £300,000, the small profits rate of 20.00% applies. From 1 April 2015, the small profits rate is abolished and all companies are taxed at the main rate. A marginal relief applies for companies with income that is above the lower limit (£300,000) but equal or below the upper limit (£1.5 million). Thus, the UK is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. The UK has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, the Brexit referendum vote has reduced growth prospects and increased volatility, as reflected by the large currency depreciation. Monetary policy has mitigated the immediate impact of the shock by stabilising financial markets and shoring up consumer confidence. This projection assumes the United Kingdom will operate with a most favoured nation status after 2019, but there is considerable uncertainty about this, which will increasingly weigh on growth, and in particular private investment, including foreign direct investment. Higher inflation is projected to hit households’ purchasing power and to reduce corporate margins, weakening private consumption and investment. As growth slows, the unemployment rate is projected to rise. Macroeconomic policies need to be expansionary. Inflation is set to exceed the target of 2%, but the monetary policy stance is expected to be unchanged as the inflationary impact of currency depreciation should be temporary. The latest government plans released in the Autumn Statement indicate a slower pace of fiscal consolidation and some increase in public investment. A more significant increase in public investment would support demand in the near term and boost supply in the longer term. This chapter provides a survey on the actual tax law frame conditions in the United Kingdom and practical support in international tax planning and transfer pricing planning between the US and the United Kingdom based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing the United Kingdom applies the arm’s length principle and the OECD Guidelines, especially the the following transfer pricing methods: the comparable uncontrolled price method; the resale price method; the cost-plus method; the transactional net margin method; and the profit split method. Other methods are also permitted if the facts and circumstances of the case mean that a different method is a more reliable way of determining an arm’s length result. In limited circumstances, it may be appropriate to combine two or more methods. Two companies are related if one controls the other, or if they are both under common control. A company has “control” over another company, (i) if it has the power to ensure that the affairs of that other company are conducted in accordance with its wishes; and (ii) this power is exercised either by means of the holding of shares or the possession of voting power, directly or indirectly, or by virtue of any powers conferred in the articles of association or other document regulating that company. Companies are required to keep documentation on transactions with related companies. Cost sharing is allowed, with respect to business restructuring special rules apply, there is a conection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available. There are rules for dispute resolution and advance pricing agreemens are available.

Introduction

International tax planning and transfer pricing planning between the United Kingdom as most important national economy of the British Commenweath, partially regulated market economy, fifth-largest economy in the world and second-largest in Europe after Germany, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2015 3rd place of the most populous countries in the world (4.4% of the world population). [1] Further, the UK is one of the most populous countries in Europe (with 65 million inhabitants 0.88% of world population).

According to the International Monetory Fund[2] the UK confirms in 2016 with a gross domestic product (GDP) of US$ 2,649,890 million the second-highest GDP of Europe. In the UK the corporation tax rate has fallen to 20.00% from 1 April 2015. For UK resident companies with taxable profits of below £300,000, the small profits rate of 20.00% applies. From 1 April 2015, the small profits rate is abolished and all companies are taxed at the main rate. A marginal relief applies for companies with income that is above the lower limit (£300,000) but equal or below the upper limit (£1.5 million). Thus, the UK is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. The UK has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD[3], the Brexit referendum vote has reduced growth prospects and increased volatility, as reflected by the large currency depreciation. Monetary policy has mitigated the immediate impact of the shock by stabilising financial markets and shoring up consumer confidence. This projection assumes the United Kingdom will operate with a most favoured nation status after 2019, but there is considerable uncertainty about this, which will increasingly weigh on growth, and in particular private investment, including foreign direct investment. Higher inflation is projected to hit households’ purchasing power and to reduce corporate margins, weakening private consumption and investment. As growth slows, the unemployment rate is projected to rise. Macroeconomic policies need to be expansionary. Inflation is set to exceed the target of 2%, but the monetary policy stance is expected to be unchanged as the inflationary impact of currency depreciation should be temporary. The latest government plans released in the Autumn Statement indicate a slower pace of fiscal consolidation and some increase in public investment. A more significant increase in public investment would support demand in the near term and boost supply in the longer term. With a weak economic outlook, further raises in the minimum wage should be considered prudently. Despite recent increases, long-term interest rates remain low, creating fiscal space as debt service obligations fall. Reducing tax expenditures and adopting a single VAT rate would improve both efficiency and fairness, but would require flanking policies to protect the poor. More spending on physical infrastructure and skills in regions lagging behind would raise productivity and wages, making fiscal policy more inclusive.

According to Orbitax[4] (Daily Tax News Digest of 7 December 2016)

on 5 December 2016, the UK published the draft provisions for Finance Bill 2017, which includes the measures announced as part of the Autumn Statement 2016.

What has been published? - The government is publishing draft provisions for Finance Bill 2017 for consultation. Where secondary legislation will give substantive effect to the Finance Bill clause, this has also been published in draft.

Each provision is accompanied by:

  • a tax information and impact note (TIIN) which sets out what the legislation seeks to achieve, why the government is undertaking the change and a summary of the expected impacts
  • an explanatory note which provides a more detailed guide to the legislation

TIINs are published in the overview of legislation in draft document, and are also available individually on the tax information and impact notes page. [5]

Contacts and closing date - If you wish to comment on any of the draft clauses, please use the contact details provided at the end of the relevant explanatory note. The closing date for comments is Wednesday 1 February 2017. Click the following link for the consultation page[6], which includes an overview of the legislation in draft, the draft provisions, and draft explanatory notes.

According to Orbitax[7] (Daily Tax News Digest of 28 November 2016),

on 23 November 2016, UK Chancellor of the Exchequer Philip Hammond delivered the Autumn Statement 2016 to parliament. The main tax-related measures include:

  • Individual Income Tax: The individual income tax brackets and threshold will be as follows from 6 April 2017: up to GBP 33,500 - 20%, GBP 33,501 up to 150,000 - 40%, over GBP 150,000 - 45%.

The annual personal allowance will be increased from GBP 11,000 to GBP 11,500.

Commitment to Cutting Corporation Tax to 17% by 2020. The main rate of corporation tax has already been cut from 28% in 2010 to 20%, and will be cut again to 17% by 2020, by far the lowest in the G20 and benefitting over 1 million businesses.

  • Interest Deduction Limitation: The government will introduce rules that limit the tax deductions that large groups can claim for their UK interest expenses from April 2017. These rules will limit deductions where a group has net interest expenses of more than GBP 2 million, net interest expenses exceed 30% of UK taxable earnings, and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group.
  • Loss Carry Forward Restriction: The government will legislate for reforms announced at Budget 2016 that will restrict the amount of profit that can be offset by carried-forward losses to 50% from April 2017, while allowing greater flexibility over the types of profit that can be relieved by losses incurred after that date. The restriction will be subject to a GBP 5 million allowance for each standalone company or group. The amount of profit that banks can offset with losses incurred prior to April 2015 will continue to be restricted to 25% in recognition of the exceptional nature and scale of losses in the sector.
  • Taxation of Non-Resident Companies: The government is considering bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime. At Budget 2017, the government will consult on the case and options for implementing this change. The government wants to deliver equal tax treatment to ensure that all companies are subject to the rules which apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and loss relief rules.
  • Northern Ireland Corporation Tax: The government will amend the Northern Ireland Corporation Tax regime in Finance Bill 2017 to give all small and medium sized enterprises (SMEs) trading in Northern Ireland the potential to benefit. Other amendments will minimize the risk of abuse and ensure the regime is prepared for commencement if the Northern Ireland Executive demonstrates its finances are on a sustainable footing.
  • Patent Box Rules: The government will legislate in Finance Bill 2017 to add specific provisions to the Patent Box rules, covering the case where Research and Development (R&D) is undertaken collaboratively by two or more companies under a ‘cost sharing arrangement’. The provisions ensure that such companies are neither penalized nor able to gain an advantage under these rules by organizing their R&D in this way. This will have effect for accounting periods commencing on or after 1 April 2017.
  • Hybrids and Other Mismatches: The government will legislate in Finance Bill 2017 to make minor changes to ensure that the hybrid and other mismatches legislation works as intended. The changes will have effect from 1 January 2017.
  • VAT Flat Rate Scheme: The government will introduce a new 16.5% VAT rate from 1 April 2017 for businesses with limited costs, such as many labor-only businesses.
  • Updating the VAT Avoidance Disclosure Regime: As announced at Budget 2016 and following consultation, legislation will be introduced in Finance Bill 2017 to strengthen the regime for disclosure of avoidance of indirect tax. Provision will be made to make scheme promoters primarily responsible for disclosing schemes to HMRC, and the scope of the regime will be extended to include all indirect taxes. This will have effect from 1 September 2017.
  • A Penalty for Participating in VAT Fraud: As announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 to introduce a new and more effective penalty for participating in VAT fraud. It will be applied to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud. The penalty will improve the application of penalties to those facilitating orchestrated VAT fraud. The new penalty will be a fixed rate penalty of 30% for participants in VAT fraud. This will be implemented following Royal Assent of the Finance Bill 2017. Click the following link for the Autumn Statement 2016 webpage[8] on the Gov.UK site, which includes links to the full statement and related documentation.

Acording to Orbitax[9] (Daily Tax News Digest of 22 November 2016),

UK HMRC has published guidance on the general anti-abuse rule (GAAR) and provisional counteraction notices. The guidance provides an overview of the GAAR and when tax arrangement are considered abusive, as well as an overview of provisional counteraction notices on adjustments HMRC intends to make to counteract tax advantages and the actions taxpayers can take.

Click the following link for Compliance checks: general anti-abuse rule and provisional counteraction notices - CC/FS34[10].

According to Orbitax[11] (Daily Tax News Digest of 21 November 2016),

on 15 November 2016, UK HMRC published a supplementary paper on tax adjustments as part of its consultation on simplifying the corporation tax computation (previous coverage). The supplementary paper covers the most frequent adjustments that companies use and seeks input on the adjustments that would benefit from simplification.

Click the following link for the consultation page[12], which includes the initial report, the supplementary paper, and comprehensive and summary tables of the adjustments. The consultation ends 31 December 2016.

According to Orbitax[13] (Daily Tax News Digest of 28 June 2016) and according to a briefing paper published by the UK House of Commons, the tax-related implications of the UK exiting the European Union mainly concern indirect taxation. The impact on indirect taxation is due to EU law that has established common rules regarding value added tax (VAT), which limits the UK's ability to set particular rates for various goods and services, as well as the ability to provide exemptions. Regarding other forms of taxation, the paper states that no such direct rules exist, although the overarching provisions of the Treaty for the Functioning of the EU, which provides for the free movement of goods, persons, services and capital across the single market and the prohibition of discrimination, would no longer apply for the UK. In addition, the UK would no longer need to comply with EU State aid rules. One area the briefing paper overlooks is the benefits of the EU Parent-Subsidiary Directive and the Interest and Royalties Directive, which provide for withholding tax exemptions on dividends distributions and interest and royalty payments respectively. Such benefits would no longer be available to UK groups once the UK leaves the EU, although depending on how the exit is ultimately negotiated, certain benefits may be maintained. [14]

According to Orbitax[15] (Daily Tax News Digest of 17 June 2016) the UK HM Treasury on 14 June 2016 published amendments of the Finance Bill 2016 concerning the application of the General Anti-Abuse Rule (GAAR). These include:

  • Amendments to Clauses 144 and 145: Provisional counteractions and binding of tax arrangements to lead arrangements: To ensure that GAAR procedural changes work as intended, and ensure that consequences that already result from a GAAR counteraction apply equally under the new GAAR counteraction procedures; and To ensure that those who engage in abusive arrangements concerning National Insurance Contributions (NICs) are subject to the procedural changes under Clause 145 and the GAAR Penalty under Clause 146;
  • Amendments to Clause 146: General Anti-Abuse Rule Penalty: To ensure that those who are successfully counteracted under the GAAR will be subject to a GAAR Penalty when they submit a return, claim or other document to HMRC on the basis that a tax advantage arises from the tax arrangements where all or part of that tax advantage is later counteracted under the GAAR; and To ensure the smooth running of the GAAR Penalty and to reflect the amendments made in respect of Clause 145. [16]

The pivotal question is therefore, how groups of affiliated companies with group companies in the United Kingdom and the US can – before the background of ant-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning on the basis of cross-border case studies.

Therefore and first of all the low tax country United Kingdom is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of the United Kingdom (see section 3), and constructive hereon 10 case studies in international tax planning between the United Kingdom and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between the United Kingdom and the US.

This article had been written based on the following sources:

  • Orbitax®[17], Orbitax® Country Analysis United Kingdom and USA, Orbitax® Cross-Border Calculation Tools, Orbitax® Transfer Pricing Tool,
  • The UK Corporation Tax Act 2010, [18]
  • the US Internal Revenue Code, [19] and
  • the Double Taxation Convention between between the USA and the United Kingdom of 24 July 2001, effective from 31 March 2003 [20].
The low tax country United Kingdom in the OECD context

International tax planning and transfer pricing planning between the United Kingdom and the US on the basis of cross-border case studies is of central importance. In the UK the corporation tax rate has fallen to 20.00% from 1 April 2015. For UK resident companies with taxable profits of below £300,000, the small profits rate of 20.00% applies. From 1 April 2015, the small profits rate is abolished and all companies are taxed at the main rate. A marginal relief applies for companies with income that is above the lower limit (£300,000) but equal or below the upper limit (£1.5 million). Thus the United Kingdom is a low tax country. The UK has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

Between OECD Member States, especially the United Kingdom and the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Herefrom there results the incentive to international tax planning and to shipft the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any country are the statutary corporate income tax rates. [21] Furthermore in many OECD Member States there are – in addition to the statutory corporate income tax rates – further coporate income taxes, especially on the level of subordinated regional administration bodies. Consequential and following the concept of Gerd Rose[22] there can be calculated combined tax rates for any country, that applied to one (uniform) taxable basis, result in the tax burden of the related country. The combined corporate income tax rates of countries with several taxes can than be compared with countries that just apply a single corporate income tax rate. In addition an average rate for the whole OECD can be calculated.

In 2016 the United Kingdom has a combined tax rate of 20.00%. Within the OECD the corporate income tax rates range between 12.50% in case of Ireland (distribution rate) und 40.00% in case of France (distribution rate). The average corporate income tax rate in the OECD in 2016 is 24.95%. The margin is 27.50 percentage points. It attracts attention that OECD Member States with the highest tax burden also apply surtaxes, as the US. 21 of the OECD Member States are also EU Member States.

The United Kingdom is 4.95 percentage points under and the US 14.65 percentage ponts over the OECD average. Kigh corporate income tax rates form the incentive to reduce the taxable basis by cross-border tax planning measures.

Transfer pricing rules of the United Kingdom Arm's length principle

The United Kingdom applies the arm's length principle under Taxation (International and Other Provisions) Act 2010 (TIOPA 2010). The OECD Guidelines are imported directly into UK legislation under section 164 of TIOPA 2010. [23]

Transfer pricing methods

The methods available in the United Kingdom are those of the OECD Guidelines as at July 2010 (or as at May 1998 for periods before April 2011). Specifically:

  • the comparable uncontrolled price method;
  • the resale price method;
  • the cost-plus method;
  • the transactional net margin method; and
  • the profit split method.

Other methods are also permitted if the facts and circumstances of the case mean that a different method is a more reliable way of determining an arm’s length result. In limited circumstances, it may be appropriate to combine two or more methods.

Definition of related companies the arm's length principle applies, in general, to transactions between related companies, whether or not resident in the United Kingdom. Apart from the purchase and sale of goods, transactions covered include the letting and hiring of property, grants and transfers of rights, interests or licences, financial transactions and the giving of business facilities of any kind. Exemption is available for small and medium-sized enterprises (as defined for EU purposes).

Two companies are related if one controls the other, or if they are both under common control. A company has “control” over another company, (i) if it has the power to ensure that the affairs of that other company are conducted in accordance with its wishes; and (ii) this power is exercised either by means of the holding of shares or the possession of voting power, directly or indirectly, or by virtue of any powers conferred in the articles of association or other document regulating that company. The regime also encompasses loans and other financing arrangements where any persons act together in relation to such arrangements (e.g. certain private equity transactions).

Country-by-Country reporting

Following the release of Finance Act 2015, multinational enterprises with parent companies in the United Kingdom will now be required to make an annual country-by-country report to HMRC showing for each tax jurisdiction in which they do business:

  • the amount of revenue, profit before income tax, and income tax paid and accrued; and
  • their total employment, capital, retained earnings and tangible assets.

For example, if a transfer pricing adjustment is made in a tax return, there should be a basis for deciding what it should be and a calculation of the amount. These will constitute the tax adjustment records.

On 27 January 2016, the United Kingdom and 30 other jurisdictions signed to a Multilateral Competent Authority Agreement (MCAA) (2016) on the automatic exchange of Country-by-Country reports. The signing ceremony marks an important milestone towards implementation of the OECD/G20 BEPS Project and a significant increase in cross-border co-operation on tax matters.

The agreement was developed within the scope of the OECD's BEPS project on corporate taxation. It describes the type of information to be exchanged between states on the activities of multinationals in their territories.

The signatory countries comprise Australia, Austria, Belgium, Chile, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, Netherlands, Nigeria, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland and the United Kingdom.

Documentation requirements

There is no rule specific to the transfer pricing legislation which requires the preparation of transfer pricing documentation. The documentation requirement stems instead from general record-keeping requirements (see section 13.2.), although in interpreting the general record-keeping requirements in relation to transfer pricing, HMRC are guided by chapter V of the OECD Guidelines.

For corporation tax, part III of schedule 18 of FA 1998 contains an obligation to have and to keep records and all supporting documents needed “to deliver a correct and complete return”. The equivalent legislation for income tax is found in section 12B of the Taxes Management Act 1970.

Broadly this means that a taxpayer must have the records needed to prepare its return accurately, must keep them for the statutory period (usually 4 years) and must be able to demonstrate that this is the case if HMRC should embark on an enquiry.

Under the self-assessment system which operates in the United Kingdom, by filing a return the taxpayer is essentially declaring that it has considered whether transfer pricing rules apply and is satisfied that the figures in the return are based on arm’s length pricing. Consequently, the records and supporting documents required “to deliver a correct and complete return” and to show that such a return has been delivered for transfer pricing purposes may go beyond the normal accounting records that would otherwise be kept.

The penalty for failure to keep adequate records for an accounting period is GBP 3,000.

Cost sharing

There are no specific rules in the United Kingdom on cost contribution arrangements and no case law on which to refer. However, for cost contribution arrangements the United Kingdom follows the stipulations of the OECD Guidelines.

It will usually be important in the United Kingdom to demonstrate that there is a benefit from pooling resources, that the benefits are mutual and that the contributions required of the parties reflect the benefits they derive.

Business restructuring

There are no specific transfer pricing rules for business restructuring or the reorganization of supply chains; the general rules apply. However, with effect from April 2011 chapter IX of the OECD Guidelines (published in 2010) is directly applicable in the United Kingdom.

Interaction between customs valuation and transfer pricing

As a member of the European Union, the United Kingdom applies EU customs rules. In principle both these and the transfer pricing rules require goods sold between related parties to be priced at arm’s length; the primary method for customs duty valuation is the value of the actual transaction. It is then necessary to demonstrate that this price:

  • is at arm's length for customs purposes; and
  • includes all relevant costs.

If the transaction value (Method 1) cannot be used (e.g. because it is not at arm’s length), a hierarchy of other methods exists. Methods 2 (identical goods) and 3 (similar goods) are variations on the comparable price method. Methods 4 and 5 correspond to the resale price method (see section 4.5.) and cost-plus method (see section 4.6.), but will not necessarily be identical. Method 2 must be used before Method 3 and Method 3 before Methods 4 or 5. The taxpayer can choose between Methods 4 and 5. Method 6 can only be used if all the others fail and involves relaxing some of the tight conditions for comparability under the other methods.

Dispute resolution

Most but not all of the United Kingdom's double tax treaties contain the equivalent of article 25 on the mutual agreement procedure. However, HMRC have not in practice regarded the absence of such a provision as preventing them from doing so if an exchange of information article exists to permit the provision of information as part of a discussion. HMRC is the competent authority that deals with MAPs in the United Kingdom.

Advance pricing arrangements (APAs) are available in the United Kingdom.

Calculation of the case studies in international tax planning between the United Kingdom and the USA

For 10 case studies on the taxation of cross-border payments between the United Kingdom and the US see the following tables 1 and 2:

Table 1: Payments from the United Kingdom to the US

Case study

1

2

3

4

5

Kind of payment

dividend

interest

royalty

fees

Capital gains

Subsidiary in

GB

GB

GB

GB

GB

Parent company in

US

US

US

US

US

Treaty concluded on

24.07.2001

24.07.2001

24.07.2001

24.07.2001

24.07.2001

Treaty effective since

31.03.2003

31.03.2003

31.03.2003

31.03.2003

31.03.2003

Amending protocol effective since

31.03.2003

31.03.2003

31.03.2003

31.03.2003

31.03.2003

Holding period

24 months

n/a

n/a

n/a

24 months

Level of subsidiary

[million $]

[million $]

[million $]

[million $]

[million $]

Profit before expenses and taxes

10.00

10.00

10.00

10.00

10.00

- Expenses

0.00

-10.00

-10.00

-10.00

0.00

= Taxable income

10.00

0.00

0.00

0.00

0.00

x CIT rate

20.00%

20.00%

20.00%

20.00%

20.00%

= CIT

-2.00

0.00

0.00

0.00

0.00

Payment before WHT

8.00

10.00

10.00

10.00

10,00

WHT Rate

0.00%

0.00%

0.00%

0.00%

0.00%

WHT

0.00

0.00

0.00

0.00

0.00

= Net payment

8.00

10.00

10.00

10.00

10.00

Case study

1

2

3

4

5

Level of parent company

[million $]

[million $]

[million $]

[million $]

[million $]

= Income from foreign sources

8.00

10.00

10.00

10.00

10.00

Double taxation relief

Indirect credit

Ordinary credit

Ordinary credit

Ordinary credit

Ordinary credit

Credit of WHT

0.00

0.00

0.00

0.00

0.00

Credit of CIT

2.00

n/a

n/a

n/a

n/a

Total tax credit

0.00

0.00

0.00

0.00

0.00

= Taxable percentage

100.00%

100.00%

100.00%

100.00%

100.00%

= Taxable income

10.00

10.00

10.00

10.00

10.00

x CIT rate

39.60%

39.60%

39.60%

39.60%

39.60%

= CIT

-3.96

-3.96

-3.96

-3.96

-3.96

- Tax credit

2.00

0.00

0.00

0.00

0.00

Results

[million $]

[million $]

[million $]

[million $]

[million $]

= Return after tax

6.04

6.04

6.04

6.04

6.04

Group tax ratio

39.60%

39.60%

39.60%

39.60%

39.60%

Legend: CIT = corporate income tax   fees = management and technical service fees   n/a = not applicable   GB = United Kingom   US = United States of America   WHT = withholding tax  

Sources:

Orbitax, Orbitax Country Analysis, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool, USA, 2016, www.orbitax.com, www.fag.hiof.no/~rainerz.

 

Table 2: Payments from the US to the United Kingdom

Case study

6

7

8

9

10

Kind of payment

dividend

interest

royalty

fees

Capital gains

Subsidiary in

US

US

US

US

US

Parent company in

GB

GB

GB

GB

GB

Treaty concluded on

24.07.2001

24.07.2001

24.07.2001

24.07.2001

24.07.2001

Treaty effective since

31.03.2003

31.03.2003

31.03.2003

31.03.2003

31.03.2003

Amending protocol effective since

31.03.2003

31.03.2003

31.03.2003

31.03.2003

31.03.2003

Holding period

24 months

n/a

n/a

n/a

24 months

Level of subsidiary

[million $]

[million $]

[million $]

[million $]

[million $]

Profit before expenses and taxes

10.00

10.00

10.00

10.00

10.00

- Expenses

0.00

-10.00

-10.00

-10.00

0.00

= Taxable income

10.00

0.00

0.00

0.00

0.00

x CIT rate

39.60%

39.60%

39.60%

39.60%

39.60%

= CIT

3.96

0.00

0.00

0.00

0.00

Payment before WHT

6.04

10.00

10.00

10.00

10,00

WHT Rate

0.00%

0.00%

0.00%

0.00%

0.00%

WHT

0.00

0.00

0.00

0.00

0.00

= Net payment

6.04

10.00

10.00

10.00

10.00

Case study

6

7

8

9

10

Level of parent company

[million $]

[million $]

[million $]

[million $]

[million $]

= Income from foreign sources

6.04

10.00

10.00

10.00

10.00

Double taxation relief

Exemption

Ordinary credit

Ordinary credit

Ordinary credit

Ordinary credit

Credit of WHT

n/a

0.00

0.00

0.00

0.00

Credit of CIT

n/a

n/a

n/a

n/a

n/a

Total tax credit

n/a

0.00

0.00

0.00

0.00

= Taxable percentage

0.00%

100.00%

100.00%

100.00%

100.00%

= Taxable income

0.00

10.00

10.00

10.00

10.00

= KSt-Satz

20.00%

20.00%

20.00%

20.00%

20.00%

= CIT

0.00

-2.00

-2.00

-2.00

-2.00

- Tax credit

n/a

0.00

0.00

0.00

0.00

Results

[million $]

[million $]

[million $]

[million $]

[million $]

= Return after tax

6.04

8.00

8.00

8.00

8.00

Group tax ratio

39.60%

20.00%

20.00%

20.00%

20.00%

Legend: CIT = corporate income tax   fees = management and technical service fees   n/a = not applicable   GB = United Kingom   US = United States of America   WHT = withholding tax  

Sources:

Orbitax, Orbitax Country Analysis, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool, USA, 2016, www.orbitax.com, www.fag.hiof.no/~rainerz.

 

Download tables 1 and 2 in Xls format

Design of the tables

Tables 1 and 2 provide an overview on 10 case studies in the taxation of cross-border payments between the United Kingdom and the US. For that matter the columns 1 to 5 show payments of dividends, interests, royalties, management and technical service fees and capital gains from the United Kingdom to the US, whereas the columns 6 to 10 show payments of the same kind from the US to the United Kingdom.

Any column begins with a payment of $ 10 million before expenses and taxes and ends with the respective return after tax and the group tax ratio. The payment of dividends and capital gains does not represent expenses as it is allocation of profits, whereas all other payments represent espenses, which will be discussed as follows relative to every single case study.

The treaty UK-USA in brief

According to the Double Taxation Convention between the USA and the United Kingdom of 24 July 2001, effective from 31 March 2003 the withholding tax rates are 0.00% on dividends, if the beneficial owner is a company that owns shares representing directly or indirectly at least 80.00% of the voting power over a 12 months holding period, 0.00% on interests and 0.00% on royalties. There are no Withholdingtaxes agreed upon on management and technical service fees.

BEPS Project progress

According to Orbitax[24] (Daily Tax News Digest of 25 November 2016) on 24 November 2016, the OECD announced that negotiations have concluded for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI was developed by an ad hoc group of over 100 countries as part of BEPS Action 15. More than 100 jurisdictions have concluded negotiations on a multilateral instrument that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The new instrument will transpose results from the OECD/G20 Base Erosion and Profit Shifting Project (BEPS) into more than 2,000 tax treaties worldwide. A signing ceremony will be held in June 2017 in Paris. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS[25] will implement minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies. It will also allow governments to strengthen their tax treaties with other tax treaty measures developed in the OECD/G20 BEPS Project. The OECD/G20 BEPS Project[26] delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues. Over 100 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and treaties. The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming. The new multilateral convention helps solve this.

The United Kingdom in brief

CIT rate: The corporation tax rate for the financial year beginning 1 April 2014 was 21.00%.[27] This main rate applies when profits exceed £1.50 million. The corporation tax rate has fallen to 20.00% from 1 April 2015. For UK resident companies with taxable profits of below £300,000, the small profits rate of 20.00% applies. From 1 April 2015, the small profits rate is abolished and all companies are taxed at the main rate. A marginal relief applies for companies with income that is above the lower limit (£300,000) but equal or below the upper limit (£1.5 million). Withholding taxes are as follows:

  • There is no withholding tax on the payment of dividends. Imputation tax credits are granted to non-resident corporate shareholders with a voting power of at least 10.00% in the UK Company who are resident in a country with which the UK has entered into a double tax treaty that has granted such a right. Not all UK treaties grant such a right and it seems that in more recent negotiations the UK has sought to remove this right. Where the right is granted under a relevant double tax treaty, the treaty will provide in the case of a shareholder with a holding of 10.00% or more, a payment equal to 1/2 of the tax credit to which a UK individual would be entitled, less the liability to UK tax at up to 5.00% in respect of that dividend. The European Court of Justice has confirmed that this charge to tax does not constitute a withholding tax for the purposes of the EC Parent-Subsidiary Directive. Consequently, the UK considers has the right to charge such a tax where dividends are paid to a parent resident in an EU member state.
  • The withholding tax rate is 20.00% on interest and royalty payments, unless a tax treaty reduces the rates.
  • There are no special provisions regarding withholding tax on fees in the United Kingdom.

CIT system: The United Kingdom uses the classical system of corporate taxation. Profits are taxed at corporate income tax rates in the year earned and are taxed again when received by shareholders.

Taxable basis: Domestic corporations are taxable on their worldwide income.

Deductible expenses: Expenses incurred in the production of taxable income are deductible if normal requirements for such deductions are met. However, the deductibility of excessive interest payments between connected companies may be disallowed, see further under the heading Thin capitalisation. Management fees are deductible under the conditions that companies are able to identify the services and they provide an economic benefit to the recipient.

Patent Box Regime: The patent box regime-relief takes the form of a deduction in the calculation of trading profits for the relevant accounting period. Broadly, the deduction is of an amount equal to the company’s relevant intellectual property profits (RIPP). The legislation sets out very detailed and formulaic rules for calculating the RIPP. The deduction has effect as if a 10.00% rate were applied to the relevant profits. As such, the legislation refers to a "lower rate", applicable to profits falling within the regime. The relief is phased in for financial years 2013, 2014, 2015 and 2016. Full relief is granted with effect from financial year 2017. The relevant deduction equates to 80% of RIPP. For financial year 2016, the figure is 90% of RIPP. Full relief, i.e. 100% of RIPP, becomes available from financial year 2017.

Thin capitalization: The United Kingdom's thin capitalisation rules do not contain any specific safe haven rules that guarantee that a company will not be regarded as thinly capitalised. In the past a 1:1 debt/equity ratio was sometimes used as a rule of thumb. The UK tax authorities now seek to apply a pure arm's length approach to determine whether a company is thinly capitalised or not. For example, asset rich companies (such as real estate investment companies) may be permitted a higher level of gearing. They in general use the ratios that a third party would use. For gearing this is usually Debt to EBITDA and for Interest Cover it is EBITDA to Debt. These ratios are taken as of the date of the transaction.

Capital gains taxation - non-resident companies: Non-resident companies are subject to UK corporation tax on the sale of shares in resident companies only if they are trading in the United Kingdom through a permanent establishment.

Capital gains taxation - resident companies: Gains realised by a UK resident company are subject to corporation tax at normal rates. However, gains are exempt from corporation tax in respect of substantial shareholdings. Broadly a substantial shareholding equates with a holding of 10.00% of the ordinary share capital of a company provided that the shareholder also has at least 10.00% economic interest in the company. The regime applies to qualifying companies disposing of any shares in a qualifying investing company in which they have held a substantial interest throughout a 12-month period. Only trading companies or companies within a trading group are qualifying in this context.

Diverted profits tax: The diverted profits tax has effect for relevant profits arising on or after 1 April 2015. It is aimed at catching profits being diverted away from the United Kingdom, typically by multinational enterprises. The rules target two main types of transaction:

  • where UK profits are diverted away by the exploitation by foreign enterprises of the permanent establishment rules; and
  • where tax advantages are created by means of transactions or entities lacking economic substance.

Detailed provisions apply. Several exemptions from the diverted profit tax apply, including for small and medium-sized companies, companies with limited UK sales or expenses, and where arrangements give rise to loan relationships only. The diverted profits tax charge is 25.00% of the diverted profits relating to UK activity.

Anti-avoidance rules: With respect to anti-avoidance rules the United Kingdom applies a general anti-avoidance rule (General Anti-Abuse Rule - GAAR), CFC legislation, thin capitalization rules (interest barrier), treaty shopping rules and transfer pricing rules. With respect to transfer pricing the United Kingdom applies the arm’s length principle and the OECD Guidelines, especially the the following transfer pricing methods: the comparable uncontrolled price method; the resale price method; the cost-plus method; the transactional net margin method; and the profit split method. Other methods are also permitted if the facts and circumstances of the case mean that a different method is a more reliable way of determining an arm’s length result. In limited circumstances, it may be appropriate to combine two or more methods. Two companies are related if one controls the other, or if they are both under common control. A company has “control” over another company, (i) if it has the power to ensure that the affairs of that other company are conducted in accordance with its wishes; and (ii) this power is exercised either by means of the holding of shares or the possession of voting power, directly or indirectly, or by virtue of any powers conferred in the articles of association or other document regulating that company. Companies are required to keep documentation on transactions with related companies. Cost sharing is allowed, with respect to business restructuring special rules apply, there is a conection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available. There are rules for dispute resolution and advance pricing agreemens are available.

Double taxation relief: Unilateral relief from double taxation is generally given by the credit method; i.e. the foreign tax paid is deducted from the UK tax payable on the same source of income. However, most dividends received by large and medium-sized companies are tax exempt, see further under separate heading.

Double taxation relief – foreign dividends: Dividends received are normally exempt from corporate income tax. The exemption applies to distributions

  • from controlled companies. The recipient must control the payer, or together with other conditions, be one of two persons who control the payer.
  • in respect of non-redeemable ordinary shares.
  • in respect of portfolio holdings. Holdings representing less than 10% of their class of share (and with entitlement to less than 10% of distributions of profits and on winding up assigned to that class) qualify as portfolio holdings.
  • in the form of dividends derived from transactions not designed to reduce tax.
  • certain distributions of shares accounted for as liabilities.

However, some transactions fall under a list of excluded schemes and the exemption does not include these dividends. The following are listed as excluded schemes:

  • schemes involving manipulation in order to come within the controlled company exempt class;
  • schemes involving quasi-preference or quasi-redeemable shares;
  • schemes involving manipulation in order to come within the portfolio holdings exempt class;
  • schemes in the nature of loan relationships;
  • schemes involving distributions for which deductions are given;
  • schemes involving payments for distributions;
  • schemes involving payments not on arm's length terms;
  • schemes involving diversion of trading income.

Fewer conditions apply where the recipient is considered a 'small' company for UK tax purposes. However it is necessary that the payee company does not receive a local tax deduction in respect of the distribution, that the distribution is not part of a tax advantage scheme and that the payee company is resident in a territory that has an appropriate double tax treaty (i.e. one that includes a non-discrimination provision, with the UK). Depending on the source of the income, the dividend exemption may result in exposure to withholding tax, in the foreign territory, that would otherwise be recovered if the dividend were subject to UK corporate income tax. Accordingly an election can be made to disapply the dividend exemption if it might be beneficial to the company. The election must be made within two years of the end of the accounting period in which the distribution is received. The 'on-shore pooling' rules, which allowed unutilised foreign tax credit in relation to foreign tax suffered on dividends to be offset in other periods, were repealed from 1 July 2009 with the introduction of the foreign dividend exemption. Where the dividend exemption does not apply, or an election to disapply the relief is made, credit relief will be available in respect of the foreign tax paid in connection with foreign dividends received. There is though no relief for unutilised foreign tax credit.

Double taxation relief – excess foreign tax credit: Any unused credit may be carried back for one year and forward indefinitely to be offset against corporate tax on income or gains from the same source. Unrelieved foreign tax arising in respect of dividends can be carried back for three years on last in first out basis, i.e. later accounting period before an earlier one. The credit is given against the corporation tax liability from the qualifying foreign dividends. However, the credit cannot be offset against capital gains unless the gain is repatriated by way of dividend to the UK Company. The same rule will apply to the carry forward of unrelieved foreign tax credits to the future accounting periods.

The USA in brief

CIT rate: Due to the nature of the United States as a federal union, income and other taxes are imposed by both the Federal Government and the State Government and, in some cases, by municipalities. [28] Federal corporate income tax is at progressive rates of 15.00% to 35.00%. The effective tax rate is 35.00% for income above $ 10 million. To the federal corporate tax state taxes are to be added. State corporate income taxes are deductible from gross income for federal income tax purposes. In this survey, the value of 7.10% for the state New York is used. Dividends paid by US corporations to foreign corporations are subject to withholding tax at a rate of 30.00% or the lower rate under an applicable tax treaty. The withholding taxes are as follows:

  • Dividends paid by a US corporation are exempt from US withholding tax as long as 80.00% or more of a US corporation's gross income (measured over the three year period preceding the year of payment), is from foreign sources and is attributable to an active trade or business conducted in one or more foreign jurisdictions (including US possessions). However, dividends emanating from domestic source earnings of a US corporation that meets the 80.00% active foreign business requirement will continue to be subject to US withholding if paid to foreign shareholders.
  • Interest paid from US sources is subject to withholding tax at the rate of 30.00% or the lower rate under an applicable tax treaty. Interest paid on 'portfolio obligations' of US issuers is exempt from withholding tax under US domestic law provided that the recipient owns less than 10.00% of the equity of the issuer and certain other requirements are met. Under the 1993 Tax Act interest that is contingent, for example, on income, receipts, sales or change in asset value of the debtor, is not eligible for the portfolio withholding exemption. Interest paid by a US corporation is exempt from withholding tax if the corporation meets the 80.00% active foreign business requirement discussed above.
  • Royalty payments from US sources are subject to withholding tax at a rate of 30.00% or the lower rate under an applicable tax treaty.
  • There are no special provisions regarding withholding tax on fees in the United States.

CIT system: The United States uses the classical system of corporate taxation. Profits are taxed at corporate income tax rates in the year earned and are taxed again when received by shareholders.

Taxable basis: Domestic corporations are taxable on their worldwide income.

Deductible expenses: Expenses incurred in the production of taxable income are deductible if normal requirements for such deductions are met. However, the deductibility of interest payments is limited in certain situations, i.e. thin capitalisation. The United States does not have a debt/equity ratio that can be used as a safe harbour to ensure debt treatment. Instead, the debt/equity ratio is merely one factor taken into account by the IRS and the courts, although it is generally believed that the IRS will not challenge a ratio of 3:1 or less on debt instruments that do not have equity features.

Research and development expenses: Companies who have incurred R&D expenses exceeding a base period amount may receive a tax credit equal to 20% of the exceeding amount (IRC § 41; Reg. §§ 1.41-0 to -9). The total tax credit can amount to 20% tax credit for increased qualified research expenses and a 20% tax credit for increased qualified basic research expenses. The tax credit is scheduled to expire for expenses incurred after 31 December 2014.

Anti-avoidance rules: With respect to anti-avoidance rules the USA don’t apply a general anti-avoidance rule, but apply CFC legislation, thin capitalization rules and and transfer pricing rules. With respect to the transfer pricing methods the USA apply the following rules: the transfer pricing method depends on the type of the transaction, for the definition of related companies the relevant parameters are legal control and factual control, the are no reporting requirements and documentation requirements, cost sharing is allowed, with respect to business restructuring no rules apply, there is a conection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available.

Capital gains taxation - non-resident companies: Capital gains derived by a foreign company from the sale of shares in US companies and from the sale of other securities are not subject to tax in the United States if not effectively connected to a US trade or business. An exception applies if the US Company is a real property holding company (generally more than 50.00% of assets are US real property interests), in which case the FIRPTA tax applies (Foreign Investment in Real Property Tax Act) and the seller must treat the gain on shares as US business income subject to maximum 35% tax. The US purchaser must withhold 10.00% of purchase price and remit to IRS.

Capital gains taxation - resident companies: The United States taxes worldwide capital gains derived by resident companies at the same rate as for ordinary income.

Double taxation relief: The United States relieves international double taxation unilaterally by granting a foreign tax credit. In lieu of the credit, a tax deduction may be claimed. The foreign tax credit may only be claimed for foreign taxes imposed on foreign-source income. Foreign taxes imposed on US-source income may not be credited. In addition, the foreign tax for which a credit is claimed must meet the definition of an income tax in the US sense of the term.

Double taxation relief - Foreign dividends: When a US corporation owning more than 10% of the foreign payer receives dividends, the direct withholding tax and the underlying indirect tax on the profits out of which the dividends are paid may be credited against the US tax liability.

Multi-tier tax credit: The indirect credit can be claimed for foreign taxes paid by subsidiaries down to the level of six tiers. A subsidiary must be a member of a 'qualifying group' in order for the foreign taxes paid by it to be creditable. This entails the following stock ownership requirements:

  • the US parent corporation must own at least 10% of the voting stock of the first-tier foreign corporation;
  • each foreign corporation in the chain must own at least 10% of the voting stock of the foreign corporation immediately below it; and
  • the indirect ownership of the US parent corporation in each foreign subsidiary (from the second tier down to the sixth tier) must be at least 5%. The indirect ownership of the US parent is determined by multiplying together the percentage ownership at each level.

In addition, the subsidiaries in the fourth, fifth and sixth tiers must each be classified as a CFC and the US parent corporation must be treated as a 'US shareholder' for each subsidiary (i.e. as an owner directly, indirectly or constructively of 10% or more of the subsidiary's voting stock).

Double taxation relief - Foreign tax credit rules: The foreign tax credit (FTC) may only be claimed for foreign taxes imposed on foreign-source income. The amount of foreign tax claimed as a credit may not exceed the amount of US federal income tax that would have been imposed on the same income. For purpose of calculating the FTC limitation, a basket system is used. Under the basket system, income must be assigned to one of nine separate baskets. The basket system prevents income that is subject to foreign taxes that exceed the maximum US rate from being combined with income of a different type that is subject to lower foreign taxes, and thereby producing an overall average within the US limitation. The number of FTC limitation baskets is reduced to two for taxable years beginning after 31 December 2006. The two remaining baskets are the passive category income basket and the general category income basket.

Holding period requirements: Taxpayers must meet certain holding period requirements in order to claim an FTC for foreign withholding taxes imposed on dividends and for the indirect tax credit for foreign taxes imposed on earnings of foreign subsidiaries from which dividends are paid. In the case of common stock and most preferred stock, the holding period requirement is that the stock must be held for at least 16 days during the 30-day period that commences 15 days prior to the date the stock becomes ex-dividend (i.e. the date the stock is tradable without the right to the dividend attached). In the case of preferred stock paying a dividend attributable to periods in excess of 366 days, the required holding period is 46 days during the 90-day period that commences 45 days prior to the date the stock becomes ex-dividend. The shareholder is not permitted to reduce the risk of loss on the common or preferred stock during the required holding period whether by short sale or otherwise. For the indirect tax credit for dividends paid through a chain of foreign subsidiaries, which is permitted for corporate shareholders through six tiers of subsidiaries, the holding period requirement must be met with respect to the stock of each subsidiary in the chain of ownership.

A holding period requirement also applies to foreign withholding taxes imposed on all other items of income or gain, including interest and royalties, effective for amounts paid or credited on or after 22 November 2004. The FTC will be disallowed if the property with respect to which the payment is made is held for 15 days or less during the 31-day period that begins 15 days before the right to receive the payment arises or to the extent that the taxpayer is under an obligation to make related payments with respect to positions in substantially similar or related property.

Foreign tax credit limitation formula: (Total taxable income within the separate category / Total taxable income) x U.S. income tax before credit = Maximum credit for that category

Special restrictions for Mineral / Oil & Gas Income: Additional restrictions apply on foreign tax credits for Foreign Mineral Income and for Foreign Oil and Gas Extraction Income.

Excess foreign tax credit: If foreign income taxes paid or accrued exceed the amount that may be credited for the tax year, the excess is carried back one year and forward ten years.

Design of case studies

Following 10 case studies are calculated and discussed separately. Doing so special attention is layed on the withholding tax and the double taxation relief methods according to the double taxation convention as well as the relative return after tax und group tax ratio. All the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between the United Kingdom and the US.

Case study 1: Dividends from the United Kingdom to the US

First it is paid by the subsidiary in the UK in the form of dividends to the parent company in the US.

In the UK the combined corporate income tax rate is 20.00%.

There is no withholding tax on the payment of dividends. The treaty rate is 0.00% as well.

In the US credit is granted for underlying tax paid on received dividend. Credit can be made for tax paid in six tiers under the provision that the ownership between the tiers is at least 10% and that the US owns at least 5% indirect of each tier. In addition, the subsidiaries in the fourth, fifth and sixth tiers must each be classified as a CFC and the US parent corporation must be treated as a ´US shareholder´ for each subsidiary.

In case study 1 the return after tax is $ 6.04 million and the group tax ratio is 39.60%, equal to the tax level of the receiving country, thus it is locked up to the high US tax burden.

Case study 2: Intesests from the United Kingdom to the US

Next it is paid by the subsidiary in the United Kingdom in the form of interests to the parent company in the US.

In the United Kingdom the statutory withholding tax rate on interest is 20.00%. According to the treaty, the rate has been reduced to 0.00%.

As double taxation relief the US apply the ordinary credit method on interests. Thus withholding tax paid in the previous country is to be credited against tax payable in the US. If a matching credit...

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