Ch.6 - Corporate anti-avoidance Flashcards
What is value shifting?
When a company pays a pre-sale dividend out of distributable profits it will reduce the value of the company and hence the gain on its disposal. However, where a company pays a dividend out of untaxed profits, it may be attempting to avoid tax by reducing the value of the company and converting a taxable gain into tax free dividend income. The consideration on the sale of shares may therefore be subsequently adjusted by a ‘just and reasonable amount’ (unless covered by SSE).
What are depreciatory transactions?
Applies to companies that are part of same capital gains group where there has been movement of assets around a group at less than MV or cancellation of intra-group debt, excessiven payments etc. to reduce the value of shareholding being disposed of (an example of value shifting).
What are controlled foreign companies (CFCs)?
Overseas companies set up in the countries with low rates of tax (tax havens). CFC is a company:
- resident outside of the UK and either:
a) under UK control (more than 50% or de facto) or
b) at least 40% controlled by UK resident and at least 40% but no more than 55% controlled by non-UK resident
What are 5 exemptions for a company not to be CFC and therefore get CFC charge?
- exempt period - first 12m of the company coming under the control of UK residents (period of time to restructure) - ONLY for purchased company
- excluded territories - HMRC’s list of approved territories with tax high enough to avoid CFC charge
- low profits - chargeable profits of foreign company are £50k or less in 12m or no more than £500k (max £50k of non-trading income)
- low profit margin - company’s accounting profits are no more than 10% of relevant operating expenditure
- tax exemption - tax paid overseas is at least 75% of the UK CT that would have been paid (net of any DTR) - best is to look at net rate of tax
When will the profits of the CFC pass through ‘ charge gateway’?
Unless compant meets the following criteria, CFC will pass through a gateway:
- CFC has not been a part to arrangements with purpose of eliminating/reducing a charge to tax (genuine commercial reasons for being o/s)
- none of CFC’s assets are managed from the UK
- CFC has the ability to manage its own business
- all of the CFC’s profits consist solely of non-trading profits and/or property income
If CFC passes charge gateway, it must analyse its significant people functions (SPFs). If any of the relevant SPFs are carried out in the UK, the profits relating to them pass through gatewat and bocme chargeable in the UK.
When does CFC charge arise after passing gateway?
UK company must hold at least 25% interest in the CFC and it must may CT on ist share of CFCs profits = apportioned profit rule. No UK losses or surplus expenses can be offset against CFC charge, but credit can be taken for their share of any foreign tax actually paid = creditable tax.
What anti-avoidance can take place with transfer pricing?
Transfer price is set at other than MV in order to shift profits to a company paying tax at lower rate (also applies to amounts loaned and rates of interest charged). Only applies to:
- connected companies
- large companies (at least 250 employees or revenue>50m EUR and total assets>43m EUR)
Adjustment needs to be made to reflect profit that would have been achieved at arm’s length basis, although a company can enter into an Advance Pricing Agreement)
What is thin capitalisation?
Refers to the situation where the amount of loan finance provided to a connected company exceeds the amount a third party would be willing to provide.
- interest charged is not allowable expense
- further disallowance if level of interest is not at arm’s length
What are diverted profits tax (DPT) rules?
DPT rules cover artificial arrangements (unless company is SME) where overseas companies avoid having UK PE and pay UK tax for doing business in the UK or transations lack economic substance (e.g. US company deals with UK customers through subsidiary in Ireland).
If DPT applies, it is charged at 25% on ‘taxable diverted profits’, SUBJECT to CONDITIONS.
What conditions must be met for DPT rules to apply?
- mismatch condition - there is an effective mismatch outcome as a result of the arrangement (the value of the reduction in tax outweight the value of any other non-tax financial benefits achieved). Does not apply if the increase in CT payable is at least 80% of the reduction in other party’s tax or total sales do not exceed £10m or total expenses do not exceed £1m.
or - tax avoidance condition - main purpose is to eliminate/reduce the charge to CT
What are hybrid mismatch arrangements?
Aim to achieve a double deduction or deduction by one entity with no corresponding income in the other (usually in cross-border transactions). Such arrangements should be counteracted (double deduction or in case of non-inclusion, the deduction will be disallowed).
What is the corporate interest restriction?
From 1 April 2017, there is a limit to the interest costs deductible in the UK for companies in a large group (worldwide) where net tax-interest expense exceeds £2m.
Net interest deductible cannot exceed interest capacity, which is made up of CY interest allowance and spare capacity b/f. Must be applied before loss reliefs.
Interest restriction return is filed if there is a restriction by appointed reporting company within 12m from the end of CAP.
How is interest capacity calculated for corporate interest restriction rules?
- fixed ratio method (default basis)
- interest allowance is lower of:
a) 30% of group’s EBITDA
b) fixed ratio debt cap or ‘ANGIE’ (adjusted net group interest expense) - group ratio method (by election)
- interest allowance is lower of:
a) group ratio % (given in the exam)
b) group ratio debt cap (qualifying group net interest expense)
