Introduction Background Note
8.Section 798A of ICTA alters the way that section 797(1) limits the allowance of credit for foreign tax against corporation tax in respect of trade income. It limits the amount of the credit for foreign tax paid on trade receipts to no more than the corporation tax arising on the relevant part of the trade profits.
9.It does this by requiring companies to deduct direct expenses and a reasonable proportion of their allowable deductions and expenses which include overheads when calculating the amount of profit attributable to the foreign tax and hence the amount available to credit against their corporation tax.
10.Where the taxpayer is not a bank or a company connected with a bank, there is no change to the existing legislation but the new legislation puts it beyond doubt that banks and companies connected with banks will be required to include their funding costs within these deductions and expenses.
11.The existing section 798B(4) counters the use of avoidance schemes by banks which attempt to avoid the requirement to deduct overheads and expenses by artificially diverting trading income into investment subsidiaries which are not subject to the same requirement. The new clause clarifies the existing rule and puts it beyond doubt that from 22 April 2009, where there is an avoidance scheme or arrangement, any item of income which it is reasonable to assume would be trade income if received by a bank will be treated as trade income of the investment subsidiary.