GIM12110 | Double taxation relief: overseas branch profits: creditability of taxes on branch profits: OECD Article 7

Where a treaty is in force that follows the standard OECD Model, the taxing rights of the foreign State are limited to the net profit attributable to a permanent establishment, if there is one. Foreign tax properly payable in accordance with the terms of the treaty is in principle available for credit, to the extent that the foreign tax charge is otherwise compatible with the treaty. This normally means that, however it is calculated, it must not exceed tax at the other country’s normal income tax rate on the profits attributable to the permanent establishment according to the principles laid down in the Business Profits Article of the relevant treaty.

An enquiry as to the basis of the foreign tax charge may be appropriate if the amount of credit claimed is substantial, or there is reason to believe that the foreign State in question is not levying tax in accordance with the terms of the treaty.

Article 7 – arm’s length and conventional basis

Some treaties, though, allow for the branch profits to be calculated on a conventional basis, provided that this is consistent with the arm’s-length principle that underlies the Business Profits Article (see GIM10120). So we will not give credit for excess foreign tax levied on a conventional basis if on an arm’s length basis less tax would be payable or there would be a loss.

Attribution of investment return

The foreign state may attribute investment return to the branch which is not disclosed in branch accounts. This should not be regarded as contrary to the principles of Article 7 if the amount so attributed is commensurate with the amount that the branch would have if it were an independent enterprise. See GIM10140 for the UK approach to this issue.

Unilateral relief

Where the UK has no treaty with the foreign State in question, that State is of course free to tax the UK insurer on whatever basis it chooses. But credit is only available, under ICTA88/S790 (4), for foreign tax that is computed by reference to income arising in the other country. Income arises where the operations take place from which the profits in substance arise (see Yates v GCA International Ltd 64 TC at page 56). Generally, we do not accept that the underwriting profit of a UK resident insurer arises outside the UK unless there is, in the foreign country, either a fully-fledged branch, or a dependent agent, or an independent agent with a binding authority to conclude contracts.