International Taxation: Group Structure, Loss Relief, Capital Transactions

This document provides a comprehensive analysis of international taxation, including the group structure and tax rates, loss relief groups and maximum amount, tax treatment of capital transactions, UK mainstream corporation tax liabilities, income tax consequences, and tax implications.

INTERNATIONAL
TAXATION

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
a. Diagram of the group structure and the limit for tax rates.......................................................3
b. Loss relief groups and maximum amount...............................................................................4
c. Tax treatment of the capital transactions.................................................................................5
d. UK mainstream corporation tax liabilities...............................................................................6
e. Income tax consequences.........................................................................................................6
f. Tax implications.......................................................................................................................6
QUESTION 2..................................................................................................................................7
a. Comparison of expansion options............................................................................................7
b. Advice......................................................................................................................................7
c. Loss relief.................................................................................................................................7
d. VAT registration......................................................................................................................8
QUESTION 3..................................................................................................................................8
a. Domicile status of each employee...........................................................................................8
b. Claim to remittance..................................................................................................................9
c. Calculation of UK tax payable.................................................................................................9
REFERENCES..............................................................................................................................11

QUESTION 1
a. Diagram of the group structure and the limit for tax rates
The group structure indicates the holding companies and the subsidiaries company. the
following structure can be prepared for the Opus Plc at present based on its holdings:
Tax payment dates:
Since all the companies are within the limit of the £ 1.5 million profits, all are categorised
as non- large company. Therefore the tax payment dates are ascertained as per the normal rule
i.e. 9 months and 1 day after the end of chargeable accounting period (Maffini, Xing and
Devereux, 2019). In this case, all the companies have the same ending date i.e. 31 March, 2020,
and hence their tax payment dates would be 1st January, 2021.
Capital Gain Tax Group:
Capital Gains group
Groups Opus Plc, Sally Ltd. and Waga Inc form a single
capital gains group.
Waga Inc. and Tess Ltd. form another capital
gains group.
Rationale The effective interest of the principal company
i.e. Opus Plc is not more that 75% in case of Tess
ltd and hence it is not included in the same group.
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Opus Plc
Sally Ltd.
(90% holding)
Waga Inc.
(90% holding)
Film Ltd.
(5% investment)
Tess Ltd.
(80% holding)

Note: In the entire evaluation Waga Inc. has been included in the capital gains group
because despite being a non- resident of UK, the company has a permanent establishment in UK
only. Therefore, these companies are allowed in the group and are treated as residents.
b. Loss relief groups and maximum amount
The loss relief group for the current Opus Plc can be identified in following manner:
Loss relief group
Groups Opus Plc and Sally Ltd.
Opus Plc and Waga Inc.
Waga Inc. and Tess Ltd.
Rationale There are only two companies in all the groups
because the holding company does not have at least
75% interest in the other companies except the
immediate subsidiary (Walker, 2019). In case of
Tess Ltd., it is only 72% interest and hence it is not
included in the same group.
It is evident that Waga Inc. has faced the total loss of £180,000 and £120,000 but in the
current loss relief, only the amount of £180,000 can be taken into consideration as the other
establishment does not categorise as a resident of UK and hence cannot claim the amount.
Waga Inc can set of its loss of with two companies:
With Opus Plc
UK trading profit £482000
Interest receivable £42000
Net overseas rental £15000
(Interest Payable) (£5056)
Net taxable profit £533944
Group relief (Waga Inc) (£180000)
Remaining profit £ 353944
With Tess Ltd.:
Net taxation profit = £60,000
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The profit here that Waga Inc can set off will only be up to the amount of £60000 i.e. out
of £180,000 only £60000 will be set off and remaining £120000 will have to be borne by the
company.
The best options therefore for Waga Inc. is to set off its losses with Opus Plc where the
entire loss can set off.
c. Tax treatment of the capital transactions
The capital transactions and the manner in which they will be treated are as follows for
different companies.
For Opus Plc:
Sale value of Plot 70570 Sale of 5% investment 175300
Original Purchase Amount (18780) Original Purchase Amount (20000)
Indexation Factor (16225.92) Indexation Factor (1700)
Chargeable Gain 35564.08 Chargeable Gain 153600
Total Chargeable gain 189164.1
For Tess Ltd.:
Sale value of Property 77000
Original Purchase Amount (28000)
Indexation Factor (19180)
Chargeable Gain 29820
Corporate tax@ 19% (5665.8)
Net Gain 24154.2
Note: The gains of Tess Ltd. will be charged with the corporate taxation rate at the rate of 19%.
In order to set off the capital loss that has been carried forward by Sally Ltd. from the
year ending 2019, it can be evidently said that the losses can be set off from the chargeable gains
of Opus Plc which is the holding company of Sally Ltd.
Total Chargeable gain 189164.1
Capital Loss set off of Sally Ltd. (200000)
Net chargeable losses c/f (10835.9)
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d. UK mainstream corporation tax liabilities
The corporation tax liabilities for all the companies can be illustrated in following manner:
Particulars Opus Plc Sally Ltd. Waga Inc Tess Ltd.
Trading Profit/ (Loss) 482000 170000 (180000) 60000
Interest Receivable 42000
Net Overseas Rental 15000
Chargeable Gains 189164.1 29820
Interest Payable (5056)
Capital Losses set off of Sally Ltd. (200000)
Net Income to be taxed 523108.1 170000 0 89820
Group Relief of Waga Inc. (180000)
Net taxable profits 343108.1 170000 89820
Corporate tax @19% (65190.54) (32300) (17065.8)
Profits after taxes 277917.6 137700 72754.2
The due date for the payment of taxes for all the companies is 1st January, 2021.
e. Income tax consequences
The income earned by such residents of UK on business trip is taxable after deducting all
the exemptions and allowances that they are given. The money that is given by the employers to
such foreign business employees is taxable after allowances (Walker, 2019). For Duncan, the
entire income will be taxable at the rate of 20% on first 37500, 40% on next 112500 and 45%
further on. However, if there are any personal allowances, savings allowances etc. given by the
employer are not included in the taxable income. Additionally the travel expenses to and fro UK,
the accommodation expenses etc. are also exempted from the taxation.
The family visits are funded by company and hence will be exempt from tax but any
personal expenses that are made or incomes that are earned will be taxable accordingly.
f. Tax implications
Any income earned from the debt funding in the overseas subsidiaries is exempt from being
taxed if they are within the debt cap (White, 2017). Therefore the 1% interest earnings of Tess
Ltd. from loan given to Pilou Inc. is exempt from taxes.
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QUESTION 2
a. Comparison of expansion options
The expansion of Ant Plc can be evaluated between option 1 and option 2 in following
manner:
Option 1: Permanent Establishment Option 2: Share Holding
Vat will not be charged even if the
supplied are exchanged to and fro from
the UK head office.
Vat will be charged on all the supplies.
UK corporation tax will be charged only
on the income that is attributable to that
particular foreign establishment in
Estonia.
UK corporation taxes will be implemented
on the worldwide incomes and profits
earned by that establishment.
Ring fencing does not need to be done
even if the double tax treat did not exist.
Ring fencing could have been done after it
is subjected to the secondary tax liabilities
(Habu, 2017).
Therefore, the evaluation of the different factors point out the fact that the best option for
Ant Plc out of the two would be to develop a permanent establishment in Estonia rather than
gaining ownership through shareholding of another company.
b. Advice
The foreign subsidiary can either include a tie breaker clause for the company or it can
even have entire separate and independent decision making and control apart from the home
county of UK (Farrar, 2020). Therefore, Ant Plc can adopt either of these strategies to avoid the
foreign subsidiary being treated as tax resident of UK.
c. Loss relief
Option 1: Permanent
establishment of Ant Plc
Option 2: Share holding Option 3: Permanent
establishment of Bug Inc.
The losses incurred by foreign
establishments can be set off
with the overall profits or
losses that are earned by head
company.
No loss relief can be gained if
the losses are incurred by a
subsidiary company in which
shares are held by the head
company based in UK
Since the permanent
establishment of Bug Inc.
would still not make the
company a resident of UK, the
loss relief would not be given
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(Azémar and Dharmapala,
2019).
to the company thus set up.
Therefore, all the three options have different treatments that can be served for each one of
them individually.
d. VAT registration
Ant Plc can easily establish their group of companies under group vat where they will be
taxed as single individuals but only Bug Inc. can be included in the group despite it being a non-
UK resident (Solilová, Nerudová and Dobranschi, 2017). The reason is that Ant Plc has 90%
holding i.e. more than 75% holding in the company. In case of Fly Ltd. it has only 70% owning
and thus it cannot be categorised as subsidiary of Ant Plc.
QUESTION 3
a. Domicile status of each employee
Since all the four employees belong to separate birth land, their domicile status of these
employees can be categorised under domicile by choice (Walker, 2019). Now whether they are
UK domiciles or not can be evaluated by the “deemed domicile” status that has been
implemented from 6th April, 2017. Individual categorised under this can no longer make claims
on the remittance basis and are taxed on arising basis. There are two conditions and either must
be fulfilled (Guidance note for residence, domicile and the remittance basis: RDR1, 2018).
Condition 1:
 Born in UK
 Domicile of Origin in UK
 Resident of UK for 2017 to 2018 and later on
Condition 2:
 UK resident for at least 15 out of 20 years immediately prior to the tax year.
Now, it is evident that only Lin is of UK domicile as she meets the second condition.
Pierre began living from 2006/ 07 and Isabella came in 2010/11 and hence have not
completed the tenure of 15 previous years as required.
In case of Xin, he ceased to be a resident from the year 2017 thus breaking the first
condition.
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Therefore, both Pierre and Isabella can make remittance claims on their foreign income but
Lin cannot avail remittances. Since Xin ceased to be both resident and domicile, he also cannot
claim for remittances.
b. Claim to remittance
Since Pierre and Isabella both can make remittance claims, the remittance charge that is
applicable to both of them can be analysed in following manner:
 For Pierre: Since he has been resident of UK for at least 12 years out of previous 14 years,
he will be charged £60000. Additionally since Pierre brings more that £2000 to UK, he is
ineligible for any tax free allowances.
 For Isabella: Since she has been resident for at least 7 years out of the previous 9 years, she
will be charged £30000. Isabella brings only £1500 in UK and hence she is eligible to claim
tax- free allowances where she will not be liable to pay tax on income upto £12500.
c. Calculation of UK tax payable
UK tax payable by Lin:
Particulars Amount
UK salary for year 2019-20 60000
Overseas Income Remitted to UK 40000
Net Taxable income 100000
Tax @ 40% 40000
Capital gain from shares 50000
Capital gain tax charged at the rate of 20% 10000
Income from rental property 50000
Income tax charged on rental income in UK @20% 10000
(Credit of 10% foreign tax charged on overseas
rental income)
(5000)
Net tax charged on rental income 5000
Total tax to be paid by Lin:
40,000 + 10000 + 5000
55000
Therefore, Lin is required to pay £ 55000 in total.
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REFERENCES
Books and Journals
Azémar, C. and Dharmapala, D., 2019. Tax sparing agreements, territorial tax reforms, and
foreign direct investment. Journal of Public Economics. 169. pp.89-108
Farrar, S., 2020. Tax and Optimal Capital Budgeting Decisions. Routledge.
Habu, K., 2017. How much tax do companies pay in the UK?.
Maffini, G., Xing, J. and Devereux, M.P., 2019. The impact of investment incentives: evidence
from UK corporation tax returns. American Economic Journal: Economic Policy, 11(3),
pp.361-89.
Solilová, V., Nerudová, D. and Dobranschi, M., 2017. Sustainability-oriented future EU funding:
a financial transaction tax. Empirica. 44(4). pp.687-731.
Walker, R., 2019. Non-UK residents will be subject to UK tax on all gains on direct and certain
indirect disposals of UK property. Property Journal, pp.16-16.
Walker, R.J., 2019. Tax:'From 6 April 2020, non-resident corporate landlords will be subject to
the corporation tax regime'. Property Journal, pp.24-24.
White, J., 2017. UK Parties Split over Taxes. Int'l Tax Rev., 28, p.17.
Online
Guidance note for residence, domicile and the remittance basis: RDR1. 2018. [ONLINE]
Available through: < https://www.gov.uk/government/publications/residence-domicile-
and-remittance-basis-rules-uk-tax-liability/guidance-note-for-residence-domicile-and-the-
remittance-basis-rdr1#conb>
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