What does section 107 of the Taxation (International and Other Provisions) Act 2010 require?

Section 107 requires a United Kingdom company to disregard foreign tax on a derivative contract to the extent that tax is attributable to a period when the company was not a party to the contract. The attribution must be made on a just and reasonable basis, ensuring double taxation relief only covers periods of actual participation.

What is a notional interest payment under section 107 TIOPA 2010?

A notional interest payment arises where a derivative contract specifies a notional principal amount, a period, and an interest rate, and the payment is calculated by applying a rate matching that specified interest rate to the notional principal for the specified period. Foreign tax on these payments must be apportioned and, where appropriate, disregarded.

Why must foreign tax on derivative contracts be disregarded under section 107?

Foreign withholding taxes are imposed when cash flows occur, but UK tax recognises derivative contract income when it appears in accounts. This mismatch can distort double taxation relief. Section 107 corrects this by excluding foreign tax attributable to periods before the company became a party to the derivative contract.

How is foreign tax apportioned under section 107 when a company acquires a derivative contract partway through its life?

The foreign tax must be apportioned on a just and reasonable basis. For example, if a company acquires rights under an interest-rate swap halfway through the specified period, only the proportion of foreign withholding tax corresponding to the period of actual participation may be taken into account for double taxation relief.

Taxation (International and Other Provisions) Act 2010 section 107

Disregard of foreign tax referable to derivative contract

Section 107 requires a company to ignore certain foreign tax paid in connection with a derivative contract, where that tax relates to a period when the company was not actually a party to the contract.

Foreign tax linked to derivative contracts must be disregarded where it relates to periods when the company was not a party to the contract
The rule applies to tax under the law of any territory outside the United Kingdom, apportioned on a just and reasonable basis
A "notional interest payment" arises where a derivative contract specifies a notional principal amount, a period, and an interest rate, and the payment is calculated by applying a rate matching that specified interest rate to the notional principal for the specified period
This provision is the first in a group of rules that align double taxation relief on cash flows from derivative contracts with the way income from those contracts is taxed in the accounts

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