Taxation (International and Other Provisions) Act 2010 section 112

Deduction from income for foreign tax (instead of credit against UK tax)

Section 112 allows a person to reduce their foreign income by the amount of foreign tax paid on it, as an alternative to claiming a tax credit against UK tax, subject to various limits and anti-avoidance rules.

• Foreign income may be reduced by the amount of foreign tax paid in the country where the income arose, so that only the net amount is brought into UK tax
• The deduction may be restricted where accrued income losses apply, where the income brought into account for UK tax is less than the gross foreign income, or where special CFC loan relationship rules limit the relief available
• If a tax authority makes a payment by reference to the foreign tax (whether to the taxpayer, a connected person, or another person under a scheme), the income must be increased by the amount of that payment, effectively clawing back the deduction
• The deduction is not available where a tax credit has already been allowed and UK tax is not calculated on the full foreign amount, where the income is taxed on a remittance basis, or in respect of underlying tax that has been excluded from credit relief calculations