How does section 18 of TIOPA 2010 reduce UK tax?

Section 18 reduces UK income tax, corporation tax or capital gains tax by the amount of any foreign tax credit allowed under a double taxation agreement or unilateral relief arrangement. The credit offsets the UK tax on income or gains that have already been taxed overseas, preventing double taxation on the same amount.

What foreign tax qualifies for credit relief under section 18 TIOPA 2010?

The credit covers tax actually payable under the law of the overseas territory concerned. Special rules treat certain taxes, particularly on dividends, as payable even if imposed differently. However, tax paid on profits exempted under the overseas permanent establishment election in section 18A of CTA 2009 does not qualify for credit relief.

Can a UK company claim both permanent establishment exemption and foreign tax credit relief?

No. If a company has elected to exempt overseas permanent establishment profits under section 18A of CTA 2009, any foreign tax attributable to those exempt profits cannot qualify for credit relief under section 18. This prevents a double benefit of exemption combined with credit relief on the same foreign income.

At what stage is foreign tax credit relief applied for UK income tax purposes?

For income tax, the foreign tax credit is applied at Step 6 of the income tax calculation set out in section 23 of ITA 2007. This is the stage where tax reducers, including foreign tax credits, are deducted from the tax otherwise due. Credit must be matched to the specific UK tax the arrangements authorise.

Taxation (International and Other Provisions) Act 2010 section 18

Entitlement to credit for foreign tax reduces UK tax by amount of the credit

Section 18 establishes how foreign tax credit relief works in practice, by reducing the UK tax payable on income or chargeable gains by the amount of any credit allowed under double taxation arrangements or unilateral relief arrangements.

Where credit is allowed under a double taxation agreement or unilateral relief arrangement, the UK income tax, corporation tax or capital gains tax on the relevant income or gain is reduced by the amount of that credit.
"Credit" means credit for tax actually payable under the law of the overseas territory concerned, though certain taxes not strictly payable under that territory's law may be treated as if they were (for example, in relation to dividends).
Foreign tax paid by a company that has elected for the overseas permanent establishment exemption under section 18A of CTA 2009 is excluded — no credit relief is available for such tax.
Credit is only given against a particular UK tax (income tax, corporation tax or capital gains tax) if the relevant arrangements specifically permit credit against that tax, and credit against income tax is given effect at Step 6 of the income tax calculation under section 23 of ITA 2007.

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