Taxation (International and Other Provisions) Act 2010 section 31

Calculation of income or gain where remittance basis does not apply

Section 31 sets out the general rule for how income or gains must be calculated when a taxpayer is entitled to double taxation relief by way of a credit against UK tax, and the remittance basis does not apply.

• When calculating income or gains eligible for foreign tax credit relief, no deduction may be made for foreign tax or special withholding tax — the relief comes solely through the credit mechanism, not as an expense deduction.
• Where the credit relates to a dividend, the dividend amount must be grossed up by adding any "underlying tax" (broadly, the overseas corporate tax on the profits out of which the dividend was paid), even where that underlying tax is ultimately restricted or excluded from the credit calculation.
• The gross-up for underlying tax does not apply to notional "tax-spared" amounts — that is, foreign tax that was never actually paid but is deemed paid under a tax-sparing provision in a double taxation agreement designed to preserve an overseas development incentive.
• These rules take priority over the normal corporation tax computational rules for loan relationships and intangible fixed assets, ensuring that foreign tax credits are always calculated consistently regardless of the type of income involved.