Taxation (International and Other Provisions) Act 2010 section 371KI

Category D income

Section 371KI identifies two types of CFC income that fall into Category D: income reduced through related-party transfer pricing adjustments where no corresponding increase arises elsewhere, and income benefiting from a special tax ruling or arrangement with local government authorities.

• Category D income is measured on a gross basis — before deducting expenses or transfers to or from reserves — and must be included in the CFC's accounting profits for the period.
• Where a CFC's income from a connected-company arrangement is reduced for local tax purposes on the grounds that it exceeds an arm's length amount, and no corresponding increase is taxed in any other territory, the amount of that reduction is Category D income.
• Income taxed at a reduced rate because of a ruling, decision or arrangement made by a governmental authority in the CFC's territory is also Category D income to the extent of the benefit.
• The practical effect is to capture income that has escaped full taxation either through transfer pricing mismatches with no offsetting adjustment or through preferential local tax treatment granted to the CFC.