New Tax Reclaim Procedures Announced Regarding U.S.-U.K. Treaty
Washington, DC, February 15, 2000 - The United Kingdom repealed its advance corporation tax and substantially reduced the tax credit available to U.K. shareholders for dividends paid from U.K. companies after April 5, 1999. Under the new U.K. rules, the U.K. shareholder tax credit is reduced from one-fourth to one-ninth of the dividend paid. Tax credits and tax credit or "reclaim" payments that are available to U.S. investors under the U.S.-U.K. Income Tax Treaty (the "Treaty") are determined by reference to the amount of the U.K. shareholder tax credit. As a result, this change in U.K. law also effectively reduces the tax credits and tax credit payments for U.S. investors in U.K. equities.
The Internal Revenue Service recently released Revenue Procedure 2000-13 to provide new rules and procedures for applying the Treaty to dividends paid by U.K. corporations after April 5, 1999. The revenue procedure confirms that U.S. portfolio investors—those holding, directly or indirectly, less than 10 percent of the voting stock of the U.K. corporation paying the dividend—are entitled to claim a U.S. foreign tax credit for U.K. withholding tax paid on U.K.-source dividends.
Specifically, a treaty-eligible U.S. portfolio investor in U.K. equities is entitled to receive a tax credit payment from the United Kingdom equal to the amount of the U.K. shareholder tax credit, reduced by a U.K. withholding tax of 15 percent of the sum of the cash dividend and such tax credit payment. This means, for example, that where a U.K. corporation pays a $90 dividend after April 5, 1999, a U.S. portfolio investor is treated as:
- receiving a U.K. tax credit payment of $10 (one-ninth of $90) and total U.S. taxable income of $100 ($90 cash dividend plus $10 U.K. tax credit amount), and
- paying a $10 U.K. withholding tax.
No tax credit payment is due to the U.S. investor from the United Kingdom.
Tax credit payments are due to U.S. portfolio investors from the United Kingdom for U.K.-source dividends paid before April 6, 1999. For an $80 dividend paid by a U.K. corporation on March 1, 1999, for example, a U.S. portfolio investor is treated as:
- receiving a U.K. tax credit payment of $20 (one-fourth of $80) and total U.S. taxable income of $100 ($80 cash dividend plus $20 U.K. tax credit payment), and
- paying a $15 U.K. withholding tax (15 percent of $100). In this case, the U.S. portfolio investor is entitled to a tax credit payment from the United Kingdom of $5 ($20 U.K. tax credit payment minus $15 U.K. withholding tax).
The U.S. foreign tax credit that may be claimed by the U.S. investor equals the $10 U.K. withholding tax, which is considered due and paid to the extent of the $10 U.K. tax credit payment. Under the Treaty, the 15 percent U.K. withholding tax cannot exceed the amount of the U.K. tax credit payment due to the U.S. portfolio investor.
To claim the U.S. foreign tax credit for dividends paid by U.K. companies after April 5, 1999, a U.S. portfolio investor is not required to obtain a receipt or other evidence from the United Kingdom verifying payment of the U.K. withholding tax. Instead, the U.S. investor may elect to be treated as receiving the U.K. tax credit payment due under the Treaty (and paying the U.K. withholding tax in an equal amount) by so indicating on line 5 of Form 8833 (Treaty-based Return Disclosure Under Section 6114 or 7701(b)). The U.S. investor must file Form 8833 with its tax return for the relevant year. Revenue Procedure 2000-13 also confirms that the regular foreign currency translation rules in the Internal Revenue Code apply to dividend distributions covered by the Treaty. This means that accrual basis taxpayers claiming foreign tax credits must translate U.K. taxes (including U.K. withholding taxes) into U.S. dollars at the average exchange rate for the taxable year to which the taxes relate.