U.S. IRS Issues Guidance on Creditability of U.K.’s Remittance Basis Charge
On August 11, 2011, the U.S. Internal Revenue Service (IRS) issued Rev. Rul. 2011-19, which provides that a foreign tax credit is allowable for U.S. tax purposes for the Remittance Basis Charge (RBC) of £30,000 paid by certain individuals who elect the remittance basis of taxation in the United Kingdom. However, a credit will only be available if the other legal requirements for claiming a credit under the U.S. Internal Revenue Code and regulations have been met.
Pursuant to legislation enacted in the United Kingdom in 2008 (and subsequently amended), individuals who are U.K. residents but who are not domiciled in the United Kingdom (“non-domiciliaries”) are permitted to elect each year to be taxed on one of the two following alternative bases:
1. The default basis (or “arising basis”) of taxation whereby non-domiciliaries pay U.K. income and capital gains taxes on their worldwide income and capital gains; or
2. The remittance basis, whereby non-domiciliaries with non-U.K. source income or gains can elect to be taxed on their non-U.K. source income and gains only when they are remitted to the United Kingdom. Remittance basis taxpayers are also subject to tax on their U.K. source income and gains under the rules applicable to all U.K. residents.
A special rule applies to non-domiciliaries age 18 years or older who have been U.K. residents in at least seven of the prior nine tax years. Such individuals are known as “long-term non-domiciliaries” or “LTNDs.” A LTND who elects the remittance basis of taxation is required to pay the RBC of £30,000 in addition to the remittance basis tax. For a LTND’s election to be taxed on the remittance basis to be valid, the LTND must nominate (i.e., identify) at least £1 of non-U.K. source income or gains.
The RBC of £30,000 constitutes tax imposed on the arising basis on all or part of a LTND’s unremitted non-U.K. source income or gains that arose or accrued in that year and was nominated by the LTND, where the nominated income or gains would give rise to an increase in U.K. tax liability of £30,000 after taking into account any credit for foreign tax paid.
If a LTND realizes or accrues but does not nominate sufficient non-U.K. source income or gains to result in a tax charge of £30,000, the LTND will be taxed as if sufficient additional realized income or gains had been nominated to result in a tax charge of £30,000.
• If a LTND elects the remittance basis but does not have sufficient non-U.K. source realized income or gains to result in a tax charge of £30,000, the LTND will be deemed to have sufficient realized non-U.K. source income or gains and to have nominated an amount necessary to result in a tax charge equal to £30,000.
A taxpayer can elect the remittance basis and pay the RBC even though he or she does not have sufficient non-U.K. source income and gains to generate an actual U.K. tax charge of £30,000. However, it is unlikely that a taxpayer in this situation would elect the remittance basis of taxation.
The United Kingdom applies ordering rules whereby nominated amounts that are remitted to the United Kingdom in subsequent years are treated as being paid first out of income or gains that have not previously been subject to U.K. tax. If nominated income or gains are remitted to the United Kingdom, they are treated as having been previously taxed and a LTND will not be subject to additional U.K. tax on such amounts. However, this rule only applies if the LTND has previously nominated sufficient income or gains to result in a tax charge of £30,000. In any case where the LTND either (1) realizes or accrues, but does not nominate sufficient non-U.K. source income or gains to result in a tax charge of £30,000, or (2) does not have sufficient non-U.K. source income or gains to result in a tax charge of £30,000, and is therefore deemed to have such income or gains, the LTND is not treated as having previously-taxed income and is therefore subject to U.K. tax if and when such income or gains are actually remitted to the United Kingdom.
Rev. Rul. 2011-19
Rev. Rul. 2011-19 analyzes in detail the requirements under section 901 of the Code for a foreign tax to qualify as a creditable tax for purposes of the foreign tax credit.
It concludes that the remittance basis and the arising basis of taxation imposed by the United Kingdom are separate levies, and that the £30,000 RBC, in combination with the remittance basis of taxation, is a single and separate levy. This is because a LTND’s (1) U.K. source income and gains, (2) remitted non-U.K. source income and gains, and (3) unremitted non-U.K. source income and gains, are combined when determining the LTND’s U.K. taxable income.
It further concludes:
• the RBC is a tax because it is a compulsory payment under U.K. law, and
• the predominant character of this tax is that of an income tax because it satisfies the realization, gross receipts, and net income tests set out in the U.S. income tax regulations under section 901 of the Code.
In its holding, however, Rev. Rul. 2011-19 also points out that a credit will be available to a LTND only if the other legal requirements for claiming a credit under the Code and regulations have been met. Specifically, these include the requirement that an amount of foreign tax paid must be a compulsory payment to be creditable.3 Hence, a LTND must avail himself/herself of all relevant provisions of U.K. law, including the elective provisions relating to the RBC, so as to reduce, over time, his or her reasonably expected liability to U.K. income tax.