Diversity & Inclusion
On August 11, 2011, the Internal Revenue Service (IRS) issued Revenue Ruling 2011-19, which concludes that the remittance basis charge (RBC) applied to long-term nondomiciliaries of the U.K. — those resident in the U.K. for seven of the last nine years but who claim foreign domicile — meets the requirements of a creditable foreign income tax for U.S. income tax purposes. The conclusions reached in the IRS Ruling are consistent with the advice we provided to Her Majesty’s Treasury in March 2008 when the RBC provisions were initially announced. The IRS Ruling is important for U.S. citizens who are long-term resident nondomiciliaries of the United Kingdom, and employers of such persons, as it provides that U.S. citizens will generally not be subject to double taxation on unremitted non-U.K.-sourced income subject to the RBC.
In general, persons resident and domiciled in the U.K. are taxed on their worldwide income and capital gains as they arise — the so-called arising basis of taxation. Those persons who are resident but not domiciled within the U.K. may, alternatively, elect to be taxed pursuant to the remittance-basis tax regime. Under that regime, a nondomiciliary is not taxed on non-U.K. income that remains offshore for U.K. tax purposes, but is subject to U.K. tax only on income or gain remitted or deemed remitted to the U.K. and on U.K.-source income.
In 2008, the RBC was introduced as an amendment to the remittance-basis tax provisions, and requires long-term nondomiciliaries who elect to be taxed on the remittance basis to pay a £30,000 minimum charge to remain within the U.K. remittance-based tax regime. For purposes of the RBC, long-term nondomiciliaries are required to nominate an amount of income or gain that does not exceed an amount that, if subject to U.K. tax, would give rise to a U.K. tax equal to the £30,000 RBC amount. If a long-term nondomiciliary does not nominate a sufficient amount of income or gain, the RBC provisions deem an amount of income to have been nominated (“deemed nominated income”) that, along with the actually nominated income, would give rise to a U.K. tax equal to the £30,000 RBC amount.
In its ruling, the IRS determined that the RBC and remittance basis of taxation are a single tax, which is referred to as the long-term nondomiciliary (LTND) levy, and that the tax has the predominant character of an income tax. As a result of meeting these core requirements of the U.S. Treasury Regulations, the IRS Ruling concludes that the RBC paid as part of the remittance basis of U.K. taxation is a creditable foreign income tax for purposes of the U.S. foreign tax credit provisions. In its analysis of whether the LTND levy satisfies the predominant character test, the IRS Ruling considered the realization, gross receipts and net income requirements of the U.S. Treasury Regulations. In this regard, the IRS noted that, in limited cases, the realization requirement could be viewed as not met where a LTND did not have enough non-U.K. source income or gain to justify the £30,000 charge (e.g., the LTND had only £10,000 of unremitted non-U.K. source income), but still elected to be taxed on the remittance basis. The IRS recognized, however, that it was reasonable to assume that a LTND in such a case would not elect to be taxed on the remittance basis and pay the £30,000 RBC amount, but instead would choose to be taxed on the arising basis of taxation. Thus, the IRS concluded that, in most cases, the LTND levy is not based only or predominantly on amounts of income which a LTND has not actually earned. Based on meeting the above requirements, the IRS Ruling concludes that that the LTND tax is likely to reach net gain in the normal circumstances in which it applies and has the predominant character of an income tax in the U.S. sense.
Of particular note, the IRS Ruling cautions that, in certain circumstances, the remittance-basis tax (including the RBC) is not creditable for U.S. tax purposes if it is considered a noncompulsory payment of U.K. tax. The IRS Ruling states that in considering whether the remittance-basis tax (including the RBC) may be claimed as a credit, the payment of the U.K. tax must be considered in light of the elections and options an LTND could exercise in determining its U.K. tax liability, and such elections and options must be exercised in a manner that is considered to reduce, over time, the LTND’s liability for U.K. tax. In regard to the IRS caveat, there may be several situations where the remittance-basis tax (including the RBC) paid by an LTND may be considered noncompulsory, including the following two general circumstances.
In addition to the above, an LTND should note that the IRS Ruling addresses only the general ability to claim a credit for the payment of a RBC to the United Kingdom. To actually claim an amount as a credit for U.S. income tax purposes, however, an LTND must also consider the application of other rules in the U.S. foreign tax credit regime that impose limitations on the ability of a person to claim a foreign tax credit. These limitations may require an LTND to defer actually claiming all or part of an otherwise creditable foreign tax, such as the RBC, to another taxable year.
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