Chartered Institute of Taxation (CIOT / CTA) Taxation of Major Corporates Advisory Flashcards

24 sample cards from the Taxation of Major Corporates Advisory deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is the foreign branch exemption election (CTA 2009 s18A)?

   An irrevocable election to exempt all foreign PE profits and losses from UK corporation tax. Once made it applies to all the company's overseas branches; anti-diversion (CFC-style) rules can claw back exempt profits artificially diverted.

2. What is the purpose of the Controlled Foreign Companies (CFC) regime?

   To counter diversion of UK profits to low-taxed overseas subsidiaries. A CFC charge taxes UK resident companies (holding 25% or more) on a CFC's 'chargeable profits' that pass through the gateway, at the UK corporation tax rate, with credit for foreign tax.

3. Define a CFC.

   A company that is (a) resident outside the UK and (b) controlled by UK resident persons (companies or individuals). 'Control' includes legal, economic and accounting control, and a 40%/40% joint-venture test.

4. How does the CFC 'gateway' and entity-level exemptions work?

   Profits are only charged if they pass through the gateway (Chapters 4–8, e.g. profits from UK significant people functions, non-trading finance profits). Entity exemptions — exempt period, low profits, low profit margin, tax exemption (foreign tax ≥ 75% of UK), and excluded territories — remove a CFC from charge entirely.

5. What is the CFC finance company partial exemption (Chapter 9)?

   For qualifying loan relationships (intra-group overseas lending), a company can claim to exempt 75% (or up to 100%) of the non-trading finance profits, giving an effective rate of around 6.25% on financing income before its EU State-aid-driven restrictions.

6. State the arm's length principle underlying transfer pricing.

   Transactions between connected/associated parties must be priced as if between independent parties dealing at arm's length. UK rules (TIOPA 2010 Part 4) adjust profits only to increase UK taxable profits (one-way street), with a compensating adjustment for the UK counterparty.

7. Which businesses are exempt from UK transfer pricing rules?

   Small enterprises (under 50 staff and either turnover or balance sheet under €10m) are wholly exempt; medium enterprises (under 250 staff and turnover under €50m or balance sheet under €43m) are exempt unless HMRC issues a notice — except for transactions with non-treaty territories.

8. What is thin capitalisation and how do UK rules address it?

   Thin capitalisation is excessive debt funding by connected parties relative to what an independent lender would provide. It is treated as a transfer pricing issue — interest on the 'excess' debt is disallowed by adjusting to arm's length borrowing levels and terms.

9. Summarise the Corporate Interest Restriction (CIR).

   Restricts a group's UK net tax-interest deduction to the higher of the fixed ratio (30% of UK tax-EBITDA) or the group ratio, subject to a $\pounds 2$m de minimis. Disallowed interest carries forward indefinitely; unused capacity carries forward 5 years.

10. What is the Diverted Profits Tax (DPT) and its rate?

    A standalone tax (currently 31%, set 6% above the main CT rate) targeting profits artificially diverted from the UK via (a) avoidance of a UK PE or (b) transactions lacking economic substance between connected parties. Designed as a deterrent to encourage proper CT/transfer pricing self-assessment.

11. What are the two main charging situations for Diverted Profits Tax?

    (1) A foreign company avoiding a UK taxable permanent establishment despite significant UK activity; (2) entities/transactions lacking economic substance that create an effective tax mismatch. A notification and HMRC charging-notice process applies, with a 12-month review period.

12. What is the headline rate and scope of the Pillar Two global minimum tax?

    A 15% global minimum effective tax rate for multinational groups with consolidated revenue of at least €750m. The UK implements it via the Multinational Top-up Tax (MTT, an income inclusion rule) and Domestic Top-up Tax (DTT) for accounting periods from 31 December 2023.

13. Explain the Income Inclusion Rule (IIR) and the top-up tax calculation under Pillar Two.

    The IIR makes the parent pay top-up tax on low-taxed subsidiaries. Top-up tax = top-up percentage × excess profit, where $$\text{Top-up }\% = 15\% - \text{ETR}$$ and excess profit is GloBE income less the substance-based income exclusion (a carve-out for payroll and tangible assets).

14. What is the Undertaxed Profits Rule (UTPR) under Pillar Two?

    A backstop to the IIR: where low-taxed profits are not captured by an IIR (e.g. at the ultimate parent level in a non-implementing country), other group entities deny deductions or make an equivalent adjustment to collect the residual top-up tax.

15. Who must be the Senior Accounting Officer (SAO) and which companies are in scope?

    The SAO is the director or officer with overall responsibility for the company's financial accounting arrangements. The regime applies to UK companies (and groups) with turnover over $\pounds 200$m and/or a balance sheet total over $\pounds 2$bn in the previous year.

16. What are the SAO's main duties and the penalties for failure?

    To take reasonable steps to establish and monitor appropriate tax accounting arrangements and to provide HMRC an annual certificate (compliant or not). Penalties: $\pounds 5{,}000$ personally on the SAO for a failure, $\pounds 5{,}000$ for failing to certify, and $\pounds 5{,}000$ on the company for not notifying the SAO's name.

17. What does the Corporate Criminal Offence (CCO) of failure to prevent the facilitation of tax evasion cover?

    Under the Criminal Finances Act 2017, a 'relevant body' (company/partnership) is strictly liable where an associated person (employee, agent, contractor) criminally facilitates tax evasion (UK or foreign), unless it had reasonable prevention procedures. There is no upper limit on the fine.

18. What is the only defence to the Corporate Criminal Offence?

    That the body had reasonable prevention procedures in place (or that it was unreasonable to expect any), based on six guiding principles: risk assessment, proportionality, top-level commitment, due diligence, communication/training, and monitoring/review.

19. What is the UK General Anti-Abuse Rule (GAAR)?

    A rule (Finance Act 2013) counteracting 'abusive' tax arrangements — those that cannot reasonably be regarded as a reasonable course of action (the 'double reasonableness' test). HMRC may make just and reasonable adjustments, with an advisory GAAR Panel and a 60% GAAR penalty.

20. How do Targeted Anti-Avoidance Rules (TAARs) differ from the GAAR?

    TAARs are specific statutory provisions aimed at particular avoidance (e.g. transactions in securities, unallowable purpose rules for loan relationships), operating automatically where conditions are met. The GAAR is a broad backstop for abusive arrangements not caught by specific rules.

21. What is the 'unallowable purpose' rule for loan relationships?

    Under CTA 2009 s441–442, where a loan relationship has an unallowable purpose (a main purpose of securing a tax advantage not among the company's business/commercial purposes), debits attributable to that purpose are disallowed on a just and reasonable apportionment.

22. Which large businesses must publish a tax strategy, and what must it contain?

    UK companies/groups exceeding the SAO-style thresholds (turnover over $\pounds 200$m or balance sheet over $\pounds 2$bn, or qualifying multinationals) must publish their UK tax strategy annually online. It must cover approach to tax risk management/governance, attitude to tax planning, level of accepted tax risk, and approach to dealings with HMRC.

23. What is the Business Risk Review (BRR+) and HMRC's customer compliance manager (CCM) relationship?

    Large businesses are allocated a CCM and given a BRR+ rating — Low Risk, Moderate, Moderate–High, or High Risk — across systems, internal governance, and approach to tax. A lower rating means lighter-touch HMRC engagement; ratings drive the intensity of compliance interventions.

24. What are DOTAS and the role of disclosure regimes in corporate tax risk?

    DOTAS (Disclosure of Tax Avoidance Schemes) requires promoters/users to notify HMRC of arrangements bearing avoidance 'hallmarks', generating a scheme reference number reported on returns. Alongside DAC6/Mandatory Disclosure Rules for cross-border arrangements, it gives HMRC early visibility of avoidance, informing tax risk management.

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