US Multinationals with UK Subsidiaries Should Consider Distributing Earnings
US MULTINATIONALS WITH UK SUBSIDIARIES SHOULD CONSIDER DISTRIBUTING EARNINGS to the US as dividends before April 6.
A dividend of $15 million paid before April 6 will generate a tax credit refund in the United Kingdom of over $1 million. The same dividend paid April 6 or later will generate a refund of less than $42,000. This is due to interaction between the US-UK tax treaty and the “advance corporations tax,” or ACT, in the United Kingdom. The ACT has been repealed effective April 6.
However, before paying dividends, US multinationals should consider whether the benefits outweigh possible detriments. For example, a US multinational that is not in a position to use foreign tax credits in the US may find the US taxes it must pay on the dividend exceed any tax savings in the UK.
A recent private letter ruling suggests there may be a way to distribute earnings that is considered a dividend in the UK but not in the US. This would trigger UK refunds without triggering taxes in the US. (See “IRS Provides Roadmap for Hybrids” in the November 1998 issue of the NewsWire.)