BP 2007 Annual Report Download - page 91

US federal income taxation
A US holder is subject to US federal income taxation on the gross
amount of any dividend paid by the company out of its current or
accumulated earnings and profits (as determined for US federal income
tax purposes). Dividends paid to a non-corporate US holder in taxable
years beginning before 1 January 2011 that constitute qualified dividend
income will be taxable to the holder at a maximum tax rate of 15%,
provided that the holder has a holding period in the ordinary shares or
ADSs of more than 60 days during the 121-day period beginning 60 days
before the ex-dividend date and meets other holding period
requirements. Dividends paid by the company with respect to the shares
or ADSs will generally be qualified dividend income.
As noted above in UK taxation, a US holder will not be subject to UK
withholding tax. A US holder will include in gross income for US federal
income tax purposes the amount of the dividend actually received from
the company and the receipt of a dividend will not entitle the US holder
to a foreign tax credit.
For US federal income tax purposes, a dividend must be included in
income when the US holder, in the case of ordinary shares, or the
Depositary, in the case of ADSs, actually or constructively receives the
dividend, and will not be eligible for the dividends-received deduction
generally allowed to US corporations in respect of dividends received
from other US corporations. Dividends will be income from sources
outside the US, and generally will be ‘passive category income’ or, in the
case of certain US holders, ‘general category income,’ each of which is
treated separately for purposes of computing the allowable foreign tax
credit.
The amount of the dividend distribution on the ordinary shares or
ADSs that is paid in pounds sterling will be the US dollar value of the
pounds sterling payments made, determined at the spot pounds sterling/
US dollar rate on the date the dividend distribution is includible in income,
regardless of whether the payment is in fact converted into US dollars.
Generally, any gain or loss resulting from currency exchange fluctuations
during the period from the date the pounds sterling dividend payment is
includible in income to the date the payment is converted into US dollars
will be treated as ordinary income or loss and will not be eligible for the
15% tax rate on qualified dividend income. The gain or loss generally will
be income or loss from sources within the US for foreign tax credit
limitation purposes.
Distributions in excess of the company’s earnings and profits, as
determined for US federal income tax purposes, will be treated as a
return of capital to the extent of the US holder’s basis in the ordinary
shares or ADSs and thereafter as capital gain, subject to taxation as
described in Taxation of capital gains – US federal income taxation.
Taxation of capital gains
UK taxation
A US holder may be liable for both UK and US tax in respect of a gain on
the disposal of ordinary shares or ADSs if the US holder is (i) a citizen of
the US resident or ordinarily resident in the UK, (ii) a US domestic
corporation resident in the UK by reason of its business being managed
or controlled in the UK or (iii) a citizen of the US or a corporation that
carries on a trade or profession or vocation in the UK through a branch or
agency or, in respect of corporations for accounting periods beginning on
or after 1 January 2003, through a permanent establishment, and that
have used, held, or acquired the ordinary shares or ADSs for the
purposes of such trade, profession or vocation of such branch, agency or
permanent establishment. However, such persons may be entitled to a
tax credit against their US federal income tax liability for the amount of
UK capital gains tax or UK corporation tax on chargeable gains (as the
case may be) that is paid in respect of such gain.
Under the Treaty, capital gains on dispositions of ordinary shares or
ADSs generally will be subject to tax only in the jurisdiction of residence
of the relevant holder as determined under both the laws of the UK and
the US and as required by the terms of the Treaty.
Under the Treaty, individuals who are residents of either the UK or the
US and who have been residents of the other jurisdiction (the US or the
UK, as the case may be) at any time during the six years immediately
preceding the relevant disposal of ordinary shares or ADSs may be
subject to tax with respect to capital gains arising from a disposition of
ordinary shares or ADSs of the company not only in the jurisdiction of
which the holder is resident at the time of the disposition but also in the
other jurisdiction.
US federal income taxation
A US holder that sells or otherwise disposes of ordinary shares or ADSs
will recognize a capital gain or loss for US federal income tax purposes
equal to the difference between the US dollar value of the amount
realized and the holder’s tax basis, determined in US dollars, in the
ordinary shares or ADSs. Capital gain of a non-corporate US holder that is
recognized in taxable years beginning before 1 January 2011 is generally
taxed at a maximum rate of 15% if the holder’s holding period for such
ordinary shares or ADSs exceeds one year. The gain or loss will generally
be income or loss from sources within the US for foreign tax credit
limitation purposes. The deductibility of capital losses is subject to
limitations.
We do not believe that ordinary shares or ADSs will be treated as
stock of a passive foreign investment company, or PFIC, for US federal
income tax purposes, but this conclusion is a factual determination that is
made annually and thus is subject to change. If we are treated as a PFIC,
unless a US holder elects to be taxed annually on a mark-to-mark basis
with respect to ordinary shares or ADSs, gain realized on the sale or
other disposition of ordinary shares or ADSs would in general not be
treated as capital gain. Instead a US holder would be treated as if he or
she had realized such gain and certain ‘excess distribution’ ratably over
the holding period for ordinary shares or ADSs and would be taxed at the
highest tax rate in effect for each such year to which the gain was
allocated, in addition to which an interest charge in respect of the tax
attributable to each such year would apply.
Additional tax considerations
UK inheritance tax
The Estate Tax Convention applies to inheritance tax. ADSs held by an
individual who is domiciled for the purposes of the Estate Tax
Convention in the US and is not for the purposes of the Estate Tax
Convention a national of the UK will not be subject to UK inheritance tax
on the individual’s death or on transfer during the individual’s lifetime
unless, among other things, the ADSs are part of the business property
of a permanent establishment situated in the UK used for the
performance of independent personal services. In the exceptional case
where ADSs are subject both to inheritance tax and to US federal gift or
estate tax, the Estate Tax Convention generally provides for tax payable
in the US to be credited against tax payable in the UK or for tax paid in
the UK to be credited against tax payable in the US, based on priority
rules set forth in the Estate Tax Convention.
UK stamp duty and stamp duty reserve tax
The statements below relate to what is understood to be the current
practice of the UK Inland Revenue under existing law.
Provided that the instrument of transfer is not executed in the UK and
remains at all times outside the UK and the transfer does not relate to
any matter or thing done or to be done in the UK, no UK stamp duty is
payable on the acquisition or transfer of ADSs. Neither will an agreement
to transfer ADSs in the form of ADRs give rise to a liability to stamp duty
reserve tax.
Purchases of ordinary shares, as opposed to ADSs, through the
CREST system of paperless share transfers will be subject to stamp duty
reserve tax at 0.5%. The charge will arise as soon as there is an
agreement for the transfer of the shares (or, in the case of a conditional
agreement, when the condition is fulfilled). The stamp duty reserve tax
will apply to agreements to transfer ordinary shares even if the
agreement is made outside the UK between two non-residents.
Purchases of ordinary shares outside the CREST system are subject
either to stamp duty at a rate of 50 pence per £100 (or part), or stamp
duty reserve tax at 0.5%. Stamp duty and stamp duty reserve tax are
generally the liability of the purchaser. A subsequent transfer of ordinary
shares to the Depositary’s nominee will give rise to further stamp duty at
BP ANNUAL REPORT AND ACCOUNTS 2007 89