BT 2003 Annual Report Download - page 154

the gross amount of £100, i.e. £15, leaving a net cash payment of £85. The full dividend plus the full Treaty
payment including the UK tax withheld was taxable income for US purposes, and the UK tax withheld generally
was available as a US credit or deduction.
For dividends paid on or after 6 April 1999 and subject to the 1980 Convention as described above, the
Treaty payment reduces to one ninth of the dividend (i.e. one tenth of the gross payment). As a result of the UK
withholding tax (which cannot exceed the amount of the hypothetical Treaty payment), US Holders will no longer
receive any Treaty payment. In the above example, the cash dividend would be £80, and the hypothetical Treaty
payment would be £8.89 (one ninth of £80). However, since the UK withholding tax (15% of £88.89), would
exceed the amount of the hypothetical Treaty payment, no Treaty payment will be made and the US Holder will
receive only the cash dividend (here, £80). A US holder will be taxable in the US on the full dividend and full
hypothetical Treaty payment (£88.89), and will be treated as having paid a foreign tax equal to the hypothetical
Treaty payment (here, £8.89).
The foreign tax deemed paid generally will be available as a US credit or deduction. A US Holder could elect
to receive a foreign tax credit or deduction with respect to any UK withholding tax on IRS Form 8833 (Treaty-
Based Return Position Disclosure Under Section 6114 or 7701(b)). A US Holder will be denied a foreign tax credit
(and instead allowed a deduction) for the hypothetical Treaty payment unless the US Holder has held the shares
upon which the dividend was received for at least 16 days during the 30-day holding period beginning on the date
which is 15 days before the ex-dividend date. Any days during which a US Holder has a substantially diminished
risk of loss on the shares are not counted toward meeting the 16-day holding period requirement. Also, a
US Holder that is under an obligation to make related payments with respect to the shares (or substantially similar
or related property) is not entitled to claim a foreign tax credit with respect to a foreign tax imposed on a dividend.
For purposes of calculating the foreign tax credit, dividends paid on the ordinary shares or ADSs will be
treated as income from sources outside the United States and generally will constitute ‘‘passive income’’ or,
for certain holders, ‘‘financial services income’’. The rules relating to the determination of the foreign tax credit
are very complex. US Holders who do not elect to claim a credit with respect to any foreign taxes paid in a given
taxable year may instead claim a deduction for foreign taxes paid. A deduction does not reduce US federal income
tax on a dollar for dollar basis like a tax credit. The deduction, however, is not subject to the limitations
described above.
There will be no hypothetical Treaty payment and no notional UK withholding tax applied to a dividend
payment made under the New Convention. Therefore, it will not be possible for US Holders to claim a foreign tax
credit in respect of any dividend payment made by BT on or after 1 May 2003 (or 1 May 2004 in the case of a
Holder who effectively elects to extend the applicability of the 1980 Convention as described above).
The UK does not currently apply a withholding tax on dividends under its internal tax laws.
For US federal income tax purposes, a distribution (including any additional dividend income arising from a
foreign tax credit claim as described above) will be treated as ordinary dividend income to the extent paid out
of our current or accumulated earnings and profits, as determined for US tax purposes, based on the US dollar
value of the distribution calculated by reference to the spot rate in effect on the date the distribution is actually or
constructively received by a US Holder of ordinary shares, or by the Depositary, in the case of ADSs. Distributions
by us in excess of our current and accumulated earnings and profits will be treated first as a tax-free return
of capital to the extent of the US Holder’s basis in the ordinary shares or ADSs, and thereafter as capital gain.
Dividends paid by us will not be eligible for the US dividends received deduction.
US Holders should consult their own tax advisors to determine whether the US Holder is eligible for benefits
under the 1980 Convention and the New Convention, whether, and to what extent, a foreign tax credit will be
available with respect to dividends received from BT, whether it may be advisable in light of the Holder’s
particular circumstances to elect to have the provisions of the 1980 Convention continue in force until 1 May
2004, and the treatment of any foreign currency gain or loss on any pounds sterling received with respect to
ordinary shares that are not converted into US dollars on the date the pounds sterling are actually or
constructively received.
Taxation of capital gains
Unless a US resident carries on a trade through a branch or agency in the UK, and the disposal of ordinary shares
and/or ADSs is related to the activities of that trade, UK capital gains tax is not charged on US residents who
dispose of ordinary shares and/or ADSs.
For US federal income tax purposes, a US Holder generally will recognise capital gain or loss on the sale or
other disposition of ordinary shares or ADSs in an amount equal to the difference between the US dollar value
of the amount realised on the disposition and the US Holder’s adjusted tax basis (determined in US dollars)
in the ordinary shares or ADSs. Such gain or loss generally will be US source gain or loss, and will be treated
as long-term capital gain or loss if the ordinary shares have been held for more than one year at the time
of disposition. The deductibility of capital losses is subject to significant limitations. Capital gains of an individual
US Holder are subject to US federal income tax at preferential rates if specified holdings periods are met.
Additional information for shareholders
BT Annual Report and Form 20-F 2003 153