BT 2006 Annual Report Download - page 143

Taxation of dividends
Under current UK tax law, BT will not be required to withhold tax at source from dividend payments it makes.
For US federal income tax purposes, a distribution will be treated as ordinary dividend income. The amount of the distribution
includible in gross income of a US Holder will be 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. A US Holder who converts the British pounds into US dollars on the date of receipt generally should not
recognise any exchange gain or loss. A US Holder who does not convert the British pounds into US dollars on the date of receipt
generally will have a tax basis in the British pounds equal to their US dollar value on such date. Foreign currency gain or loss, if any,
recognised by the US Holder on a subsequent conversion or other disposition of the British pounds generally will be US source
ordinary income or loss. Dividends paid by BT to a US Holder will not be eligible for the US dividends received deduction that may
otherwise be available to corporate shareholders.
For purposes of calculating the foreign tax credit limitation, 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’ for tax years beginning before 1 January 2007, and for tax years beginning after 31 December 2006, will be
treated as ‘passive category income’ or ‘general category 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 applicable to foreign credits.
There will be no right to any UK tax credit or to any payment from HMRC in respect of any tax credit on dividends paid on
ordinary shares or ADSs.
Certain US Holders (including individuals) are eligible for reduced rates of US federal income tax (currently at a maximum rate of
15%) in respect of ‘qualified dividend income’ received in taxable years beginning before 1 January 2009. For this purpose,
qualified dividend income generally includes dividends paid by a non-US corporation if, among other things, the US Holders meet
certain minimum holding periods and the non-US corporation satisfies certain requirements, including that either (i) the shares (or
ADSs) with respect to which the dividend has been paid are readily tradeable on an established securities market in the United
States, or (ii) the non-US corporation is eligible for the benefits of a comprehensive US income tax treaty (such as the Convention)
which provides for the exchange of information. BT currently believes that dividends paid with respect to its ordinary shares and
ADSs should constitute qualified dividend income for US federal income tax purposes. Each individual US Holder of ordinary shares
or ADSs is urged to consult his own tax advisor regarding the availability to him of the reduced dividend tax rate in light of his own
particular situation and regarding the computations of his foreign tax credit limitation with respect to any qualified dividend
income paid by BT to him, as applicable.
Taxation of capital gains
Unless a US Holder of ordinary shares or ADSs is resident in or ordinarily resident for United Kingdom tax purposes in the United
Kingdom or unless a US Holder of ordinary shares or ADSs carries on a trade, profession, or vocation in the United Kingdom
through a branch, agency, or permanent establishment in the UK, and the ordinary shares and/or ADSs have been used, held, or
acquired for purposes of that trade, the holder should not be liable for UK tax on capital gains on a disposal of ordinary shares and/
or ADSs.
A US Holder who is an individual and who has ceased to be resident or ordinarily resident for tax purposes in the United
Kingdom on or after 17 March 1998 or who falls to be regarded as resident outside the United Kingdom for the purposes of any
double tax treaty (Treaty non-resident) on or after 16 March 2005 and continues to not be resident or ordinarily resident in the
United Kingdom or continues to be Treaty non-resident for a period of less than five years of assessment and who disposes of his
ordinary shares or ADSs during that period may also be liable on his return to the United Kingdom to United Kingdom tax on
capital gains, subject to any available exemption or relief, even though he is not resident or ordinarily resident in the United
Kingdom or is Treaty non-resident at the time of disposal.
For US federal income tax purposes, a US Holder generally will recognise capital gain or loss on the sale, exchange 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. Long-term capital gains recognised by an individual US Holder generally are
subject to US federal income tax at preferential rates. The deductibility of capital losses is subject to significant limitations.
Passive foreign investment company status
A non-US corporation will be classified as a Passive Foreign Investment Company for US federal income tax purposes (a PFIC) for
any taxable year if at least 75% of its gross income consists of passive income or at least 50% of the average value of its assets
consist of assets that produce, or are held for the production of, passive income. BT currently believes that it did not qualify as a
PFIC for the taxable year ending 31 March 2006. If BT were to become a PFIC for any taxable year, US Holders would suffer
adverse tax consequences. These consequences may include having gains realised on the disposition of ordinary shares or ADSs
treated as ordinary income rather than capital gains and being subject to punitive interest charges on certain dividends and on the
proceeds of the sale or other disposition of the ordinary shares or ADSs. Furthermore, dividends paid by BT would not be ‘qualified
dividend income’ which may be eligible for reduced rates of taxation as described above. US Holders should consult their own tax
advisors regarding the potential application of the PFIC rules to BT.
Additional information for shareholders BT Group plc Annual Report and Form 20-F 2006 141