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This
is a summary only of the principal US federal income
tax and UK tax consequences of the ownership and disposition
of ordinary shares or ADSs by US Holders (as defined
below) who hold their ordinary shares or ADSs as capital
assets. It does not address all aspects of US federal
income taxation and does not address aspects that may
be relevant to persons who are subject to special provisions
of US federal income tax law, including US expatriates,
insurance companies, tax-exempt organisations, financial
institutions, securities broker-dealers, persons subject
to alternative minimum tax, investors that actually
or constructively own 10% or more of our outstanding
share capital, persons holding their shares or ADSs
as part of a straddle, hedging transaction or conversion
transaction, persons who acquired their shares or ADSs
pursuant to the exercise of options or similar derivative
securities or otherwise as compensation, or persons
whose functional currency is not the US dollar, amongst
others. Those holders may be subject to US federal income
tax consequences different from those set forth below.
For purposes of this summary, a ‘‘US Holder’’
is a beneficial owner of ordinary shares or ADSs that,
for US federal income tax purposes, is: an individual
citizen or resident of the United States, a corporation
or certain other entities created or organised in or
under the laws of the United States or any state thereof,
an estate whose income is subject to US federal income
taxation regardless of its source, or a trust if a US
court can exercise primary supervision over the administration
of the trust and one or more US persons are authorised
to control all substantial decisions of the trust. If
a partnership holds ordinary shares or ADSs, the tax
treatment of a partner generally will depend upon the
status of the partner and the activities of the partnership.
If a US Holder is a partner in a partnership that holds
ordinary shares or ADSs, such Holder is urged to consult
its own tax adviser regarding the specific tax consequences
of owning and disposing of the ordinary shares or ADSs.
In particular, this summary is based on (i) current
UK tax law and UK Inland Revenue practice and US law
and US Internal Revenue Service (‘‘IRS’’)
practice, including the Internal Revenue Code of 1986,
as amended (the ‘‘Code’’), Treasury
regulations, rulings, judicial decisions and administrative
practice, all as currently in effect, (ii) the United
Kingdom–United States Income Tax Convention that
entered into force on 25 April 1980 as in effect on
1 January 2003 (the ‘‘1980 Convention’’),
and (iii) the United Kingdom–United States Convention
relating to estate and gift taxes as in effect on the
date of this Annual Report, all of which are subject
to change or changes in interpretation, possibly with
retroactive effect.
US Holders should be aware that a new United Kingdom–United
States Income Tax Convention entered into force on 31
March 2003 (the ‘‘New Convention’’)
and generally will have effect in respect of dividends
paid on or after 1 May 2003. However, a US Holder entitled
to benefits under the 1980 Convention may elect to have
the provisions of the 1980 Convention continue for an
additional twelve months if the election to apply the
1980 Convention would result in greater benefits to
the Holder. If a US Holder were to make an effective
election, the discussion below with respect to dividend
payments made pursuant to the 1980 Convention would
continue to apply to dividends paid by BT prior to 1
May 2004. The discussion below notes instances where
the relevant provisions of the New Convention will produce
a materially different result for a US Holder. US Holders
should note that certain articles in the New Convention
limit or restrict the ability of a US Holder to claim
benefits under the New Convention and that similar provisions
were not contained in the 1980 Convention.
US Holders should consult their own tax advisors as
to the applicability of the Conventions and the consequences
under UK, US federal, state and local, and other laws,
of the ownership and disposition of ordinary shares
or ADSs.
| Taxation
of dividends |
For
dividends paid on or before 5 April 1999, US Holders
were generally entitled to receive the cash dividend
plus a Treaty payment from the Inland Revenue of
one quarter of the dividend, subject to a UK withholding
tax of 15% of the aggregate amount paid. As an example
for illustration purposes only, a US Holder who
was entitled to a dividend of £80 was also
entitled to a Treaty payment of £20, reduced
by the withholding tax of 15% on 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.
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| US
information reporting and backup withholding
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Dividends
paid on and proceeds received from the sale or disposition
of ordinary shares or ADSs may be subject to information
reporting to the IRS and backup withholding at a
current rate of 30%. Certain exempt recipients (such
as corporations) are not subject to these information
reporting requirements. Backup withholding will
not apply, however, to a Holder who provides a correct
taxpayer identification number or certificate of
foreign status and makes any other required certification
or who is otherwise exempt. US persons who are required
to establish their exempt status generally must
furnish IRS Form W-9 (Request for Taxpayer Identification
Number and Certification). Non-US Holders generally
will not be subject to US information reporting
or backup withholding. However, such Holders may
be required to provide certification of non-US status
in connection with payments received in the United
States or through certain US-related financial intermediaries.
Amounts
withheld as backup withholding may be credited against
a Holder’s US federal income tax liability.
A Holder may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing
the appropriate claim for refund with the IRS and
furnishing any required information. |
| UK
stamp duty |
| A
transfer of an ordinary share will generally be
subject to UK stamp duty or UK stamp duty reserve
tax at 0.5% of the amount or value of any consideration
provided. A transfer of an ordinary share into a
clearance service or American depository system
gives rise to a 1.5% charge of either the amount
of the consideration provided or the value of the
share issued. No UK stamp duty will be payable on
the transfer of an ADS (assuming it is not registered
in the UK), provided that the transfer documents
are executed and always retained outside the UK.
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| UK
inheritance and gift taxes in connection with ordinary
shares and/or ADSs |
| Where
an individual holder, who is not a UK national,
of ordinary shares and/or ADSs falls within the
scope of the UK/US Estate and Gift Tax Convention,
US-domiciled holders of ordinary shares and/or ADSs
will not generally be subject to UK inheritance
tax on a gift of ordinary shares and/or ADSs if
the gift is subject to US federal gift tax. Similarly,
ordinary shares and/or ADSs passing on the death
of a US-domiciled shareholder, who is not a UK national,
will not generally be subject to UK inheritance
tax if the estate is subject to US estate tax. The
rules and scope of domicile are complex and action
should not be taken without advice specific to the
individual’s circumstances. |
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