Treatment of Dr Pepper special div paid Jul 2018

Considering the correct treatment of Dr Pepper special div paid Jul 2018

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Has anyone considered treatment of the Dr Pepper Snapple special dividend paid on the merger with Keurig?

Normally the company pays a quarterly div of a few cents / share. In Jul 18 it paid $103.75 / share in connection with the merger. My dividend records show this as a special div, and finding definitive notes on t'internet has not yielded much, but it would seem that the company then made a revised filing - http://investors.keurigdrpepper.com/download/Amended+Form+8937+Action+Af... - that said that (at least for US purposes) that was split as:

  • Special div $29.50 paid from E&P of the company and treated as a taxable div. This was subjected to 15% treaty rate WHT for non US citizens who had provided a W8BEN
  • $74.25 as a non div distribution "treated as a return of basis"(?)

So I am happy that $29.50 is taxable in the UK as a foreign div with a 15% WHT credit (subject to usual considerations), but is the remainder of $74.25 CGT (which I would prefer) or still a distribution and also taxable as a foreign div?

In the meantime still researching, but if anyone has come across this, and has a view, suggestions gratefully accepted.

Replies (12)

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By whitevanman
05th Jan 2020 18:44

I don't know if this helps but I came across a paper on t'internet. My tech skills are non-existent so I cannot give a link but try https://ssrn.com/abstract=3438049 (a US site) where the paper discusses "whose earnings and profits" (should be used for the purposes of deciding on the merger dividend etc).
What the paper does do is provides an explanation of the transaction and rationalise why it was structured in this way. The upshot would seem to be that a part is dividend income and the balance would be a reduction of "tax basis" with any excess being (capital) gain. In this connection it would appear the reference to tax basis is what we might consider a repayment of share capital. As I say, don't know if it helps at all. Good luck.

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Replying to whitevanman:
By Paul D Utherone
05th Jan 2020 23:00

Thanks for that. I shall skim the 52 pages.

The only problem that there may be is that paper is only considering the US tax code treatment. I believe it is possible that the way this was done could mean that it may correct for the US but that for the UK it is all a distribution, and income. So still looking & reading

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Replying to Paul D Utherone:
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By whitevanman
05th Jan 2020 23:25

I've only skimmed the first few pages but it seems to have been a bit of a reverse takeover and the question of E&P seems to be aimed at what we call distributable reserves. That seems to be what they calculated as $29 .50 ( or thereabouts) meaning that the balance is "something else". The intention was clearly to reduce the value of the Dr Pepper shares resulting in the required share exchange (or whatever) to the Keurig shareholders. I think in all this one can discern the real intent which should help with the categorisation (whether for UK or US taxation). The fact the US has only taxed part is also suggestive of the true nature of the payment (if not determinative).

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Replying to whitevanman:
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By Tax Dragon
06th Jan 2020 07:18

I agree with Paul. Why would US treatment determine UK tax?!

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Replying to Tax Dragon:
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By whitevanman
06th Jan 2020 09:44

It isn't about the (tax) treatment in the US as such, rather, "what is the payment"? If it is to be taxed as a dividend, it (broadly) needs to be of a similar character to a dividend as we know it.
What the paper considers is exactly which E&P should be taken into account in deciding the issue. In that connection, the US companies arrived at the view that 28% of what was being paid was (in effect) a distribution of pre-transaction profits (which appears to be the equivalent of distributable reserves). The balance is therefore considered either a return of capital or a payment to compensate for the dilution of the share value.
To determine the correct tax treatment you must first determine the nature of the payment. The facts here are suggestive of the nature (indeed I think there is argument that no part is an income div) and I would, in the absence of evidence to the contrary, proceed on the assumption that 28% was income and 72% capital in nature. You could of course, put the facts before HMRC and ask for their view. You might also file a return on the basis described and put a full explanation in the white space to safeguard the client. It all depends on how much time (money?) you / the client have.

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Replying to whitevanman:
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By Tax Dragon
06th Jan 2020 09:58

I retract my knee-jerk comment.

My more considered comment:

Company resident in UK - s383. Income.
Company not resident in UK (not checked but I guess per Ch 3 of Pt 2 of CTA 2009) -s402. In particular, s402(4).

So I agree with you.

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By Paul D Utherone
06th Jan 2020 12:21

Just going to sit down with "First Nationwide" to see if there's anything of relevance there

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Replying to Paul D Utherone:
paddle steamer
By DJKL
06th Jan 2020 12:35

Frankly anyone investing in a company that makes cough medicine into a fizzy drink deserves to be taxed on all the distribution as income- it is ghastly stuff and in no way compares with the recent "Crimbo" Irn Bru product (Irn Bru with ginger added)

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Replying to DJKL:
By Paul D Utherone
06th Jan 2020 13:43

:) Indeed, though it did merge into a coffee maker, so maybe...

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Replying to Paul D Utherone:
paddle steamer
By DJKL
06th Jan 2020 14:25

Coffee making is certainly a righteous activity.

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Replying to Montrose:
By Paul D Utherone
07th Jan 2020 17:48

Thanks. I had found that one or one very similar. I think it may ultimately require a view with a 'White Space' note. It is the final bits of the thread, that suggest that for UK purposes it is all a distribution & income rather than any part being CGT (which would be preferable), that concerns me.

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