In Peninsular & Oriental Steam Navigation Company v HMRC [2016] EWCA Civ 468 (20 May 2016), the Court of Appeal considered a scheme to boost claims to double tax credit relief (DTR) in the hands of a UK parent company on a dividend received from a non-resident subsidiary and originating from another UK resident company. It found that the scheme failed.
Peninsular had implemented a scheme to maximise claims to DTR. FA 2000 had limited the amount of the foreign tax credit to the maximum amount of UK corporation tax via ‘a mixer cap’. FA 2001 had then sought to mitigate the effects on multinational companies by allowing credit in a specific case; namely, for tax that would have been paid by the UK subsidiary of a foreign subsidiary, if the UK subsidiary had not been relieved from paying UK tax at the full rate, for example by using group relief. The purpose of the relevant provisions of FA 2001 concerned the UK subsidiary of a foreign subsidiary of a UK parent, which did not pay UK tax at the full rate. It sought to effectively put that UK subsidiary in the same position as the UK subsidiary of a UK parent company which paid a dividend to its UK parent. The payment of that dividend was not subject to UK corporation tax and the absence of DTR in that situation (deemed ‘the Unfair Case’) was unfair.
Peninsular, the UK ultimate parent in this case, contended that, under the legislation as amended, in the Unfair Case the amount of the credit (allowed in this case by unilateral DTR) was fixed mathematically. This was calculated by reference to the difference between the amount of foreign tax credit resulting from the mixer cap and the amount of underlying tax (foreign tax), which might be nil. HMRC countered with principally two propositions. First, the underlying tax must have been paid for DTR to be given (the tax borne argument). Second, the dividend paid by the UK subsidiary must flow through to the UK ultimate parent, i.e. be the source of profits for successive dividends up the chain to the UK ultimate parent, which had not happened in this case (the disappearing dividend argument).
The Court of Appeal agreed with Peninsular on the tax borne argument but it also agreed with HMRC on the dividend disappearing argument. Therefore, it dismissed the appeal.
The court saw no reason why Parliament should not have decided to give a foreign tax credit where a non-resident company, A, makes a payment of dividend (out of profits distributed to it by a UK subsidiary) to a UK-resident company, B, in circumstances where the payment carries tax in the UK but would have carried no tax if company A had been in the UK; and to do so without requiring that company A or its subsidiary should have suffered tax locally. Additionally, Parliament may have provided for the credit to be reduced if the payment only reached the UK to some extent.
Why it matters: The Court of Appeal expected that its finding on the tax borne argument would ‘sound like heresy to HMRC, which urged on us that double taxation necessarily involved that the original dividend had been paid out of profits which had been taxed in its local jurisdiction’. The court also noted that the relevant legislation had been repealed but that some of the issues may be relevant to the future development of double tax.
In Peninsular & Oriental Steam Navigation Company v HMRC [2016] EWCA Civ 468 (20 May 2016), the Court of Appeal considered a scheme to boost claims to double tax credit relief (DTR) in the hands of a UK parent company on a dividend received from a non-resident subsidiary and originating from another UK resident company. It found that the scheme failed.
Peninsular had implemented a scheme to maximise claims to DTR. FA 2000 had limited the amount of the foreign tax credit to the maximum amount of UK corporation tax via ‘a mixer cap’. FA 2001 had then sought to mitigate the effects on multinational companies by allowing credit in a specific case; namely, for tax that would have been paid by the UK subsidiary of a foreign subsidiary, if the UK subsidiary had not been relieved from paying UK tax at the full rate, for example by using group relief. The purpose of the relevant provisions of FA 2001 concerned the UK subsidiary of a foreign subsidiary of a UK parent, which did not pay UK tax at the full rate. It sought to effectively put that UK subsidiary in the same position as the UK subsidiary of a UK parent company which paid a dividend to its UK parent. The payment of that dividend was not subject to UK corporation tax and the absence of DTR in that situation (deemed ‘the Unfair Case’) was unfair.
Peninsular, the UK ultimate parent in this case, contended that, under the legislation as amended, in the Unfair Case the amount of the credit (allowed in this case by unilateral DTR) was fixed mathematically. This was calculated by reference to the difference between the amount of foreign tax credit resulting from the mixer cap and the amount of underlying tax (foreign tax), which might be nil. HMRC countered with principally two propositions. First, the underlying tax must have been paid for DTR to be given (the tax borne argument). Second, the dividend paid by the UK subsidiary must flow through to the UK ultimate parent, i.e. be the source of profits for successive dividends up the chain to the UK ultimate parent, which had not happened in this case (the disappearing dividend argument).
The Court of Appeal agreed with Peninsular on the tax borne argument but it also agreed with HMRC on the dividend disappearing argument. Therefore, it dismissed the appeal.
The court saw no reason why Parliament should not have decided to give a foreign tax credit where a non-resident company, A, makes a payment of dividend (out of profits distributed to it by a UK subsidiary) to a UK-resident company, B, in circumstances where the payment carries tax in the UK but would have carried no tax if company A had been in the UK; and to do so without requiring that company A or its subsidiary should have suffered tax locally. Additionally, Parliament may have provided for the credit to be reduced if the payment only reached the UK to some extent.
Why it matters: The Court of Appeal expected that its finding on the tax borne argument would ‘sound like heresy to HMRC, which urged on us that double taxation necessarily involved that the original dividend had been paid out of profits which had been taxed in its local jurisdiction’. The court also noted that the relevant legislation had been repealed but that some of the issues may be relevant to the future development of double tax.
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