Aozora GMAC Investments Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 April 2021 |
| Neutral Citation | [2021] UKFTT 99 (TC) |
| Date | 12 April 2021 |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 99 (TC)
Judge Aleksander
David Ewart QC, counsel, instructed by Eversheds Sutherland (International) LLP, appeared for the appellant
James Rivett QC and Barbara Belgrano, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Double tax relief – Appellant received interest payments from US – Appellant denied treaty benefits on such interest – HMRC denied unilateral tax credit – Unilateral relief is denied if an express provision to the effect that relief by way of credit shall not be given is present under the relevant tax treaty – Is art. 23 of the UK/US tax treaty such an express provision – Found art. 23 not such express provision – Appeal allowed – TIOPA 2010, s. 11(3).
The First Tier Tribunal allowed an appeal by the taxpayer company against closure notices made by HMRC covering the taxpayer's returns for the years 31st March 2007 to 31st March 2009. The notices denied the taxpayer unilateral tax credit relief under ICTA 1988, s. 790 for each year (the entitlement to relief is now given under TIOPA 2010, s. 9). Relief was denied under the provisions of ICTA 1988, s. 793A (now TIOPA 2010, s. 11(3)). Unilateral relief can in general be given where the relevant treaty does not provide relief. However, ICTA 1988, s. 793A (now TIOPA 2010, s. 11(3) prevents unilateral relief being given where there is an express provision in the relevant treaty to deny credit relief under the treaty in cases or circumstances specified in the treaty, and these cases or circumstances apply.
Article 23 of the UK/US tax treaty denies relief under the treaty in certain situations. In the circumstances of the taxpayer, it had applied to deny the taxpayer treaty benefits. HMRC was of the view that art. 23 was an express provision for the purposes of ICTA s. 793A and HMRC thus denied unilateral relief to the taxpayer. The taxpayer company appealed.
The appellant company was incorporated in England and Wales in 2006 and was tax resident in the UK at all material times. The appellant was and is a wholly owned subsidiary of Aozora Bank Limited (Aozora Japan), a Japanese company. The appellant made loans to a US subsidiary, on which it charged interest. The interest received in the relevant periods was:
| Year to 31st March 2007 | $8,710,800 |
| Year to 31st March 2008 | $26,132,400 |
| Year to 31st March 2009 | $8,289,310 |
In each of these years, US withholding tax at 30% was applied to the interest payments. The UK has a tax treaty with the US which exempts interest payments to UK residents from US withholding tax. However, this is subject to a limitation of benefits clause (art. 23 of the treaty), which denies treaty benefits if the UK resident is owned by taxpayers who are themselves not UK or US resident, except in specific circumstances. The appellant was and is owned by a Japanese taxpayer, not a UK or US resident taxpayer, and the US tax authorities determined the appellant did not meet the other requirements needed to escape the limitation of benefits clause. Accordingly, the appellant was denied treaty relief.
Under (previously) ICTA 1988, s. 790, and now TIOPA 2010 s. 9, the UK grants relief for credit paid for tax outside the UK against UK tax payable on the same income, where relief is not given under a tax treaty. The appellant had claimed such relief against the UK tax due on its interest income. For the years ended 31st March 2007 and 31st March 2008, the UK corporation tax rate was 30% and for the year ended 31st March 2009 it was 28%. Accordingly, unilateral relief for the US withholding tax would eliminate any UK tax liability on the income.
The availability of unilateral relief was (and is) subject to ICTA 1988, s. 793A(3), now TIOPA 2010, s. 11(3). Under this section, unilateral relief will not be given when:
- a payment is made to the UK from a resident of a state with which the UK has a tax treaty;
- the treaty contains an express provision to the effect that relief by way of credit is not to be given under the treaty in cases or circumstances specified or described in the treaty; and
- those cases or circumstances apply to the payment.
HMRC took the view that the denial of relief from US withholding tax by the limitations of benefits provision in art. 23 constituted such an “express provision” and denied the appellant relief under ICTA 1988, s. 790. As a result, the appellant was subject to UK tax on the net amounts received in the UK (the UK income being computed after the deduction of the withholding tax under ICTA 1988, s. 811, now see TIOPA 2010, s. 112).
Both HMRC and the appellant made several technical arguments as to the interpretation of tax treaties and the interaction with domestic law. However, the tribunal decided that the case turned on what was meant by “express provision” and whether art. 23 met the definition of an “express provision” once this was determined. The FTT decided that for an “express provision” to exist, the relevant tax treaty had to be explicit as to the cases and circumstances in which credit relief was not to be available; it was not sufficient for a treaty article to have the effect of denying credit relief under the treaty.
Article 23 deals with when treaty benefits are available in general and does not make any specific references to credit relief. Whilst it might have the effect of denying credit relief and had done so for the appellant in this case, art. 23 does not make explicit mention of when credit relief is not to be available. Accordingly, the tribunal concluded that art. 23 did not constitute an “express provision” for the purposes of ICTA 1988, s. 793A(3) – now TIOPA 2010, s. 11(3).
The taxpayers appeal would be allowed.
Whilst both Counsel in this case put forward detailed and intricate arguments, the decision hinged on what was meant by “explicit provision”, and the key authority for the FTT was ultimately the Oxford English Dictionary and its definition of “express”.
The FTT drew a distinction between art. 23 of the UK/US treaty and art. 24(4)(c); the latter article specifically denies credit relief under the treaty for underlying tax on dividends paid under certain hybrid financing arrangements. The tribunal judge described ICTA 1998, s. 793A(3) as an “enabling provision” for articles such as art. 24(4)(c) of the UK/US treaty.
A further point of note was that at the time of the arrangements made by Aozora, HMRC's guidance suggested that the only time ICTA 1988, s. 793(A) would be point was in relation to art. 24(4)(c) of the UK/US treaty. Counsel for the appellant made the point that art. 23 was likely to be in point more often than art. 24(4)(c), and it was surprising this was not referred to in the HMRC International Manual. The tribunal judge stated that he did not find the Manual's comment was “academic authority”; he noted that it was ironic that Counsel for HMRC had been the one to argue the Manual was incorrect; and HMRC's Counsel had also acknowledged that this was not the first time, and would probably not be the last time, that HMRC's guidance was found wanting. However, given his decision, the tribunal judge thought the International Manual had been correct at the time. In the current version of the International Manual, the paragraph mentioned at the FTT does not contains a reference to the point in question at the FTT.
The tribunal judge said he thought an appeal against his decision was quite likely and given the quite difficult distinctions the FTT had to draw here, an appeal would not be a surprise.
[1] This is an appeal by the Appellant, Aozora GMAC Investments Limited (“Aozora”) against a review decision relating to a number of closures notices issued by HMRC dated 20 May 2016 following enquiries into the Appellant's corporation tax returns for the accounting periods ending 31 March 2007, 31 March 2008, and 31 March 2009. The total amount of UK corporation tax in dispute is nearly £4.5 million.
[2] The effect of each closure notice was to deny Aozora credit under section 790, Income and Corporation Taxes Act 1988 (“ICTA” – and references in this decision to “sections” are references to sections of ICTA) in respect of withholding tax imposed by the United States of America on interest paid to Aozora on loans it made to its US subsidiary.
[3] The only issue in these proceedings is whether s793A(3) denies Aozora entitlement to unilateral relief in the UK under s790 in respect of the US withholding tax imposed by the United States of America on the interest it received.
[4] Aozora was represented by Mr Ewart and HMRC were represented by Mr Rivett and Ms Belgrano.
[5] The evidence before me was included in a joint electronic bundle comprising 583 pages, including a statement of agreed facts and issues. The facts in this appeal are not in dispute, and there was no witness evidence.
[6] On the basis of the statement of agreed facts and the other evidence before me, I find that the background facts are as follows:
[7] Aozora was incorporated in England and Wales as a company limited by shares on 6 November 2006. Aozora is resident for tax purposes in the United Kingdom.
[8] At all material times, Aozora is and was a wholly owned subsidiary of Aozora Bank Limited (“Aozora Japan”).
[9] Aozora has two subsidiaries in the US, including Aozora Investments, Inc, (“Aozora US”, formerly named Aozora GMAC Investment, Inc). Aozora US has at all material times been resident for tax purposes in the US.
[10] By an agreement dated 28 November 2006, Aozora US borrowed $217,770,000 from Aozora. The loan to Aozora US had a maturity of 30 November 2016. Interest was receivable at a fixed rate of 12% per annum.
[11] During the accounting periods ended 31 March 2007, 31 March 2008 and 31 March 2009...
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