Commissioners of Inland Revenue v Commerzbank AG IRC v Banco do Brasil SA
| Jurisdiction | England & Wales |
| Judgment Date | 09 February 1990 |
| Date | 09 February 1990 |
| Court | Chancery Division |
Chancery Division.
Mummery J.
Mr Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Mr Graham Aaronson QC, Mr Stephen Oliver QC and Mr David Ewart (instructed by S J Berwin & Co) for the banks.
The following cases were referred to in the judgment:
Avery Jones (Rowley's Administrator) v IR Commrs TAX(1976) 51 TC 443
Fothergill v Monarch Airlines Ltd ELR[1981] AC 251
Great West Life Assurance Co v US 678 S 2d 180; 82-1 US Tax Cas (CCH) 9374
IR Commrs v Exxon Corp TAXTAX(1982) 56 TC 237; [1982] BTC 182
James Buchanan & Co Ltd v Babco Forwarding & Shipping (UK) Ltd ELR[1978] AC 141
Strathalmond (Lord) v IR Commrs TAX(1972) 48 TC 537
Corporation tax - Double taxation relief - Branches of German and Brazilian banks permanently established in UK - Interest received from US corporations - Whether exempt from UK tax - Double Taxation Relief (Taxes on Income) (USA) Order 1946 (SR & O 1946/1327) (replaced with effect from 25 April 1980 by a new Convention (SI 1980/568); Double Taxation Relief (Taxes on Income) (USA) Order 1966 (SI 1966/1188);Income and Corporation Taxes Act 1970 section 497 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 497(1) (now Income and Corporation Taxes Act 1988 section 788 subsec-or-para (1) section 788 subsec-or-para (3)sec. 788(1), (3) of the 1988 Act.
This was an appeal by the Revenue against two decisions of the special commissioners that the London branches of a German bank and a Brazilian bank were exempt from UK tax in respect of interest received from US corporations under the double tax Convention agreed between the UK and the US in 1945, as amended in 1966.
The two banks respectively resident in the Federal Republic of Germany and Brazil, each maintained a branch trading in the UK. In the 1970s both banks, in the course of their trading activities, received interest on loans made to US corporations. The loans were US sources and under US law were taxable there. Since the interest also fell to be taxed in the UK by virtue of the Income and Corporation Taxes Act 1970 section 246 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 246(1), although not resident or incorporated in either country, the banks would be liable to tax on the same interest in both countries unless exempted by art. XV.
There was in existence a double tax agreement between the UK and Germany but there was no agreement between the UK and Brazil.
Each bank claimed that the interest received from US corporations during the relevant periods was exempt from UK corporation tax by virtue of theIncome and Corporation Taxes Act 1970 section 497 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 497(1) and the UK/US double taxation Convention in force at the time contained in the SI 1946/1327 article XVDouble Taxation Relief (Taxes on Income) (United States of America) Order 1946, art. XV, as amended by the Double Taxation Relief (Taxes on Income) (United States of America) Order 1966.
In each case the Revenue refused relief and the banks successfully appealed to the special commissioners.
The question was whether the exemption in the opening words of art. XV applied if the recipient of such interest was the London branch of a corporation, such as a bank, organised under the laws of a country other than the US or the UK.
The Revenue accepted that the banks came within the terms of the exemption but contended that the intention of the Convention to achieve reciprocity of effect in the US and the UK would not be achieved if the exemption were available to the banks because in equivalent circumstances, under US law, interest paid by a UK company would not be exempt from US tax.
The Revenue, while accepting that a treaty might deal with rights and obligations of persons other than citizens, residents and corporations of the contracting parties, further contended that this Convention, read as a whole, dealt almost exclusively with the right to tax, or waiver of the right to tax, citizens, residents and corporations of a contracting party, including corporations with a permanent establishment in, the territory of one or other of the contracting parties. It would be surprising if, in the absence of express words to that effect, art. XV were to be interpreted as waiving the right to tax a corporation of a non-contracting party with a permanent establishment in a host country.
The Revenue finally contended that the Convention must be viewed in the context of the power of the UK and the US to enter into double taxation agreements with other countries. Both the UK and the US had agreements with Germany which should regulate the position of a branch of a German bank in the UK, and it would be reasonable to expect the UK to preserve its right to tax the UK branch of a Brazilian bank until a reciprocal arrangement was made with Brazil.
Held, dismissing the Revenue's appeal:
1. The natural and ordinary meaning of the words was thatSI 1946/1327 article XVart. XV exempted from UK tax interest which had been paid by US corporations. All interest coming from that source was exempted by the first sentence of SI 1946/1327 article XVart. XV, except for those recipients expressly referred to in the exception, i.e. a recipient who was a citizen, resident or corporation of the UK. The banks were none of those things and the Revenue could not expand the exception so that recipients, additional to those expressly mentioned, were not entitled to the exemption.
2. The clear words of SI 1946/1327 article XVart. XV did not give rise to manifestly absurd or unreasonable, or even surprising, consequences. Although the banks were not corporations of either contracting party, elements connected to the contracting parties were present. The interest was paid by US corporations and the recipient in each case was the UK branch of the bank. The application ofSI 1946/1327 article XVart. XV was limited to dividends and interest arising in one of the contracting states. The article operated only to exclude interest from that specified source from the computation of the chargeable profits of the bank.
3. There was no indication in the purpose of the Convention, or in its surrounding circumstances, or in articles other than SI 1946/1327 article XVart. XV to qualify the clear words. There were articles which confined the scope of the provisions to citizens or residents of one of the contracting parties. But there was no such restriction in SI 1946/1327 article XVart. XV. The exemption was defined by reference to the character of the source of the income and not to any characteristic of the recipient.
1. On 11 November 1987, I, being a commissioner for the special purposes of the Income Tax Acts heard the appeal by Commerzbank AG ("the bank") against the refusal by the Board of Inland Revenue of the bank's claim to relief from corporation tax pursuant to Income and Corporation Taxes Act 1970 section 497 subsec-or-para (1)sec. 497(1) of the Income and Corporation Taxes Act 1970 in relation to its accounting periods ended 31 December 1973 to 31 December 1976.
2. The question for my determination, my findings of fact, the respective contentions of Mr Stephen Oliver QC on behalf of the bank and Mr WJ Durrans on behalf of the Commissioners of Inland Revenue together with my conclusions are set out in my written decision which was issued on 30 November 1987.
3. No witnesses gave evidence before me.
4. In addition to a statement of agreed facts (with two appendices) an agreed copy of the Convention dated 22 July 1954 and made between the United States of America and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income was adduced in evidence.
5. In addition to the cases mentioned in my decision the following case was cited to me:
Lord Strathalmond v IR Commrs TAX(1972) 48 TC 537.
6. During the course of the hearing I was invited by Mr Oliver to assume jurisdiction over the question of the bank's entitlement to repayment supplement pursuant to Finance Act 1975 section 48 subsec-or-para (2)sec. 48(2) off the Finance (No. 2) Act 1975 should its appeal against the refusal of its claim to relief be successful. This I declined to do in an oral ruling given on 11 November 1987 before the conclusion of the hearing. My reasons for rejecting Mr Oliver's application, briefly stated, were:
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(i) no appeal machinery appeared to exist within the Taxes Acts in relation to repayment supplement, and
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(ii) that in any event, no claim to repayment supplement had yet been made by the bank or refused by the Board of Inland Revenue, and
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(iii) that in the event that the bank should succeed in its appeal and then be denied repayment supplement, it would appear that its remedy would be to issue proceedings for the recovery of the amount claimed.
7. The bank immediately after the determination of the appeal declared its dissatisfaction with my oral ruling on the question relating to repayment supplement as being erroneous in point of law. The Commissioners of Inland Revenue immediately thereafter declared their dissatisfaction with my determination of the appeal as being erroneous in point of law.
On 1 December 1987 the Commissioners of Inland Revenue and on 15 December 1987 the bank respectively required me to state a case for the opinion of the High Court pursuant to Taxes Management Act 1970 section 56sec. 56 of the Taxes Management Act 1970.
8. The questions of law for the opinion of the court are:
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(a) whether I was right during the course of the hearing not to assume jurisdiction over the question of the bank's entitlement to repayment supplement, for the reasons given in para. 6 of this case [this question was not considered by the court], and
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(b) whether I was right to hold that the bank...
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