R Aozora Gmac Investment Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Sir Kenneth Parker |
| Judgment Date | 14 November 2017 |
| Neutral Citation | [2017] EWHC 2881 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/610/2017 |
| Date | 14 November 2017 |
[2017] EWHC 2881 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Sir Kenneth Parker
Sitting as a Judge of the High Court
Case No: CO/610/2017
David Ewart QC (instructed by Eversheds LLP) for the Claimant
James Rivett and Barbara Belgrano (instructed by The Solicitors, The Commissioners for HM Revenue and Customs) for the Defendant
Hearing dates: 18 – 19 October 2017
Judgment Approved
Introduction
The Claimant in this claim for judicial review is Aozora GMAC Investment Limited ("Aozora UK"), a company that was incorporated and resident in the UK at all material times. The Defendants are the Commissioners for Her Majesty's Revenue and Customs ("HMRC"). Aozora UK in effect challenges closure notices issued by HMRC dated 20 May 2016, following enquiries into tax returns for the accounting periods ending 31 March 2007, 31 March 2008 and 31 March 2009. By a review decision of 21 October 2016 HMRC definitively confirmed the closure notices.
During the material periods Aozora UK was the wholly owned subsidiary of a Japanese parent company, "Aozora Japan". Aozora UK in turn established a wholly owned subsidiary in the United States of America, Aozora GMAC Investments LLC ("Aozora US"), which was for fiscal purposes resident in the US. During accounting periods ended 31 March 2007 – 31 March 2009 Aozora UK made loans to Aozora US, and received interest payments in respect of the funds advanced. The US imposed withholding tax (at 30 percent) on the interest received. Aozora UK was liable to corporation tax in the UK on the amount of interest received from Aozora US.
The effect of each closure notice was to deny Aozora UK relief under s.790 Income and Corporation Taxes Act 1988 (' ICTA 1988') in respect of the withholding tax imposed by the US. The closure notices were issued on the basis that the provisions of s.793A ICTA 1988 operated to prevent the availability for relief under s.790 ICTA 1988. The corporation tax due from Aozora UK pursuant to each closure notice is £900,497 (for the accounting period ending 31 March 2007), £2,640,337 (for the period ending 31 March 2009) and £922,622 (for the accounting period ending 31 March 2010).
By this claim Aozora UK contends that the terms of HMRC's international manual INTM151060 ("The Manual") as in force at relevant times contained a representation by HMRC that gave rise to a legitimate expectation that it would be taxed in accordance with the Manual, whether or not the terms of the Manual were accurate; and that it would be conspicuously unjust and an abuse of power for HMRC to resile from the alleged representation.
The review decision of 21 October 2016 did not directly address the issue of legitimate expectation, but it did state the following in respect of the Manual:
"HMRC do not consider that anything turns on the original wording of INTM151060. This passage was removed as part of the updating of the International Manual when references were changed from ICTA to TIOPA. However it was also removed as it was incorrect. The 'new UK/US DTC' [Double Taxation Convention] was the first UK DTC to include a Limitation on Benefits article and all its ramifications had not been fully understood when the original guidance was written. As mentioned above, whether the incorrect guidance led to a legitimate expectation is outside the terms of this submission." (emphasis added)
That statement would tend to suggest that HMRC gave guidance which it now believes was not correct, and that it gave such erroneous advice because it had failed to understand the full meaning and scope of ICTA s.793A.
Double taxation relief
Double taxation relief ("DTR") is central to this claim. A UK resident subject to UK tax on income or gains that have suffered foreign tax may claim relief in different ways. First, a double tax agreement with another State may exempt from UK tax the relevant foreign income. Secondly, a taxpayer may choose to treat foreign tax levied as if it were an expense ("deduction") ( ICTA 1988 s.811). Thirdly, the foreign tax may be off-set as a credit against the UK tax liability, either under the terms of a double tax agreement ( ICTA 1988 ss. 788, 792–906, 812–815); or unilaterally ( ICTA 1988 s. 790) ("unilateral tax credit").
Unilateral tax credit was first introduced in the UK in 1950. Initially the credit was for one half of the foreign (that is, non-Commonwealth) tax, but this limit was removed in 1953. Unilateral tax credit remains important, for the UK, although it now has over 100 tax treaties with other States, does not have a tax treaty with every State; and there may also be situations where a relevant tax treaty does not cover the particular circumstances.
S. 790 (Unilateral relief) provides as follows:
"(1) To the extent appearing from the following provisions of this section, relief from income tax and corporation tax in respect of income and chargeable gains shall be given in respect of tax payable under the law of any territory outside the United Kingdom by allowing that tax as a credit against income tax or corporation tax, notwithstanding that there are not for the time being in force any arrangements under section 788 providing for such relief.
(2) Relief under subsection (1) above is referred to in this Part as 'unilateral relief'.
(3) Unilateral relief shall be such relief as would fall to be given under Chapter II of this Part if arrangements in relation to the territory in question containing the provisions specified in subsections (4) to (10C) below were in force by virtue of section 788, but subject to any particular provision made with respect to unilateral relief in that Chapter; and any expression in that Chapter which imports a reference to relief under arrangements for the time being having effect by virtue of that section shall be deemed to import also a reference to unilateral relief.
(4) Credit for tax paid under the law of the territory outside the United Kingdom and computed by reference to income arising or any chargeable gain accruing in that territory shall be allowed against any United Kingdom income tax or corporation tax computed by reference to that income or gain (profits from, or remuneration for, personal or professional services performed in that territory being deemed for this purpose to be income arising in that territory)……
(12) In this section and in Chapter II of this Part in its application to unilateral relief, references to tax payable or paid under the law of a territory outside the United Kingdom include only references—
(a) to taxes which are charged on income and which correspond to the United Kingdom income tax, and
(b) to taxes which are charged on income or chargeable gains and which correspond to United Kingdom corporation tax;
but for this purpose tax under the law of any such territory shall not be treated as not corresponding to income tax or corporation tax by reason only that it is payable under the law of a province, State or other part of a country, or is levied by or on behalf of a municipality or other local body."
From 1950 until relatively recently there was no generally applicable restriction on the availability of unilateral tax credit by explicit reference to treaty provisions. That changed with the enactment on 28 July 2000 of the Finance Act 2000, Sch. 30 para 5(1), which added s. 793A ("No double tax relief, etc"):
"793A No double relief etc.
(1) Where relief in respect of an amount of tax that would otherwise be payable under the law of a territory outside the United Kingdom may be allowed—
(a) Under arrangements made in relation to that territory, or
(b) Under the law of that territory in consequence of any such arrangements,
Credit may not be allowed in respect of that tax, whether the relief has been used or not.
(2) Where under arrangements having effect by virtue of section 788, credit may be allowed in respect of an amount of tax, credit by way of unilateral relief may not be allowed in respect of that tax.
(3) Where arrangements made in relation to a territory outside the United Kingdom contain express provision to the effect that relief by way of credit shall not be given under the arrangements in cases or circumstances specified or described in the arrangements, then neither shall credit by way of unilateral relief be allowed in those cases or circumstances." (emphasis added to the words that are central to this claim).
Subsections (1) and (2) of s.793A have effect in relation to claims for unilateral tax credit made on or after 21 March 2000. Subsection (3) of s.793A has effect in respect only of arrangements (that is, tax treaties) made on or after March 21 2000. As a practical matter it appears that, so far as s.793A(3) is concerned, the UK taxpayer can safely ignore all the many treaties made before that date. However, it appears that if, and only if, the taxpayer is claiming unilateral tax credit in respect of US tax, the taxpayer needs carefully to consider the UK – US tax treaty to determine the extent to which s. 793A(3) might apply, because that particular treaty was entered into after the crucial date.
S.793A(1) and s.793A(2) do not appear to present any obvious difficulty of interpretation. S.793A(1) is plainly addressing the situation where an applicable treaty has, for example, exempted the relevant income from tax. The treaty might, for example, provide that certain income arising in the relevant State should be exempt from tax if the taxpayer receiving the income is resident in the other State. The UK taxpayer may not then claim unilateral tax credit for the tax paid if, under the...
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