R Aozora GMAC Investment Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Rose,Sir Bernard Rix,Underhill LJ |
| Judgment Date | 08 October 2019 |
| Neutral Citation | [2019] EWCA Civ 1643 |
| Docket Number | Case No: C1/2017/3344 |
| Court | Court of Appeal (Civil Division) |
| Date | 08 October 2019 |
[2019] EWCA Civ 1643
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(ADMINISTRATIVE COURT)
SIR KENNETH PARKER (Sitting as a Judge of the High Court)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Underhill
(Vice-President of the Court of Appeal (Civil Division))
Lady Justice Rose
and
Sir Bernard Rix
Case No: C1/2017/3344
David Ewart QC (instructed by Eversheds Sutherlands (International) LLP) for the Appellant
James Rivett QC and Barbara Belgrano (instructed by Solicitors Office, HMRC) for the Respondent
Hearing dates: 30 and 31 July 2019
Approved Judgment
Background
The Appellant (‘Aozora UK’) appeals against the order of Sir Kenneth Parker (sitting as a judge of the High Court) by which he dismissed Aozora UK's application for judicial review of the decision of the Respondent (‘HMRC’) to issue closure notices following inquiries into Aozora UK's tax returns for accounting periods ending 31 March 2007, 31 March 2008 and 31 March 2009. Aozora UK is a member of a group of companies and is a wholly-owned subsidiary of the Japanese parent company Aozora Bank Limited (‘Aozora Japan’). Aozora UK was set up by Aozora Japan in 2006 as a vehicle for investments to be made outside Japan. In order to make such an investment, 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 issue in this appeal relates to the taxation of those interest payments in the hands of Aozora UK. The interest payments were potentially liable to tax in both the UK and the US. The US imposed withholding tax at the rate of 30 percent on the interest paid by Aozora US. 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 unilateral credit relief under section 790 of the Income and Corporation Taxes Act 1988 (‘ ICTA 1988’) so that Aozora UK was not allowed to use the tax already withheld by the US tax authorities to offset its liability to UK corporation tax on the interest. Instead it was allowed to deduct the US withheld tax from the gross amount of interest payable and to pay corporation tax on the net interest received.
The closure notices were issued by HMRC on the basis that the provisions of section 793A ICTA 1988 operated to prevent the availability of unilateral credit relief under section 790 ICTA 1988. By its judicial review claim, Aozora UK contends that the terms of HMRC's international tax manual as published at the relevant times contained a representation by HMRC that the scope of section 793A was limited to precluding the availability of credit relief only in one particular circumstance which, it is common ground, did not apply to Aozora UK. Aozora UK argues that the representation was binding on HMRC because it gave rise to a legitimate expectation that Aozora UK would be taxed in accordance with that interpretation of section 793A, whether or not the terms of the Manual were accurate as a matter of law. Further, Aozora UK argues HMRC should not be permitted by the court now to resile from the alleged representation.
Sir Kenneth Parker held that:
i) The statement in the Manual as to the proper construction of section 793A did amount to a representation on the part of HMRC on which it was reasonable for taxpayers to rely.
ii) However, Aozora UK had not relied on that representation when making the decision to arrange the loans to Aozora US through Aozora UK.
iii) Further, he held that it would not be conspicuously unjust for HMRC to resile from the representation in the circumstances of the case.
The Judge therefore dismissed the application. Permission to appeal was granted by David Richards LJ on 2 November 2018.
Double taxation relief
This appeal turns on the question when unilateral tax relief under section 790 ICTA 1988 is available in circumstances where there is a double taxation arrangement in place between the UK and the relevant overseas jurisdiction but where that arrangement does not by its terms provide double taxation relief in the particular circumstances of the taxpayer's case. Looking first at the arrangements in place between the UK and the USA, the UK and USA signed the UK/USA Double Taxation Convention (‘The Treaty’) on 24 July 2001. The Treaty entered into force on 31 March 2003 and became effective for corporation tax from 1 April 2003 and for taxes withheld at source from 1 May 2003. The detailed wording of the provisions does not matter for our purposes. What matters is that the effect of the Treaty was as follows:
i) According to Article 23 of the Treaty, UK resident companies could only benefit from the double taxation relief provided by the Treaty if they were “qualified persons” as defined in Article 23(2). That definition was aimed at ensuring, broadly, that the UK resident company was resident in the UK for some genuine business reason and not simply set up here to take advantage of the double taxation relief provided for by the Treaty – to discourage “treaty shopping”.
ii) Article 11 of the Treaty provided double taxation relief for interest payments by providing that interest payments arising in the USA but paid to a UK qualified person were taxable only in the UK and not in the USA. Thus if a company was resident in the UK and was a “qualified person” and it received interest in the USA, the interest was exempt from US tax so that no tax would be withheld at source. The income, exempt from any US tax, would then be taxed in full in the UK at the appropriate rate of corporation tax.
iii) If a UK resident company was not a qualified person and so did not benefit from relief because of Article 23, it could apply under Article 23(6) to the US competent authority (the Internal Revenue Service) to be granted the benefits that the Treaty confers on qualified persons, including exemption from US tax under Article 11.
iv) Article 24(4) of the Treaty provided for certain instances in which the double tax relief was not available or fully available. One of these, in Article 24(4)(c), dealt with tax relief on dividend payments where the USA treated the dividend as beneficially owned by a US resident and the UK treated the dividend as beneficially owned by a UK resident. It restricted the circumstances in which a qualified person could claim relief by way of credit against UK corporation tax for any US tax charged on the relevant underlying profits of the US company paying the dividend. The Judge recorded that he had struggled to make sense of the convoluted wording of Article 24(4)(c) and that he concluded, at paragraph 28 of his judgment, that it was designed to limit the benefit of the relief in respect of a particular tax avoidance arbitrage device that had come to the attention of the UK and US Governments and which they wanted to defeat.
Turning to the provisions of the relevant UK legislation, where a double taxation treaty provides that the Contracting Parties must provide relief in particular circumstances, section 788 of ICTA 1988 and subsequent provisions confer the benefit of that on the taxpayer. Unilateral double tax relief is granted by the UK Government under section 790 ICTA 1988. Such relief is available not only where there is no tax treaty at all between the UK and the other taxing jurisdiction but also, in some circumstances, where the relevant tax treaty does not cover the particular circumstances of this taxpayer. Section 790(1) ICTA 1988 provides that double taxation relief conferred by that section applies in respect of tax payable under the law of the overseas territory “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.”
The Finance Act 2000, Schedule 30 paragraph 5(1) inserted into ICTA 1988 a new section, section 793A. This provides:
“ 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.”
Subsection (3) of section 793A has effect in respect only of arrangements (that is, tax treaties) made on or after 21 March 2000. As the Judge rightly said at paragraph 11 of his judgment, if the taxpayer is claiming unilateral tax credit in respect of US tax, “the taxpayer needs carefully to consider the UK–US Treaty to determine the extent to which section 793A(3) might apply, because that particular treaty was entered into after the crucial date”. The effect of section 793A is that if...
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