R & C Commissioners v Aozora GMAC Investment Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 September 2022 |
| Neutral Citation | [2022] UKUT 258 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 258 (TCC)
Honourable Mrs Justice Falk, Judge Jennifer Dean
Upper Tribunal (Tax and Chancery Chamber)
Corporation tax – double tax relief - appellant received interest payments from US – appellant denied treaty benefits on such interest – whether unilateral relief available – no express provision in the UK/US double tax treaty denying relief – unilateral relief available – HMRC’s appeal dismissed -TIOPA 2010, s. 11(3)
In R & C Commrs v Aozora GMAC Investment Ltd [2022] BTC 531, the Upper Tribunal (UT) upheld the decision of the First-tier Tribunal (FTT) in Aozora GMAC Investments Limited [2021] TC 08082. The UT agreed with the FTT that Article 23 was not an express provision of the UK/US double tax treaty for the purposes of ICTA 1988, s. 793A (now TIOPA 2010, s. 11(3)) and the taxpayer company was entitled to unilateral relief for the US tax deducted on interest payments made to it.
The facts of the case had been well rehearsed at the FTT and were not in dispute; the taxpayer was a UK resident company which had received interest payments from the US, which, for reasons covered at the FTT had suffered deduction of US withholding tax. The taxpayer had claimed unilateral relief which had been denied by HMRC. Under ICTA 1988, s. 793(A), unilateral relief is not available where there is an express provision in the relevant double tax treaty denying relief under the treaty for tax suffered. As covered at the FTT, HMRC argued that Article 23 of the US/UK double tax treaty was such a provision. The FTT had disagreed, and held the taxpayer was entitled to unilateral relief.
HMRC appealed the decision, on the basis that the FTT had put too much weight on the word “express” in ICTA 1998, s. 793(A)(3) and that the section should be read in a more purposive manner. The FTT had focused on the mechanism by which credit relief was given, whilst the section is concerned with the effect of relief being denied rather than how that effect is achieved.
The UT considered that HMRC argument’s put too much stress on the word “effect” and accorded no weight to the word “express” in the section. The natural interpretation of the section was that there needed to be an “express provision” in the treaty for the section to have effect. The UT agreed with the FTT that Article 23 was not such an “express provision”, notwithstanding additional review of case law and commentaries building on and additional to what had been considered at the FTT.
Accordingly, on a straightforward interpretation of ICTA 1988, s. 793(A)(3), unilateral relief was available and HMRC’s appeal failed.
The UT also considered an alternative argument from the taxpayer that Article 1(2) of the treaty was not disapplied in relation to Article 23, and Article 23 could then not restrict unilateral relief through the operation of ICTA 1988, s. 793(A)(3). Whilst the UT noted that HMRC’s arguments against this would render certain articles under the treaty redundant, the UT preferred to base their decision on their “straightforward interpretation of section 793(A)(3)”covered above.
HMRC’s appeal was denied.
The UT firmly supported the FTT in how it had interpreted “express provision” and also the FTT conclusion that Article 23 was not such an “express provision”. The UT provided relatively extensive commentary on why it disagreed with HMRC’s arguments that Article 23 could be such a provision, reinforcing and adding to what had been said at the FTT.
Comment by Glyn Fullelove, Senior Tax Writer at Croner-i.
James Rivett KC and Barbara Belgrano, Counsel, instructed by the General Counsel and Solicitor for His Majesty's Revenue and Customs. appeared for the appellant
David Ewart KC, Counsel instructed by Eversheds Sutherland (International) LLP appeared for the respondents
[1] This is an appeal by HMRC against a decision of the First-Tier Tribunal (“FTT”) released on 12 April 2021 (the “Decision”).
[2] By the Decision, the FTT allowed the appeals of the Respondent (“Aozora”) against closure notices issued by HMRC following enquiries into Aozora's accounting periods ending 31 March 2007, 31 March 2008 and 31 March 2009.
[3] The effect of each closure notice was to deny Aozora the unilateral double tax credit relief that would otherwise have been available to it under section 790 of the Income and Corporation Taxes Act 1988 (“ICTA”) on its US source interest income. HMRC's view was that relief was not available as a result of the application of section 793A(3) of ICTA to Article 23 of the Double Tax Convention concluded between the US and the UK on 24 July 2001 (the “Tax Treaty”). The consequence was that Aozora was not able to set off the US tax which had been charged on the interest and withheld from the interest payments against its liability to UK corporation tax on that interest. The FTT concluded that section 793A(3) did not apply to deny relief under section 790.
[4] The appellants appeal with the permission of the FTT. Unless otherwise specified, references in this judgment to numbers in square brackets are to paragraphs of the Decision, references to sections are to sections of ICTA, and references to Articles are to Articles of the Tax Treaty.
[5] In brief outline, at the relevant time Part XVIII of ICTA governed double taxation relief in respect of tax on income and chargeable gains. Chapter I of Part XVIII contained the “Principal reliefs”. Within that Chapter, section 788 provided for relief to be made available in accordance with the terms of double taxation arrangements agreed with other territories, and section 790 provided for relief to be granted by the UK unilaterally under its domestic law (so-called unilateral relief). Chapter II of Part XVIII was entitled “Rules governing relief by way of credit”, and contained provisions which included section 793A.
[6] Double taxation arrangements agreed with other territories are not straightforwardly incorporated into domestic law. As explained by Lord Hoffmann in Boake Allen Ltd (including NEC Semi-Conductors Ltd) v R & C Commrs [2007] BTC 414 at [8]:
… An international treaty does not give rise to any rights in English domestic law unless incorporated by legislation. The EC Treaty is so incorporated, in its entirety, by the European Communities Act 1972. But with DTCs1 the position is more complicated. section 788 of the 1988 Act provides that Her Majesty may by order in council declare that arrangements made by a DTC shall “have effect”. But the result is not to make the whole DTC part of English law. By s788(3) the arrangements shall have effect “notwithstanding anything in any enactment” –
in relation to income tax or corporation tax in so far as they provide –
(a) for relief from income tax, or from corporation tax in respect of income or chargeable gains; or (b) for charging the income arising from sources, or chargeable gains accruing on the disposal of assets, in the United Kingdom to persons not resident in the United Kingdom; or … (d) for conferring on persons not resident in the United Kingdom the right to a tax credit under section 231 in respect of qualifying distributions made to them by companies which are so resident.
[7] Both sections 788 and 790 allowed for relief to be given by way of credit against UK tax on the relevant income or gain. Where credit was not available for foreign tax either under a double tax treaty or unilaterally, section 811 provided for that tax to be treated as a deduction, reducing the amount of the income or gain for UK tax purposes by the amount of the tax paid.
[8] However, a deduction under section 811 is much less beneficial than a tax credit. For example, at a 30% UK tax rate, credit in respect of foreign tax levied at 20% on £100 of income would reduce the UK tax chargeable to (30%−20%) × 100 = £10, whereas a deduction under section 811 would reduce the UK tax to 30% × (100−20) = £24. As the FTT noted at [17], the closure notices issued to Aozora calculated the tax due on the basis that section 811 applied.
[9] The Articles of the Tax Treaty of most relevance to this appeal are as follows:
Article 1 relevantly provides:
1. Except as specifically provided herein, this Convention is applicable only to persons who are residents of one or both of the Contracting States.
2. This Convention shall not restrict in any manner any benefit now or hereafter accorded:
- by the laws of either Contracting State; or
- by any other agreement between the Contracting States.
…
Article 11(1) states:
Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.
Article 23(1) provides:
Except as otherwise provided in this Article, a resident of a Contracting State that derives income, profits or gains from the other Contracting State shall be entitled to all the benefits of this Convention otherwise accorded to residents of a Contracting State only if such resident is a “qualified person” as defined in paragraph 2 of this Article and satisfies any other specified conditions for the obtaining of such benefits.
The text of Article 23 is set out in more detail in the Appendix.
[10] Article 24 provides for double tax relief by way of credit. Articles 24(1)–(3) deal with relief required to be granted by the US under the terms of the Tax Treaty, and Articles 24(4)–(6) address relief required to be granted by the UK. Article 24(4) is set out in the Appendix. Of particular relevance are Articles 24(4)(c) and (d). HMRC also relied on Article 4(5), which is similarly set out in the Appendix.
[11] At material times, section 790 relevantly provided as follows:
(1) To the extent appearing from the following provisions of this section, relief...
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