Sun Life Assurance Company of Canada v Pearson
| Jurisdiction | England & Wales |
| Judgment Date | 17 April 1984 |
| Date | 17 April 1984 |
| Court | Chancery Division |
Chancery Division.
Mr. A. Park Q.C. and Mr. D. Goy (instructed by Messrs. Freshfields) for the company.
Mr. J.M. Chadwick Q.C. and Mr. C.H. McCall (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Vinelott J.
Corporation tax - Overseas life insurance company - Charge on investment income - Charge on profits from pension and annuity business - Method of taxation of branch or agency in United Kingdom - Legislation providing for charge on proportionate basis - Double taxation treaties providing for charge as if independent enterprise - Whether legislation overridden by or preserved by treaties - Whether apportionment basis discriminated against overseas companies - section 430Income Tax Act 1952, sec. 430 - Income and Corporation Taxes Act 1970 section 312 section 315 section 316 section 318Income and Corporation Taxes Act 1970, sec. 312, 315, 316, 318.Corporation tax - Overseas life insurance company - Computation of proportion of profits attributable to branch or agency in United Kingdom - Whether proposals made through offices outside UK were made at or through UK branch - Whether expenses attributable to policies issued by closed branches outside UK deductible - Income and Corporation Taxes Act 1970 section 317Income and Corporation Taxes Act 1970, sec. 317.
These were cross appeals from two decisions of the Special Commissioners, concerning the method of taxation of the United Kingdom branch of an overseas life insurance company ("the company"). The Crown appealed against the Commissioners' decision that the company was chargeable on profits from its annuity business as if the UK branch were an independent enterprise, rather than on a proportion of its world profits. The company appealed against the Commissioners' decision that it was chargeable on a proportion of its world investment income rather than as if its UK branch were an independent enterprise. Further appeals by both parties concerned the quantification of profits attributable to the UK branch.
The company was a life assurance company with its head office in Canada, which carried on business through a branch or agency in the UK. As such it was liable to pay UK corporation tax in accordance with the provisions of Income and Corporation Taxes Act 1970 section 307sec. 307-Income and Corporation Taxes Act 1970 section 323323 of the Income and Corporation Taxes Act 1970, subject, however, to double taxation treaties concluded between Canada and the UK. In respect of the company's accounting period to 31 December 1972 and subsequent periods up to 31 December 1976, the relevant treaty ("the 1967 Treaty") was brought into effect by the
Double Taxation Relief (Taxes on Income) (Canada) Order 1967. In respect of its accounting period to 31 December 1977 the relevant treaty ("the 1980 Treaty") was brought into effect by the Double Taxation Relief (Taxes on Income) (Canada) Order 1980; this latter treaty would also apply to the accounting period to 31 December 1976 unless greater relief was available under the 1967 Treaty.
Under Income and Corporation Taxes Act 1970 section 316sec. 316 of the 1970 Act, a proportion of the company's investment income, wherever received, was deemed to be profits chargeable to tax under Sch. D, Case III. The chargeable portion corresponded to the ratio of the company's liability to UK policyholders to its liability worldwide.
Under Income and Corporation Taxes Act 1970 section 312 section 318sec. 312 and 318 of the 1970 Act, a separate charge underIncome and Corporation Taxes Act 1970 schedule DSch. D, Case I or Income and Corporation Taxes Act 1970 schedule DVI was imposed on the company's profits from annuity or pension business. This was based on a similar proportion of the company's worldwide profits from such business.
Article 6(3) of the 1967 Treaty provided that an enterprise carrying on business in the other contracting territory was to be attributed the industrial or commercial profits which it might have been expected to make if it were an independent establishment. Article 6(4) permitted the deduction of expenses connected with that establishment. However, art. 6(7) preserved any provision of UK law relating to the tax liability of an overseas life assurance company in respect of its investment income, which was in force in 1966 and not modified in more than minor respects since then. Article 22(2) provided that an overseas enterprise was not to be treated less favourably than other enterprises carrying on the same activity.
There were four points at issue, as follows:
(2) Whether section 430sec. 430 of the Income Tax Act 1952 (the predecessor of section 316sec. 316) was "a provision of UK tax law in respect of" investment income, so as to fall within the saving provision of art. 6(7). The company argued that because section 430sec. 430 charged tax on a notional profit, it was therefore not a tax "in respect of income". Thus the saving provision of art. 6(7) did not apply, and the Treaty overrode the proportionate basis of charge in Income and Corporation Taxes Act 1970 section 316sec. 316.
(3) Whether section 430sec. 430, if preserved by art. 6(7), had been modified in more than "minor respects" since 1966. For the company it was contended first that a change in 1969 in the method of calculating the proportion of profits taxable in the UK affected the general character of section 430sec. 430; and secondly that the loss in 1969 of a right to set off tax deducted at source from UK investment income had a similar effect.
(4) Whether Income and Corporation Taxes Act 1970 section 312 section 318sec. 312 and 318, relating to pension and annuity business, were rendered ineffective by art. 6(3) and (4). The Commissioners had decided this point in favour of the company, on the authority of Ostime v. Australian Mutual Provident SocietyTAX(1959) 38 T.C. 492. The Crown contended that art. 6(3) and (4) did not preclude all methods of apportionment of a company's global profits, and that the method in Income and Corporation Taxes Act 1970 section 318sec. 318 in particular was not inconsistent with the Treaty.
(5) Whether Income and Corporation Taxes Act 1970 section 312 section 318sec. 312 and 318, relating to annuity or pension business, if not rendered ineffective by art. 6(3) and (4), infringed art. 22(2) of the Treaty, by taxing overseas enterprises less favourably than other enterprises. The company argued that art. 22 applied whenever the calculation under Income and Corporation Taxes Act 1970 section 312 section 318sec. 312 and 318 was less favourable than a calculation under the Treaty. Alternatively, it was submitted that the practical effect of certain provisions of the UK legislation was to discriminate against overseas enterprises.
Articles 7(2) and (3) and 22(1) of the 1980 Treaty were in terms similar to art. 6(3) and (4) and 22(2) respectively of the 1967 Treaty (above). Article 7(4) of the 1980 Treaty preserved any method of taxation by apportionment of total profits as might be customary, so long as the result was in accordance with the principles of that article. There were three points at issue, as follows:
(2) Whether Income and Corporation Taxes Act 1970 section 316sec. 316, relating to taxation of investment income, was overridden by art. 7(2), or was saved by art. 7(4). The company argued that a provision apportioning investment income was not a provision under which "profits" attributed to a branch were customarily determined by apportionment. It was further argued that since Income and Corporation Taxes Act 1970 section 316sec. 316 apportioned gross investment income, it did not accord with the principle in art. 7, which was concerned with net income.
(3) Whether Income and Corporation Taxes Act 1970 section 312 section 318sec. 312 and 318, relating to pension and annuity business, were rendered ineffective by art. 7(2), or were preserved by art. 7(4). The Commissioners had held that they were rendered ineffective, and were not preserved by art. 7(4) because they could not be said to be "customary". The Crown's argument was the same as for the 1967 Treaty (above, point 3). Additionally, the Crown had given evidence before the Commissioners that a large number of companies had accepted computations on an apportionment basis, and that that basis had become customary.
(4) Whether any of the UK legislative provisions infringed art. 22 of the Treaty by taxing overseas enterprises less favourably than other enterprises. The same arguments were put forward as for the 1967 Treaty (above, point 4). In addition, the company referred to a statement in the Commentary to the Model Convention on which the 1980 Treaty was based, that in ascertaining whether there was discrimination it was the result alone which counted rather than the mode of taxation.
The company's British division handled business which was negotiated in the "five territories", namely the Republic of Ireland, Malta, Guernsey, Jersey and the Isle of Man. In some of these territories the company maintained a sales office; in others it had sales representatives. The question was whether liabilities to policyholders who made their proposals through these offices or representatives were liabilities to policyholders whose proposals were made "at or through" a UK branch or agency. If so, the liabilities were included in the numerator of the fraction in Income and Corporation Taxes Act 1970 section 316 subsec-or-para (3)sec. 316(3), and increased the amount of UK tax payable by the company. On appeal by the company, it was contended that these proposals were made at the place where they were delivered to a person authorised by the company to receive them, and thus were not made "at" a UK branch or agency.
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