Sun Life Assurance Company of Canada v Pearson
| Jurisdiction | England & Wales |
| Judgment Date | 12 June 1986 |
| Date | 12 June 1986 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Mr. Andrew Park Q.C. and Mr. D. Goy (instructed by Freshfields) for Sun Life Assurance Company.
Mr. John M. Chadwick Q.C. and Mr. C. McCall (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Fox, Nourse and Balcombe L.JJ.
The following cases were referred to in the judgment:
Australian Mutual Provident Society v. I.R. Commrs. TAX(1947) 28 T.C. 388
Fothergill v. Monarch Airlines Ltd. ELR[1981] A.C. 251
Ostime v. Australian Mutual Provident Society ELRTAX[1960] A.C. 459; (1960) 38 T.C. 492
The Spanish Prospecting Company, Limited, In re ELR[1911] 2 Ch. 92
Corporation tax - Overseas life assurance company - Charge on investment income - Charge on profits from pension and annuity business - Method of taxation of branch or agency in UK - 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 proposals made through offices outside UK were made at or through UK branch - section 430Income Tax Act 1952, sec. 430; Income and Corporation Taxes Act 1970 section 316Income and Corporation Taxes Act 1970, sec. 316.
This was an appeal by the taxpayer company against a decision of Vinelott J. (reported at [1984] BTC 223) relating to its liability to corporation tax in respect of the profits of its business carried on through a UK branch or agency.
The taxpayer was an overseas insurance company. Its head office was in Canada but it carried on business, inter alia, in the UK - its British Division - through its branch or agency, having headquarters in London. The territories in the British Division included Malta, the Republic of Ireland, Guernsey, Jersey and the Isle of Man. Regional offices existed within the British Division which were principally concerned with procedural matters leading up to the issue of policies and annuity contracts. Binding contracts could, however, only be made under the authority of the London office.
The taxpayer company appealed against assessments to corporation tax for its accounting periods ending 31 December 1972 - 31 December 1977 inclusive. The assessments were made on a portion of the company's worldwide investment income calculated on the basis of the proportion of its liabilities to policy holders contracting through the UK branch to its total liabilities, the formula now contained in Income and Corporation Taxes Act 1970 section 316sec. 316 of the Income and Corporation Taxes Act 1970. The taxpayer relied on the provisions of certain double tax treaties between the UK and Canada (S.I. 1967 No. 482 and S.I. 1980 No. 709). Those provisions provided for the company to be assessed as an independent enterprise, which was a more favourable basis.
The Special Commissioners made findings of principle only in relation to a number of issues arising out of the legislation. Both parties appealed.
Vinelott J. found of the Crown on most of the issues ([1984] BTC 223).
The taxpayer company appealed to the Court of Appeal on the following issues only.
The first main issue
Whether the provisions of Income and Corporation Taxes Act 1970 section 316sec. 316 of the 1970 Act (re-enacting section 430sec. 430 of the Income Tax Act 1952), being inconsistent with eu-treaty treaty article 6(2) article 6(3)Art. 6(2) and (3) of the 1967 Treaty, rendered the assessments liable to be discharged or whether they were saved by the provisions in eu-treaty treaty article 6(7)Art. 6(7)of the Treaty which preserved UK law in force at the date of the Treaty, and subsequent minor amendments which did not affect the "general character" of that existing law.
The taxpayer argued that it was agreed by the Crown that as a result of the House of Lords' decisions in Ostime v. Australian Mutual Provident Society [1960] A.C. 459, the provisions of Income and Corporation Taxes Act 1970 section 316sec. 316 could not prevail over those of the 1967 Treaty unless eu-treaty treaty article Art. 6(7)Art. 6(7) applied expressly to save them. That article did not apply as it could not be said that amendments made to section 430sec. 430 of the 1952 Act byFinance Act 1969 schedule 14Sch. 14 to the Finance Act 1969 (now contained in Income and Corporation Taxes Act 1970 section 316sec. 316 of the 1970 Act) "modified only in minor respects" the section 430sec. 430 provisions. schedule 14 subsec-or-para 9Schedule 14, para. 9(2)took away or limited a previously unlimited right to set off income tax deducted at source against corporation tax chargeable under section 430sec. 430 or to claim a repayment of such tax.
The second main issue
Whether the provisions of Income and Corporation Taxes Act 1970 section 316sec. 316, being inconsistent with eu-treaty treaty article 7(2) article 7(3)Art. 7(2) and (3) of the 1980 Treaty, rendered the assessments liable to be discharged or whether they were saved by the provisions in eu-treaty treaty article 7(4)Art. 7(4) of that Treaty.
The taxpayer argued that, applying the Ostime decision, the provisions of Income and Corporation Taxes Act 1970 section 316sec. 316 could not prevail over those of the 1980 Treaty unlesseu-treaty treaty article Art. 7(4)Art. 7(4) applied expres sly to save it. eu-treaty treaty article 7(4)Article 7(4) did not apply as it only preserved provisions under which profits attributed to a branch had been customarily determined on the basis of an apportionment of total profits and thus could not apply toIncome and Corporation Taxes Act 1970 section 316sec. 316, since thereunder what was apportioned was investment income. Further, the apportionment of gross income under Income and Corporation Taxes Act 1970 section 316sec. 316 did not accord with the principle of eu-treaty treaty article 7Art. 7under which only net profits fell to be apportioned.
The subsidiary issue
Whether the proposals relating to policy holders resident in territories and dealt with at the taxpayer company's regional offices, could be said to have been made to the taxpayer "at or through its branch or agency in the UK" so that the liabilities in respect of those policies should be included in the formula contained in Income and Corporation Taxes Act 1970 section 316 subsec-or-para (3)sec. 316(3). The taxpayer company said that proposals made by policy holders at the regional offices could not, in the circumstances of the case, be said to have been made "at or through" the taxpayer company's UK branch or agency within the meaning of Income and Corporation Taxes Act 1970 section 316 subsec-or-para (3)sec. 316(3). Those proposals were made at the place where they were delivered to a person authorised by the taxpayer company to receive them and not "at" a UK branch or agency. Thus, the liabilities in respect of those matters should not be included in the "B" element in the formula.
The Crown resisted those arguments relying on the reasons given in the judgment of Vinelott J. for upholding the Special Commissioners' determinations.
Held, (per Fox L.J., giving the judgment of the court) dismissing the taxpayer company's appeal:
The first main issue
1. In 1969, the basis of charge under section 430sec. 430 of the Income Tax Act 1952 (now re-enacted in Income and Corporation Taxes Act 1970 section 316sec. 316 of the Income and Corporation Taxes Act 1970) had been altered from a proportion of world investment income based on premiums to a proportion based on liabilities. It was difficult to say that the character of the enactment had been altered or principle violated where what had happened was that one rough and ready yardstick (liabilities) had been substituted for another (premiums). There was no reason for saying that the liabilities basis was less fair than premiums and the substitution of one for the other did not result in a change of character.
2. The other major alteration was in the basis for management expenses relief whereby the actual expenses of the UK branch or agency were substituted for a proportion of world wide expenses. Neither basis was unreasonable. The new basis was fair and it did not alter the character of the previous legislation.
3. Finance Act 1969 schedule 14 subsec-or-para 9Schedule 14, para. 9(2) to the Finance Act 1969 placed a limit on the amount of income tax deducted at source for UK investment income which could be set off against corporation tax as regards a company assessed under section 430sec. 430 to income tax at the standard rate on an amount equal to the proportion of investment income chargeable under section 430sec. 430. The 1969 legislation did not take away any right to repayment or set-off. It was concerned with machinery only. Accordingly, the amendments did not alter the character of section 430 subsec-or-para (2)sec. 430(2).
The second main issue
1. It was just as likely as not that eu-treaty treaty article 7(4)Art. 7(4) of the 1980 Treaty was intended to authorise the retention of the Income and Corporation Taxes Act 1970 section 316sec. 316 regime, bearing in mind that when the 1980 Treaty was signed, Income and Corporation Taxes Act 1970 section 316sec. 316 had been in force for eight years and the principle of taxing a conventional proportion of investment income for much longer.
2. The background to and other provisions of the Treaty seemed to be consistent with a wide interpretation of "profits" in eu-treaty treaty article 7(4)Art. 7(4). Consequently, profits meant "investment income" in that article.
3. The language of eu-treaty treaty article 7Art. 7 gave a clear indication that "profits" in eu-treaty treaty article 7(2)Art. 7(2) meant "income".
4. eu-treaty treaty article 7(4)Article 7(4) had to be authorising some computation based on an apportionment of total profits. In so far as such, an apportionment was to...
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