UBS AG v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moses,Lady Justice Arden,Lord Justice Sedley |
| Judgment Date | 21 February 2007 |
| Neutral Citation | [2007] EWCA Civ 119 |
| Docket Number | Case No: C3/2006/0477 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 February 2007 |
[2007] EWCA Civ 119
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
Mr Justice Etherton
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Sedley
Lady Justice Arden and
Lord Justice Moses
Case No: C3/2006/0477
David Ewart QC (instructed by Solicitor's Office) for the Appellant
John Gardiner QC and Jolyon Maugham (instructed by Messrs Mcdermott Will and Emery) for the Respondent
Hearing dates: 28 th-29 th November 2006
Introduction
UBS AG (“UBS”),a bank resident in Switzerland, succeeded to the banking business of the Swiss Bank Corporation (“SBC”), following a merger in 1998. SBC carried on a banking business through a branch in London. In the relevant accounting periods, at the year end in 1993, 1995 and 1996, that branch, which I shall also call UBS, had substantial trading losses brought forward. That branch was a “permanent establishment” within the meaning of the UK-Switzerland Double Taxation Convention of 8 December 1977 (“the Convention”). Had that branch been a company resident in the United Kingdom, it would have been entitled to a tax credit in each of those years. But such a tax credit was denied to UBS. UBS contends that that refusal is discrimination prohibited by Article 23(2) of the Convention and that proscription has been incorporated into UK law by the combined effect of the Double Taxation Relief (Taxes on Income) (Switzerland) Order 1978 ( S.I.1978/1408) and Section 788 of the Income and Corporation Taxes Act 1988 (“The Taxes Act”).
Following the refusal of its claim, UBS appealed to the Special Commissioners. They dismissed the appeal on the basis that, although the refusal of the tax credit amounted to discrimination proscribed by the Convention, discrimination in relation to entitlement to a tax credit had not been incorporated into UK law by the operation of Section 788(3)(a) (see [2005] STC (SCD) 589 and [2006] STC 716). But the Special Commissioners did toy with an idea, not canvassed before them, that UBS might succeed under Section 788(3)(d) (see paragraph 41 of their decision).
This suggestion was adopted by UBS on appeal to Etherton J. He agreed with the Special Commissioners' conclusions in relation to Article 23(2) and Section 788(3)(a). But he held that the denial of a right to a tax credit amounted to an infringement of the non-discrimination provision which was given effect by Section 788(3)(d). (see [2006] STC 716 at 739).
Accordingly, HM Revenue and Customs (“the Revenue”) appeal against Etherton J's decision in relation to his interpretation of Article 23(2) of the Convention and of Section 788(3)(d). UBS appeal against the judge's conclusions in relation to Section 788(3)(a), an issue which does not arise if the judge was correct in his views as to the effect of Section 788(3)(d). No further proem is required. New readers can read all about the facts and statutory provisions in the decision of the Special Commissioners and the judgment of Etherton J. Old readers should begin here.
Incorporation of the Convention into UK Law
The Convention has no effect in UK law without legislation. The Convention takes effect by the Order in Council, to which I have already referred, made under Section 788(1). Paragraph 2 of the 1978 Order made the declaration identified in section 788(1). Accordingly the Convention, set out in full to the Schedule to the Order, has effect in accordance with section 788(3). This provides:—
“Subject to the provisions of this Part, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax and 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
…
(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.”
It is, thus, apparent that section 788 may not fully incorporate a Double Taxation Convention (“DTA”). The Special Commissioners gave a number of examples where this has occurred (see paragraph 42 of their Decision). Nolan LJ recalled in R v IRC ex p Commerzbank AG [1991] 68 TC 252 that provisions in double tax conventions may benefit only one party (260D). The terms of section 788(3) show that the draftsman did not intend that everything in a DTA should become part of the law of the United Kingdom (see e.g. Park J in NEC Semi-Conductors v IRC [2004] STC 489 at paragraphs 9, 10, 35–38, the first two paragraphs cited with approval in this court at [2006] EWCA Civ 25 at paragraph 25). Ex p. Commerzbank itself provides an illustration of the limited effect of section 788(3) ; although a refusal of repayment supplement offended the non-discrimination provision in the German Convention, the bank had no effective remedy in domestic law for that breach because repayment supplement is not covered by section 788(3).
Section 788(3) identifies those arrangements which will have effect. But it does so in terms which appear to require:—
(a) a provision and
(b) that that provision will be for one, or possibly for more than one, of the purposes set out in the sub-paragraphs of that sub-section.
The Convention, like all the DTAs based on the Organisation for Economic Co-operation and Development (“OECD”) 1977 Model, and its more recent 1992 revision and updates, contains provisions which provide for the scope of the Convention (see e.g. Articles 1 and 2), for definitions within the Convention, 3, 4 and 5 (which defines permanent establishment as including a branch) and substantive provisions. Articles 6–21 of the Convention are substantive provisions. One might expect to be able to look at one of those provisions and resolve the statutory question posed by section 788(3), namely does that Article provide for any one of the matters within section 788(3)(a)-(d)? If that substantive provision does so provide, then it has effect in UK law. Art 10 of the Convention is an example of such a provision. This Article makes provision for the taxation of dividends derived either from a company resident in Switzerland (10(1)) or in the United Kingdom (10(2)). It makes provision for tax credits (10(3)) which sets a ceiling on the rate at which a tax credit on a dividend is to be calculated. In some circumstances art 10(3)(c) confers a tax credit on a non-resident company. (The extent to which that provision had been given effect in domestic law by section 788(3)(d) was the subject of dispute in Pirelli Cable Holdings v IRC [2006] 1 WLR 400 (HL). I shall need to return to this article later, but for present purposes it provides a useful starting point to demonstrate the process for determining whether a provision in the Convention has been incorporated into United Kingdom law.
But arts 23 (1) and (2) make no provision. They contain prohibitions:—
“(1) Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.
(2) The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.”
Those sub-clauses should be construed in the context of the remaining provisions…
“(3) Nothing contained in this Article shall be construed as obliging a Contracting State to grant to individuals not resident in that State any of the personal allowances and reliefs which are granted to individuals so resident.
(4) Except where the provisions of paragraph (1) of Article 9, paragraphs (4) and (6) of Article 11, or paragraph (4) of Article 12 apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.
(5) Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.
(6) The provisions of this Article shall apply to taxes of every kind and description.”
The first Convention with Switzerland was signed on 30 September 1954. The earliest predecessor to Section 788, so far as I can find, was contained in section 51 of the Finance (No. 2) Act 1945. Whilst it is easy to accept that those negotiating the Convention on behalf of the UK will have been aware that not all the provisions of the Convention will have effect by virtue of section 788(3), it is less palatable to conceive that they intended Articles 23(1) and (2) to be mere windy rhetoric, on the basis that they make no substantive provision for anything.
Accordingly, I take the view that there must be some process by which the non-discrimination provision can be...
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