UBS AG v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 07 June 2005 |
| Date | 07 June 2005 |
| Court | Special Commissioners |
special commissioners decision
Special Commissioners: John F A Jones and Julina Ghosh
John Gardiner QC and Jolyan Maugham, instructed by McDermott Will & Emery, for the Appellant
David Ewart, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents
Double Taxation Agreement - non-discrimination - whether UK permanent establishment of Swiss company entitled to payment of the tax credit on dividends underIncome and Corporation Taxes Act 1988 section 243 s 243 Taxes Act 1988 - yes, on the interpretation of the treaty - whether treaty incorporated into UK law byIncome and Corporation Taxes Act 1988 section 788 s 788 to give effect to the payment - no
1. This is an appeal by UBS AG, a Swiss bank, as successor to Swiss Bank Corporation in respect of its UK branch against refusal of a claim to relief under s 243 of the Taxes Act 1988. We shall use the expression "the Appellant" to refer to the UK branch while recognising that it is not a legal entity itself, and the expression "UBS" to refer to the entity of which the Appellant is a branch. The Appellant was represented by Mr John Gardiner QC and Mr Jolyon Maugham, and the Respondent was represented by Mr David Ewart.
2. The issue in this appeal is whether the Appellant, as the UK permanent establishment of a Swiss company, is discriminated against contrary to the UK-Switzerland Double Taxation Convention of 8 December 1977 ("the Treaty") incorporated into law in the UK by the Double Taxation Relief (Taxes on Income) (Switzerland) Order 1978 (SI 1978 No.1408) in relation to the treatment of losses under s 243 of the Taxes Act 1988 with the result that it is entitled to payment of the tax credit on dividends (and manufactured dividends) received. The appeal concerns the years 1993 to 1996 when ACT was in force and has no application after 1997.
3. There was an agreed statement of facts as follows (this is reproduced with minor editorial changes):
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A. UBS AG and Swiss Bank Corporation
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(1) UBS AG ("UBS") is a bank resident in Switzerland, Swiss Bank Corporation ("SBC") and Union Bank of Switzerland each having merged into UBS in 1998 by way of mergers under Swiss law. UBS is therefore now the successor to the business of SBC.
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(2) SBC, at all material times, was a bank resident in Switzerland that owned a number of subsidiaries operating in many countries and otherwise conducted a banking business through branches located in many countries.
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(3) SBC, at all material times, carried on a banking business in London through a branch ("the Appellant"). The agreed corporation tax computations show that, as at 1 January 1993, 1995 and 1996, the Appellant had accumulated substantial trading losses from the conduct of its banking business in London of the following cumulative amounts: £215,900,346, £515,978,719 and £595,220,041 respectively.
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B. The Appellant's activities as a market maker
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(4) The Appellant acted as a market maker on the London Stock Exchange. In other words, it held itself out in compliance with the rules of that exchange as willing to buy and sell securities at a price specified by it and was recognised as so doing by the Council of the Stock Exchange.
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(5) In the course of its activities as a market maker it (a) received dividends from United Kingdom resident companies and (b) received and paid "manufactured dividends" (as that term is used in section 737 of and Schedule 23A to the Taxes Act 1988).
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(6) The dividends received arose in respect of securities held by the Appellant on the applicable dividend record date.
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(7) The manufactured dividends received arose primarily in consequence of stock lending transactions engaged in by the Appellant over dividend payment record dates or purchases which remained unsettled over such dates. As a consequence of those transactions, the Appellant did not receive the dividends to which it would otherwise have been entitled and the borrower or the seller would make a payment to the Appellant to compensate it for the loss of the dividend. The manufactured dividends paid arose primarily in the same circumstances save that the Appellant was the borrower or the seller rather than the lender.
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C. Dividend income received
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(8) During the accounting periods comprising the calendar years 1993, 1995 and 1996 the surplus of UK dividends (and manufactured dividends) received by the Appellant over manufactured dividends paid amounted in value to £233,282,021 (the "Distributions"). Had the Appellant been a person resident in the United Kingdom, the Distributions would have carried with them tax credits, as provided by section 231 of the Taxes Act 1988, of £58,320,506.
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(9) The figures in respect of each of the accounting periods in question are as follows:
Period
Surplus of UK dividends (and manufactured dividends) received by the Appellant over manufactured dividends paid
Income tax credit
1993
£37,000,638
£9,250,160
1995
£122,447,408
£30,611,852
1996
£73,833,975
£18,458,494
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D. The Claim and Appeal
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(10) The Appellant (then a branch of SBC) claimed pursuant to section 788(6) of the Taxes Act 1988 for relief to be given under section 788(3)(a) for the accounting period ended 31 December 1993 on 24 December 1999. The basis of that claim was that Article 23 (the non-discrimination article) of the Treaty should have effect to provide for relief to be given to the Appellant so that it should be entitled to claim under section 243 for those years the same relief as would be available to a UK resident company carrying on the same activities as the Appellant.
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(11) Similar claims were made in respect of the accounting period ending 31 December 1995 and 31 December 1996 on 22 February 2000. The claims for the accounting periods ending 31 December 1993, 1995 and 1996 are referred to collectively as the Claim.
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(12) After correspondence between the parties, the Claim was refused by the Revenue by letter of 27 February 2003 (the "Decision").
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(13) By letter of 6 March 2003, the Appellant appealed against the Decision.
4. We heard evidence from Mr Nicholas Anderson, Managing Director in the Financial Control Department of the Appellant. We quote below part of his witness statement that expands on the activities of the Appellant (which we accept, except that we should make clear that his estimate of the split between dividends and manufactured dividends is not a finding of fact by us should it become relevant):
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(1) The types of financial services business carried on by SBC and Union Bank of Switzerland (and now by UBS AG) include Swiss retail (high street) banking and, internationally, private banking (wealth management), investment banking and asset management. For the purposes of this appeal, it is the investment banking activity carried on by the London Branch of SBC that is relevant. Such activity encompasses a number of different facets, including lending and deposit-taking for corporate and institutional clients, corporate finance and capital markets activity, and both client facing and own account dealing in foreign exchange, fixed income and interest rate products and equities (i.e. shares and related products). During the period in question, as paragraph 3 of the Statement of Agreed Facts records, SBC London Branch accumulated substantial trading losses from the conduct of its banking business. As at 1 January 1993, 1995 and 1996, the accumulated losses were £215,900,346, £515,978,719 and £595,220,041 respectively.
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(2) It is the part of SBC London Branch's business that comprised dealing in UK equities and, in particular, "market making", that is relevant for the purposes of this appeal.
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(3) The nature of market making (so far as it relates to UK equities, which are the relevant instruments for the purposes of this appeal) can be described as follows, this description being based on my knowledge of the conduct of such business from my work at SBC and UBS AG. The description is primarily relevant to the conduct of market making by SBC during the years relevant to this appeal (1993, 1995 and 1996), when the major stocks listed on the London Stock Exchange (LSE) were traded on a "quote driven system" relying on market makers, although it is still relevant today in relation to certain stocks not traded on the "order driven system" (SETS) which the LSE introduced in 1997.
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(4) Market makers guarantee the liquidity of the LSE listed stocks in which they are registered as a market maker by ensuring that the investing public is able to trade in them at all times during normal market hours. To be a market maker on the London Stock Exchange (the "LSE"), a particular bank or other securities dealer has to be a "member firm" of the LSE. The member firm agrees with the LSE in which stocks it will act as a market maker. By being registered as a market maker in a particular stock, the member firm is obliged to quote two-way prices in that stock ("bid/offer" prices, reflecting the prices at which it is willing to buy and sell shares respectively) during the times specified by the LSE (the "mandatory period").
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(5) A market maker may trade in stock either on behalf of a client or for its own account. When buying or selling stock, the market maker normally acts in a principal capacity rather than simply acting as agent between two other parties. As a result, if the market maker buys shares, its inventory ("long position") in that type of stock will be increased. If it sells shares, this will result either in a reduced long position or, if the sale exceeds the amount of stock that the market maker holds, in a "short position". The latter typically results in the market maker having to borrow stock from another holder, in return for the payment of a fee, until such time as the market maker has sufficient stock to repay the stock loan.
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(6) A market...
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