Union Texas Petroleum Corporation v Critchley (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 27 February 1990 |
| Date | 27 February 1990 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Dillon, Balcombe and Beldam L JJ.
Mr Rex Bretten QC and Mr Stephen Brandon (instructed by Malcolm R Brown) for the taxpayer.
Mr Robert Carnwath QC, Mr Alan Moses and Mr Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment:
Allen v Thorne Electrical Industries Ltd ELR[1968] 1 QB 487
Double taxation relief - Distribution by UK subsidiary to US corporation - Tax credit entitlement of US corporation - Payment of tax credit by UK Government - Five per cent deduction from payment - Whether deduction from payment authorised by UK legislation - If deduction authorised what method of calculation should be adopted - Income and Corporation Taxes Act 1970 section 232Income and Corporation Taxes Act 1970, sec. 232 (now Income and Corporation Taxes Act 1988 section 20Income and Corporation Taxes Act 1988, sec. 20)- Finance Act 1972 section 86Finance Act 1972, sec. 86(now Income and Corporation Taxes Act 1988 section 231Income and Corporation Taxes Act 1988, sec. 231) -SI 1980/568 section 10 subsec-or-para (2)Double Taxation Relief (Taxes on Income) (United States of America) Order 1980 (SI 1980/568), art. 10(2)(a)(i).
This was an appeal by the Crown and a cross-appeal by a US corporation from a decision of Harman J ([1988] BTC 405). The issue was whether the Convention of 31 December 1975, set out in the SI 1980/568 section 10 subsec-or-para (2)Double Taxation Relief (Taxes on Income) (United States of America) Order 1980, art. 10(2)(a)(i)authorised a deduction from tax credits paid by the UK Government, and if so, the correct method of calculating such deduction.
A US corporation received substantial dividends totalling over £312m from a UK subsidiary in each of three years from 1981 to 1984.
A special commissioner determined that, under the SI 1980/568 section 10 subsec-or-para (2)Double Taxation Relief (Taxes on Income) (United States of America) Order 1980, art. 10(2)(a)(i), a payment described as a tax credit made by the UK Government to the US corporation was subject to a deduction by way of Sch. F tax of a sum not exceeding five per cent of the aggregate of the amount of the dividend and the gross amount of the tax credit.
The judge held that a deduction was to be made but from the net amount of the tax credit after taking the deduction into account.
The Crown appealed to the Court of Appeal against the judge's decision in relation to the computation of the deduction and the US corporation cross-appealed against the decision that any deduction was to be made.
Assuming that a deduction was to be made, the Crown contended that the phrase "tax credit paid" should be read as "tax credit payable" so that the computation of a deduction under SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) should be the aggregate of the amount of the dividend and the gross amount of the tax credit, without any allowance for the deduction itself.
The US corporation claimed that the payment described as a "tax credit" in SI 1980/568 section 10 subsec-or-para (2)subpara. (i) was not a tax credit within the Finance Act 1972 section 86 subsec-or-para (4)Finance Act 1972, sec. 86(4) since half of the tax credit to which an individual resident in the UK or a UK corporation would be entitled under SI 1980/568 section 10 subsec-or-para (2)subpara. (ii) was not such a "tax credit". Consequently there could be no deduction because there would be no liability to tax under the new Sch. F introduced by Finance Act 1972 section 87 subsec-or-para (2)sec. 87(2) of the 1972 Act. It was conceded that under SI 1980/568 section 10 subsec-or-para (2)para. (2)(a)(ii), what was to be paid was a tax credit within Finance Act 1972 section 86sec. 86.
Alternatively, even if a "tax credit" in SI 1980/568 section 10 subsec-or-para (2)subpara. (i) was a tax credit withinFinance Act 1972 section 86 subsec-or-para (4)sec. 86(4), the deduction provision still had no effect because there was no provision in UK law authorising such a deduction. SI 1980/568 section 10 subsec-or-para (2)Subparagraph (i) allowed tax to be levied only by way of "deduction withheld…according to the laws of the United Kingdom". Since the abolition of the withholding provisions of the Taxes Act by the Finance Act 1972, there were no withholding provisions in UK law and, in the absence of such provision the withholding provision in SI 1980/568 section 10 subsec-or-para (2)subpara. (i) had no effect.
Held, dismissing the Crown's appeal and the US corporation's cross-appeal:
The cross-appeal
1. A "tax credit" in SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) was a tax credit within Finance Act 1972 section 86sec. 86. If the sum payable underSI 1980/568 section 10 subsec-or-para (2)subpara. (ii)was a tax credit within the meaning of Finance Act 1972 section 86sec. 86 of the 1972 Act, the deduction formula would work in relation to that subparagraph. It would be a bizarre result if the deduction formula worked under SI 1980/568 section 10 subsec-or-para (2)subpara. (ii) but not under SI 1980/568 section 10 subsec-or-para (2)subpara. (i).
2. The intention of SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) was to charge UK tax on dividends paid by a UK company to a US resident or US corporation. That intention was achieved if the words "withheld" and "according to the laws of the United Kingdom" were omitted. It was preferable to reject part of the provision leaving it to have effect rather than to leave the apparent object of the taxation provisions from the UK side completely ineffective. Alternatively the paragraph could be construed as subject to a deduction "to be" withheld from such payment and to construe "according to the laws" of the UK as referring to the 1972 Act in general, and to Finance Act 1972 section 86 subsec-or-para (4)sec. 86(4) in particular, showing how a tax credit was to be dealt with under the new Sch. F.
The appeal
The word "paid" in SI 1980/568 section 10 subsec-or-para (2) section 10 subsec-or-para (2)subpara. (i) and (ii) must mean the amount "payable" since the deduction formula had to be applied and the amount of the deduction had to be ascertained before anything was paid. However, the amount after the permitted deduction was made was all that was payable. Accordingly it was that net amount that was to be brought into the computation.
By a notice dated 29 September 1988 the Crown appealed against the decision of Harman J given on 31 August 1988. The grounds of the appeal were:
1. That the judge erred in law by construing SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) of the Convention between the government of the UK and the government of the US for the avoidance of double taxation so as to hold that deduction of £4.25 from the aggregate of a dividend of £70 and one-half of the normal tax credit due of £15 was excessive.
2. That on a proper construction of the article the words "tax credit paid" must be read as "tax credit payable" since those who negotiated and drafted the treaty could not have intended the complex and detailed calculation to be undertaken each time a dividend was paid to arrive at an amount equal to the aggregate of the amount of the dividend and the tax credit reduced by the amount of the deduction.
By a notice dated 17 October 1988 Union Texas International Corp (formerly Union Texas Petroleum Corp) cross-appealed. The grounds of the cross-appeal were:
1. That the judge was wrong in law in holding that the payment in question was a "tax credit" within the Finance Act 1972 section 86Finance Act 1972, sec. 86.
2. That the judge was wrong in law in holding that the amount withheld by the Inland Revenue was an amount properly withheld according to the laws of the UK.
Dillon LJ: The court has before it an appeal by the Crown and a cross-appeal by the taxpayer (which involves a much larger amount) against a decision of Harman J ([1988] BTC 405) of 31 August 1988 which allowed in part an appeal by the taxpayer against a decision of one of the special commissioners for income tax, Mr Everett.
The taxpayer, Union Texas International Corp (formerly Union Texas Petroleum Corp) is a US company incorporated and resident in the US, which has a wholly owned subsidiary incorporated and resident in the UK. The subsidiary is now called Union Texas Petroleum Ltd, but some years ago it was called Allied Chemical (GB) Ltd. The subsidiary paid the taxpayer seven very substantial dividends over the period from February 1981 to the end of December 1984.
The questions that arise concern the rights of the taxpayer to recover from the Crown tax credits, or sums akin to tax credits, in respect of those dividends under the double taxation Convention between the UK and the US which was entered into between the governments of those countries on 31 December 1975 and has effect in UK law by virtue of SI 1980/568 to which it is scheduled.
The case has been heard throughout on an agreed statement of facts and agreed questions of law, which are set out in the papers. But it is not necessary to set these out in full in this judgment since certain of the matters in issue in the court below are no longer in issue.
In particular, in relation to the first five of the seven dividends in question, certain payments in respect of tax credits were paid by the subsidiary direct to the taxpayer (instead of the subsidiary paying advance corporation tax to the Crown and the taxpayer claiming appropriate tax credits from the Crown) under arrangements made between the subsidiary and the Revenue entered into pursuant to the Double Taxation Relief (Taxes on Income) (General) (Dividend) Regulations1973 (SI 1973/317). There was an argument for the Crown that certain wording...
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