Union Texas Petroleum Corporation v Critchley (Inspector of Taxes)

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date31 August 1988
Date31 August 1988

Chancery Division.

Union Texas Petroleum Corporation
and
Critchley (H.M. Inspector of Taxes)

Mr. Rex Bretton Q.C. and Mrs. Jill Pagan (instructed by Clifford Chance) for the appellant.

Mr. Robert Carnwath Q.C. and Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.

Before: Harman J.

The following cases were referred to in the judgment:

I.R. Commrs. v. Exxon Corporation TAX[1982] BTC 182

Marren (H.M.I.T.) v. Ingles WLR[1980] 1 W.L.R. 983

Whitney v. I.R. Commrs. TAX(1925) 10 T.C. 88

Double taxation relief - Distribution by UK subsidiary to US corporation - Tax credit entitlement - Payment for tax credits by UK Government - Five per cent deduction from payment - Whether deduction from payment authorised - If deduction authorised what method of calculation should be adopted - Income and Corporation Taxes Act 1970 section 497 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 497(1)(d) - Finance Act 1972 section 86Finance Act 1972, sec. 86 - Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980 SI 1980/568 section 10 subsec-or-para (2)(S.I. 1980 No. 568), art. 10(2)(a)(i).

This was an appeal from a decision of a Special Commissioner by a US corporation ("the appellant"). The issue was whether the convention of 31 December 1975, set out in the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980 ("the double tax agreement") authorised a deduction from tax credits due and paid by the UK Government, and, if so, the correct method of calculating such deduction.

The appellant received dividends from a UK subsidiary in each of three years from 1981 to 1984. The subsidiary had entered into an agreement with the Revenue pursuant to the Double Taxation Relief (Taxes on Income) (Dividend) Regulations 1973, reg. 2(1) that, in paying the dividends, an "additional amount" would be paid representing tax credits payable by the UK Government under SI 1980/568 section 10 subsec-or-para (2)art. 10(2) of the double tax agreement.

By SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) the tax credit due was a sum equal to half the tax credit to which an individual resident in the UK would be entitled. (A UK resident was entitled to a 30 per cent tax credit.) The balance was paid to the Revenue as advance corporation tax (ACT). The same article required a deduction of five per cent of the aggregate of the value of the dividend and the tax credit paid to be withheld from such sum. The Revenue calculated the deduction on the basis of an aggregate of the net dividends and 15 per cent of the gross dividends, resulting in a total deduction from the tax credits for the three years in question of £23m.

The appellant submitted a claim to the inspector of foreign dividends that no deduction should have been made or, alternatively, that the amount deducted was excessive. The inspector refused to accept the claim maintaining that the amount deducted was correct in accordance withSI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) of the double taxation agreement.

The appellant contended first that the payment to which it was entitled, although called a "tax credit" was not a tax credit within theFinance Act 1972 section 86Finance Act 1972, sec. 86which applied only to distributions to persons or companies resident in the UK; that the "deduction" required under SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a) was only such deduction as was "withheld from the payment according to the laws of the United Kingdom" and under the imputation system of corporation tax introduced by the Finance Act 1972, nothing was "withheld from the payment"; that tax credits were granted to non-residents by the double tax agreement and there was no provision of UK law authorising deduction. Moreover, the deduction represented a liability to UK tax which could not be imposed in the absence of an assessment.

The second submission was that even if the payments were tax credits within Finance Act 1972 section 86sec. 86 with the result that deductions were to be made, the Revenue had used the wrong formula in calculating them, and a sum in excess of £1m had been over-deducted. The correct deduction was five per cent of the amount which would actually be paid, i.e. transferred, to the US corporation, not five per cent of the amount payable.

The Crown contended on the first point that the purpose of the double tax agreement was to fit the system of double tax relief into the system of tax credits on dividends introduced by the Finance Act 1972. TheIncome and Corporation Taxes Act 1970 section 479 subsec-or-para (1)Income and Corporation Taxes Act 1970, sec. 479(1)(d) provided for the grant to non-residents of rights to tax credits under Finance Act 1972 section 86sec. 86 and thus the tax credit referred to in SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) was a tax credit withinFinance Act 1972 section 86 subsec-or-para (1)sec. 86(1) of the 1972 Act. The appellant was liable to income tax under Sch. F, limited by the double tax agreement to five per cent, which was to be deducted from the tax credit.

On the second point the Crown submitted that the amount deducted was correct, and in any event, that having accepted that amount under the agreement made pursuant to the 1973 Regulations, the appellant could not make a further claim.

Held, allowing the appeal in part:

1. The appellant was not a party to the agreement between the UK company and the Revenue. The appellant was therefore not bound by the agreement and was not precluded from making the claim.

2. Tax credits in SI 1980/568 section 10 subsec-or-para (2)art. 10(2) were tax credits within Finance Act 1972 section 86sec. 86 of the 1972 Act. The intention of SI 1980/568 section 10 subsec-or-para (2)art. 10(2) was to provide for the system of imputed tax and tax credits due under the system introduced by the Finance Act 1972. If the appellant's first submission were correct, and the tax credits were not "Finance Act 1972 section 86sec. 86 tax credits", the provision intended to produce a deduction would have no such effect and the court would lean against a result that rendered the provision ineffective.

3. The appeal was allowed on the second point. The formula for calculating the deductions from the tax credits due to the appellant should be:

ND the net dividend paid to Union Texas and

TC the tax credit available to a UK resident.

CASE STATED

1. At a hearing on 25 and 26 March 1985 before a single Commissioner for the special purposes of the Income Tax Acts Union Texas Petroleum Corporation ("Corporation") appealed against decisions by the inspector of foreign dividends refusing claims by Corporation to be entitled to payment from the UK Government of certain amounts pursuant to the provisions of the convention scheduled to the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980 (S.I. 1980 No. 568).

2. The question for determination, the issues which emerged during the hearing, my findings of fact, the respective contentions of Mr. G.R. Bretten Q.C. on behalf of Corporation and Mr. R.J. Alderman on behalf of the Revenue and the conclusions are set out in the decision, which was issued on 14 May 1985.

3. No witnesses gave evidence before the Commissioner.

4. [Paragraph 4 set out the documents proved or admitted before the Commissioner.]

5. At the request of the Revenue the Commissioner recorded here the following further submissions in relation to all the dividends which were made by Mr. Alderman at the hearing in addition to those recorded in the decision:

  1. (2) Although SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) of the Treaty refers to the "tax credit paid", it was contended that this phrase should be construed as a reference to the "tax credit payable" to avoid the complex calculations that would otherwise be necessary in each case. The need for such calculations could not have been intended by the negotiators of the Treaty.

  2. (3) If, contrary to the submission recorded in para. 1.2 in the decision, the tax credit referred to in SI 1980/568 section 10 subsec-or-para (2)art. 10(2)(a)(i) of the Treaty was not the tax credit referred to in Finance Act 1972 section 86 subsec-or-para (1)sec. 86(1) of the Finance Act 1972, it was denied that Finance Act 1979 section 16sec. 16 of the Finance (No. 2) Act 1979 conferred upon Corporation a right to such an amount. The effect of Finance Act 1979 section 16sec. 16 of the 1979 Act, properly construed, was only to enable effect to be given to the provisions of the Treaty by virtue of an Order in Council (which was subsequently made on 21 April 1980) in such a way that relief available under the previous Treaty would be withdrawn for periods before the making of the Order. Since such a power was not conferred by Income and Corporation Taxes Act 1970 section 497 subsec-or-para (1)sec. 497(1) of the Income and Corporation Taxes Act 1970, a specific statutory provision to this effect was necessary.

6. At the request of Corporation the Commissioner included here an addition to the submission made by Mr. Bretten at the hearing and recorded at para. 1.7 in his decision. To that paragraph should be added the following words:

…the reference in subpara. 2(a)(i) being to the "tax credit paid" (not to the tax credit "payable" or "due"), and there being no difficulty in giving effect to the precise words of the Treaty.

7. In addition to the cases referred to in the decision the following case was cited: Foakes v. Beer ELR(1884) 9 App. Cas. 605.

8. Corporation immediately after the determination of the appeal declared its dissatisfaction therewith as being erroneous in point of law and on 7 June 1985 required the Commissioner to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56.

9. The question...

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3 cases
  • Union Texas Petroleum Corporation v Critchley (Inspector of Taxes)
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 27 February 1990
    ...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......
  • Getty Oil Company v Steele (Inspector of Taxes) and related appeals
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    • Chancery Division
    • 7 May 1990
    ...referred to in the judgment: Union Texas International Corporation (formerly Union Texas Petroleum Corporation) v Critchley (HMIT) TAXTAX[1988] BTC 405; [1990] BTC 253 (CA) Valleybright Ltd (in voluntary liquidation) v Richardson (HMIT)TAXTAX(1984) 58 TC 290; [1985] BTC 31 Case stated - Tra......
  • Commissioners of Inland Revenue v Oce Van Der Grinten NV (C-58/01)
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    ...I am satisfied that the 5% referred to article 10.3(a)(ii) is a tax. The decision of the Court of Appeal in Union Texas v Critchley [1988] BTC 405 reinforces this conclusion. That decision was based on the somewhat different wording of the Double Taxation Convention with the United States. ......

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