text stringlengths 5 5.67k |
|---|
In relation to state taxes, the LLC was required to submit an annual state income tax return recording the profits of the partnership, using the Massachusetts partnership return of income, together with a partners Massachusetts information schedule for each partner, setting out each partners share of the profits. FAC |
Mr Anson was also required to file annual state income tax returns, in which he reported his share of the profits. FAC |
He paid the state income tax directly to the state tax authorities. FAC |
Double taxation relief FAC |
Mr Anson was at all relevant times UK resident and ordinarily resident but non-domiciled. Ratio |
He was consequently liable to UK income tax under the Income and Corporation Taxes Act 1988 (the 1988 Act), section 18, Schedule D Case V, on income arising from possessions out of the United Kingdom which he remitted to the UK. Ratio |
He paid taxes in the US on his share of the profits at the rate of 45%, and remitted the balance to the UK. Ratio |
The question is whether he is liable to pay UK income tax on that balance at the rate of 40%, producing what he would say is an effective rate of taxation of 67% (ie 45 in US taxes for every 100 of income, plus 22 in UK tax, calculated as 40% of the 55 remitted after payment of US taxes), or is entitled to double taxat... |
Mr Anson claims double taxation relief in respect of US federal income tax under article 23(2)(a) of the UK/US Double Taxation Convention of 31 December 1975 (the 1975 Convention), for all of the relevant UK tax years up to the year ended 5 April 2003. FAC |
For the year ended 5 April 2004, he claims double taxation relief under article 24(4)(a) of the UK/US Double Taxation Convention of 24 July 2001 (the 2001 Convention). FAC |
Both Conventions are given effect in UK law, in the context of this appeal, by Orders in Council made under section 788 of the 1988 Act or the predecessor provision (SI 1980/568 and SI 2002/2848 respectively). FAC |
Mr Anson also claims unilateral relief in respect of both US federal income tax and Massachusetts state income tax under section 790(4) of the 1988 Act for all of the relevant UK tax years. FAC |
Article 24(4)(a) of the 2001 Convention is in terms which are not materially different from those of article 23(2)(a) of the 1975 Convention. STA |
It is common ground that the relevant provisions of the two Conventions have the same effect, and that the same arguments apply to both, mutatis mutandis. STA |
It is also common ground that there is no material difference, so far as the present case is concerned, between the tests imposed by article 23(2)(a) of the 1975 Convention and section 790(4) of the 1988 Act. STA |
In those circumstances, the present discussion, like the parties submissions, will focus only on the 1975 Convention. STA |
Article 23(2)(a) of the 1975 Convention provides: United States tax payable under the laws of the United States and in accordance with the present Convention, whether directly or by deduction, on profits or income from sources within the United States (excluding in the case of a dividend, tax payable in respect of the ... |
The dispute between the parties concerns, in particular, the question whether the UK tax to which Mr Anson is liable is computed by reference to the same profits or income by reference to which the US federal tax was computed, within the meaning of article 23(2)(a), and the analogous question, under section 790(4) of t... |
The proceedings before the FTT FAC |
There were three issues before the FTT. FAC |
The first was whether Mr Anson was entitled to relief under the double taxation agreements and section 790(4) of the 1988 Act. FAC |
The second was whether, if he failed in respect of that claim, he was nevertheless entitled to rely on section 739 of the 1988 Act. FAC |
The third was whether discovery assessments raised by the Commissioners were valid. FAC |
In relation to the first issue, counsel for the Commissioners invited the FTT to find that the LLC was opaque rather than transparent, applying the terminology and the approach adopted by the Court of Appeal in the case of Memec, to which it will be necessary to return. FAC |
Counsel argued that the LLC was opaque, since it, and not its members, carried on its business, was liable for the debts and obligations incurred, owned the business, and had a beneficial interest in the profits of the business. FAC |
Although the US tax had been charged in respect of the profits of the LLC, UK tax was charged in respect of income derived by Mr Anson from his rights as a member of the LLC. FAC |
It followed, counsel argued, that the UK tax was not computed by reference to the same profits or income as the US tax, within the meaning of the Conventions and section 790(4). FAC |
The FTT said that it would address the issue applying the Memec approach, although it preferred to concentrate on the words of the treaty rather than ask whether the LLC was transparent or opaque. FAC |
It had found as a fact that the LLC carried on business as a principal; that it, and not its members, was liable for its debts and obligations; and that it, and not its members, owned the business. FAC |
But it had also found that the LLC had nothing equivalent to share capital, and that the members were entitled to the profits as they arose. FAC |
There was, it said, a spectrum running from an English partnership, where the partnership had no separate personality and the partners owned the assets jointly and carried on the business, and were entitled to the profits, through the Scottish partnership, where the partnership was a legal person which owned the assets... |
The LLC stood somewhere between a Scottish partnership and a UK company, having the partnership characteristic of the members being entitled to profits as they arise and owning an interest comparable to that of a partnership interest, but also some of the characteristics of a company. FAC |
It was in their view on the partnership side of the dividing line, particularly in relation to its income. FAC |
The factor which, the FTT said, it was mainly concerned with in relation to the Conventions was whether the profits belonged to the members as they arose. FAC |
It had concluded that that was the effect of the LLC agreement and the LLC Act. FAC |
Accordingly, it said, the appellant is taxed on the same income in both countries. FAC |
He was therefore entitled to double taxation relief under the Conventions in respect of the federal income tax, and to unilateral relief under section 790(4) in respect of the state taxes. FAC |
Mr Anson therefore succeeded on the first issue. FAC |
The FTT went on to hold that, if it had been necessary to decide the other issues, it would have decided them against Mr Anson: [2010] UKFTT 88 (TC). RLC |
The Upper Tribunal FAC |
The Commissioners appealed to the Upper Tribunal, and Mr Anson cross- appealed in respect of the section 739 issue. RLC |
The Upper Tribunal (Mann J) allowed the Commissioners appeal and reversed the decision of the FTT: [2011] UKUT 318 (TCC); [2011] STC 2126. RLC |
Mann J construed the FTTs finding that the profits belonged to the members as they arose as meaning that the profits vested in the members as their property, rather than as meaning that the members had an entitlement to the profits under the LLC Act and the LLC agreement. FAC |
In doing so, he laid stress on the FTTs comparison of the LLC with English and Scottish partnerships: a comparison which, he said, would not be nearly as relevant as the FTT plainly thought it to be if it were concerned with a contractual rather than a proprietary entitlement. FAC |
It appears to be implicit in that comment that Mann J understood the partners in a Scottish partnership to have a proprietary interest in the assets of the partnership, and assumed that the FTT had shared that understanding. FAC |
Having construed the FTTs finding in that sense, Mann J noted that there was nothing in the evidence to support such a finding. FAC |
More fundamentally, as Mann J pointed out under reference to Reed v Young, profits are an accounting measure rather than specific assets. FAC |
If the assets were owned by the LLC, as the FTT found, there could be no distinct entity, profits, owned by the members. FAC |
Having construed the FTTs decision as being based to a material extent upon a finding of fact which was unsupported by any evidence and was in any event illogical, Mann J concluded that the matter had to be re-considered. FAC |
This reasoning respectfully appears to me to be open to criticism. FAC |
First, given a finding by an expert tribunal which was ambiguously expressed, I would hesitate to attribute to the tribunal a conclusion which involved an elementary error on a matter falling squarely within its expertise and which, furthermore, had no basis in the evidence. FAC |
It is clear from the FTTs decision that it understood that, as it said, conceptually, profits and assets are different. FAC |
It also understood that the assets of the business were the property of the LLC. FAC |
It based its conclusion that the profits belong as they arise to the members not upon a confusion between profits and assets, but upon the expert evidence as to the combined effect under Delaware law of sections 18-101(8) and 18-503 of the LLC Act, which respectively defined a members interest in an LLC as his share of... |
The natural reading of the FTTs decision, in those circumstances, is that when it described the profits as belonging to the members it was referring to a right in personam rather than a right in rem. FAC |
That would be consistent with the evidence of Mr Abrams. FAC |
It would also be consistent with the comparison which the FTT made between the LLC and a Scottish partnership. FAC |
Although taxed in the same way as an English partnership (Commissioners for General Purposes of Income Tax for City of London v Gibbs [1942] AC 402), and having many points of similarity to an English partnership, a Scottish partnership differs in possessing separate legal personality. FAC |
The partners do not, therefore, have any direct proprietary interest in any of the partnership assets (unless they happen to hold assets as trustees for the partnership). FAC |
They have no title to sue for damage to partnership property, and they have no insurable interest in partnership property: see MacLennan v Scottish Gas Board, First Division, 16 December 1983 (unreported on this point); Arif v Excess Insurance Group Ltd 1987 SLT 473; Mitchell v Scottish Eagle Insurance Ltd 1997 SLT 793... |
What the partners do own is a share of the partnership. FAC |
That share is an incorporeal moveable right or ius crediti (Clark, A Treatise of the Law of Partnership and Joint Stock Companies According to the Law of Scotland (1866), I 178; Bell, Commentaries on the Law of Scotland, 7th ed (1870), II 536): the right is a debt or demand against the partnership, as Bell described it... |
As long as the partnership continues, a partner is entitled under statute to require that the partnership's assets be applied for partnership purposes (Partnership Act 1890, section 20(1)), and to his share of the profits of the partnership business (section 24(1)). FAC |
On a winding up, a partner is entitled to claim his portion of the net proceeds of sale of partnership assets. FAC |
Those rights are broadly analogous to those of a member of the LLC under the LLC Act, as found by the FTT: an interest, which is personal property, entitling the member to share in the profits of the LLC in accordance with the LLC agreement, and to share in the net proceeds of sale of the LLCs assets in the event of a ... |
There are, of course, also some differences: in particular, the partners in a Scottish partnership, other than a limited partnership, have an unlimited liability for its debts, whereas the members of the LLC had no liability for its debts beyond their initial capital contributions, prior to their repayment. FAC |
Nevertheless, given the points of similarity, the comparison made by the FTT between the LLC and a Scottish partnership was understandable, and did not carry the implication which Mann J supposed. FAC |
On the basis, however, that the FTT had erred in law in this respect, and that it was therefore open to the Upper Tribunal to consider the matter afresh, Mann J accepted that, on the FTTs findings, there was no intermediate step in the form of a third party act, analogous to the declaration of a dividend, which stood b... |
The more difficult question was whether the income on which the US tax was paid was the same income, for the purposes of the double taxation treaty, as that which the Commissioners sought to tax. FAC |
Mann J considered that it was not. FAC |
The fact that the members of the LLC did not have a proprietary right in the underlying assets seemed to him to be crucial. FAC |
In the absence of such a right, the profits were owned by the LLC, and a contractual obligation to credit them to the members accounts and to distribute them did not make them the property of the members, at least for English tax purposes. FAC |
The US taxes and UK income tax were therefore not computed by reference to the same profits. FAC |
In a separate judgment, Mann J upheld the decision of the FTT on the section 739 issue: [2012] UKUT 59 (TCC); [2012] STC 1014. FAC |
The Court of Appeal FAC |
Mr Anson then appealed to the Court of Appeal in respect of the issues concerning relief from double taxation. FAC |
The court refused the appeal for reasons given by Arden LJ, with which Laws and Lloyd LJJ agreed: [2013] EWCA Civ 63; [2013] STC 557. RLC |
The Court of Appeal stated that the relevant test for determining whether a person is taxed on the same profits or income in both jurisdictions is whether the source of the profits or income in each jurisdiction is the same (para 30), the source being the source for the purposes of UK tax law (para 37). RLC |
It derived that test from the case of Memec, which was described as the leading authority on this point (para 30). RLC |
As I shall explain, that case was concerned with the equivalent of article 23(2)(b) of the 1975 Convention, rather than article 23(2)(a). RLC |
The issue was whether a dividend had been paid to a UK company by an overseas company in which it held a qualifying interest. RLC |
It was in that context that, in Memec, the court laid emphasis upon identifying the source of the UK companys income, and on the question whether its partnership (governed by foreign law) with a foreign subsidiary, which received the dividends in question and then made payments to the UK company in accordance with the ... |
On the basis that the case of Memec had established the approach to be adopted, the court derived from that case the following proposition: Where the taxpayer became entitled to the profit of an entity because of some contractual arrangement to which he is a party, he must show that the contract is actually the source ... |
This will in general mean that, as the judge held, he has to show a proprietary right to the profits. FAC |
(para 38) FAC |
This is not easy to follow. FAC |
At first sight, the first sentence appears to be suggesting the opposite of what was decided in Memec, namely that the taxpayer did not qualify for relief because the source of its income was the contract constituting the partnership, rather than the contract being a mere mechanism for the payment of income derived fro... |
The second sentence might also be contrasted with the approach of the Court of Appeal in Memec. FAC |
As will be explained, the court adopted in that case an approach to transparency which involved analysing the characteristics of the partnership agreement under the governing foreign law, comparing those characteristics with the characteristics of paradigm examples of arrangements which were transparent (such as Englis... |
That was the approach followed by the FTT in the present case. FAC |
The Court of Appeal, on the other hand, treated the ownership of business assets as decisive, Arden LJ stating: in order for a member of an entity to show that he was entitled to profits from the moment that the profit arose he will have to show that he has an interest in the assets to the value of the profit. RLC |
This will necessarily be a proprietary interest. RLC |
(para 59) RLC |
The court accepted (at para 70) the Commissioners submission that the FTTs finding, that the effect of the LLC agreement and the LLC Act was that profits of the LLC belonged to the members as they arose, was a holding on UK domestic law, with which the Upper Tribunal was entitled to interfere, rather than a finding of ... |
Arden LJ explained: Delaware law governs the rights of the members of [the LLC] as the law of the place of its incorporation, and the LLC agreement is expressly made subject to that law. FAC |
However, the question whether those rights mean that the income of [the LLC] is the income of the members is a question of domestic law which falls to be determined for the purposes of domestic tax law applying the requirements of domestic tax law . FAC |
(para 71) FAC |
Applying this approach, Arden LJ considered that the Upper Tribunal had been correct to conclude that the profits of the LLC did not belong to the members. FAC |
The source of the LLCs profits was its trading. FAC |
Mr Anson was merely entitled to a distribution out of those profits. FAC |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.