text stringlengths 5 5.67k |
|---|
He had no proprietary interest in the assets of the LLC, and was therefore said to be in a different position from the partners in an English or Scottish partnership. FAC |
Mr Anson was refused permission to advance a potentially material argument, not raised below, relating to an exchange of notes between the UK and the US dated 24 July 2001, concerned with the application of article 24 of the 2001 Convention in situations where a person was taxed as a resident of one contracting state o... |
A number of criticisms might be made of the Court of Appeals reasoning. FAC |
First and foremost, the court did not directly address the only relevant question, namely whether the UK tax was computed by reference to the same profits or income by reference to which the US tax was computed. FAC |
It began by identifying that question, but then appears to have been diverted by a consideration of the issue which it understood to have been decided in Memec, and the approach adopted in that case. FAC |
As a consequence, the remainder of its judgment focused on the question whether Mr Anson had a proprietary right to the profits of the LLC as they arose. FAC |
That question not only appears to demonstrate the persistence of the conceptual confusion between profits and assets, but does not address the critical point, namely whether the income taxed in one country is the same as the income taxed in another. FAC |
The reasoning summarised in para 47 also appears to elide two distinct issues. Ratio |
First, the questions whether the members had a right to the profits, and as to the nature of that right, were questions of non-tax law, governed by the law of Delaware. Ratio |
The FTTs conclusion, whether correctly construed as a finding that Delaware law had the effect of conferring on the members of the LLC an automatic statutory (or contractual) entitlement to the profits of the LLC, or as a finding that Delaware law vested the members with a proprietary right to the profits as they arose... |
Secondly, domestic tax law - in this case, the relevant double taxation agreements as given effect in UK law - then fell to be applied to the facts as so found. Ratio |
This approach was explained by Robert Walker J in Memec at [1996] STC 1336, 1348-1349. Ratio |
It is well illustrated by the contrasting decisions in Baker v Archer-Shee [1927] AC 844 and Archer-Shee v Garland [1931] AC 212, where the taxpayer lost in the House of Lords in the first case, and then succeeded in the House of Lords in the second case, because of the introduction in the second case of evidence estab... |
The present appeal Ratio |
Mr Anson now appeals to this court. FAC |
In the course of the initial hearing of the appeal, counsel were asked about the possible significance of the words in parentheses in article 23(2)(a) of the 1975 Convention (excluding, in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid), and of article 23(2)(b), which al... |
Counsel were also asked whether the form of words employed in article 23(2)(a), in allowing relief in respect of tax computed by reference to the same profits or income, might permit a less technical approach than that ordinarily adopted in UK tax law. FAC |
Equivalent provisions are contained in the 2001 Convention, and similar provision is also made, in relation to unilateral relief, by section 790(5) and (6) of the 1988 Act. FAC |
Counsel were given the opportunity to make additional submissions in writing in relation to these points. FAC |
As a result, substantial submissions were made in writing after the hearing of the appeal, following which a further hearing was held at the request of the Commissioners. FAC |
Two distinct grounds of appeal are now advanced on behalf of Mr Anson. Ratio |
The first is that, even assuming that US tax was charged on the profits of the LLC, and that Mr Anson was liable to UK tax only on distributions made out of those profits, the US and UK tax were nevertheless charged on the same profits or income, within the meaning of the 1975 and 2001 Conventions. Ratio |
This ground was not advanced below. Ratio |
The second ground is that, as a matter of UK tax law, and on the findings which the FTT made and was entitled to make, Mr Anson was liable to tax in the UK on his share of the profits of the trade carried on by the LLC, which was the same income as had been taxed in the US. Ratio |
The Vienna Convention on the Law of Treaties Ratio |
It is a matter of agreement that, as international treaties, the 1975 and 2001 Conventions have to be interpreted in accordance with articles 31 and 32 of the Vienna Convention on the Law of Treaties (Vienna, 23 May 1969; TS 58 (1980); Cmnd 7964). Ratio |
That is so notwithstanding that, although the US is a signatory of the Vienna Convention, the US Senate has not given its consent to it: the provisions of articles 31 and 32 can in any event be applied, since they have been accepted by the International Court of Justice (and also, in this country, by the House of Lords... |
Articles 31 and 32 of the Vienna Convention are in the following terms: Article 31 General rule of interpretation 1. STA |
A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. STA |
2. STA |
The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty; (b) Any instrument which was made by one or more part... |
3. STA |
There shall be taken into account, together with the context: (a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interp... |
4. STA |
A special meaning shall be given to a term if it is established that the parties so intended. STA |
Article 32 Supplementary means of interpretation Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpre... |
Put shortly, the aim of interpretation of a treaty is therefore to establish, by objective and rational means, the common intention which can be ascribed to the parties. Ratio |
That intention is ascertained by considering the ordinary meaning of the terms of the treaty in their context and in the light of the treatys object and purpose. Ratio |
Subsequent agreement as to the interpretation of the treaty, and subsequent practice which establishes agreement between the parties, are also to be taken into account, together with any relevant rules of international law which apply in the relations between the parties. Ratio |
Recourse may also be had to a broader range of references in order to confirm the meaning arrived at on that approach, or if that approach leaves the meaning ambiguous or obscure, or leads to a result which is manifestly absurd or unreasonable. Ratio |
The object and purpose of the Convention Ratio |
The purposes of the 1975 Convention, as stated in its preamble, are the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains. Ratio |
The preamble does not indicate more precisely what is meant by double taxation: in particular, whether the Convention is restricted to juridical double taxation, or can also extend to economic double taxation. Ratio |
The former is usually considered to arise where two jurisdictions impose income taxes on the same person in respect of the same income. Ratio |
The latter is usually considered to arise where there is taxation of the same or derivative income in separate hands. Ratio |
Context Ratio |
The contemporary background of a treaty, including the legal position preceding its conclusion, can legitimately be taken into account as part of the context relevant to the interpretation of its terms: see, for example, Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd [1961] AC 807, 836; Effort Shipping Co Ltd ... |
The 1975 Convention replaced an earlier double taxation convention between the UK and the US, signed at Washington on 16 April 1945: TS 26 (1946); Cmnd 6902 (the 1945 Convention). Ratio |
The 1945 Convention, to which effect was given by the Double Taxation Relief (Taxes on Income) Order 1946, SR & O 1946/1327, had been amended by a number of protocols, including a Supplementary Protocol signed at Washington on 17 March 1966: TS 65 (1966); Cmnd 3128 (the 1966 Protocol). Ratio |
As I shall explain, article 23(2) of the 1975 Convention repeats almost verbatim a provision of the 1966 Protocol. Ratio |
In interpreting article 23(2), it is therefore necessary to understand the intended effect of the relevant provision of the 1966 Protocol. Ratio |
That in turn requires consideration of the provision of the 1945 Convention which the 1966 Protocol was designed to amend. Ratio |
The background to the 1945 Convention Ratio |
The logical starting point is the background to the 1945 Convention. Ratio |
The UKs income tax legislation taxed income arising from foreign possessions, as I have explained. Ratio |
Relief in respect of foreign taxes was only partial, and was in any event confined to income from the Dominions. Ratio |
Partners in the UK, whether Scottish or English, were assessed jointly, in the name of the partnership, on the total tax due by the individual partners on their shares of the profits of the firm: Commissioners for General Purposes of Income Tax for City of London v Gibbs [1942] AC 402; MacKinlay v Arthur Young McLellan... |
A partners share of the profits of a foreign partnership, on the other hand, was treated as income from a foreign possession: Colquhoun v Brooks (1889) 14 App Cas 493. PRE |
So far as companies were concerned, the income tax legislation applied an imputation system to ordinary dividends paid by UK companies to UK resident shareholders. Ratio |
In other words, dividend income from a UK company was treated as franked by the companys payment of income tax on its profits. Ratio |
The rationale was that since ordinary dividends were paid out of profits on which the company had paid income tax, it was unjust to subject them to income tax in the hands of the shareholders. Ratio |
As Lord Atkin explained in Cull v Commissioners of Inland Revenue [1940] AC 51, 56: My Lords, it is now clearly established that in the case of a limited company the company itself is chargeable to tax on its profits, and that it pays tax in discharge of its own liability and not as agent for its shareholders. PRE |
The latter are not chargeable with income tax on dividends, and they are not assessed in respect of them. PRE |
The reason presumably is that the amount which is available to be distributed as dividend has already been diminished by tax on the company, and that it is thought inequitable to charge it again. PRE |
Lord Wright gave a similar explanation at p 75: ... the shareholder is not taxed under Schedule D in respect of that part of his income which consists of dividends. PRE |
The profits have been charged to tax in the hands of the company and that fact is deemed to redound to his benefit. PRE |
UK tax law did not, therefore, carry the principle of separate corporate personality to its logical conclusion. Ratio |
If it had done so, the profits of the companys trade would have been taxable in the hands of the company, and distributions of the net profits in the form of dividends would also have been chargeable under Schedule D in the hands of the shareholders. Ratio |
As Lord Phillimore noted, however, in Bradbury v English Sewing Cotton Co Ltd [1923] AC 744, 769: Their taxation would seem to be logical, but it would be destructive of joint stock company enterprise. ... The reason for their [scil, the shareholders] discharge may be the avoidance of double taxation, or to speak accur... |
Dividends paid by overseas companies to UK resident shareholders did not benefit from similar treatment under the express terms of the legislation, but they were held nevertheless to do so, by virtue of an implied term, to the extent that the profits out of which the dividends were paid had already borne UK income tax:... |
Some limits to the scope of the decision in Gilbertson v Fergusson were set by the House of Lords in Barnes v Hely Hutchinson [1940] AC 81. Ratio |
The case differed in two respects from Gilbertson v Fergusson. Ratio |
First, UK taxes had not been paid by the overseas company paying the dividend, but by UK companies in which it held shares. Ratio |
Secondly, the dividends received by the taxpayer were preference dividends rather than ordinary dividends, and were therefore paid at a fixed rate, undiminished by the taxes paid by the UK companies. Ratio |
In these circumstances, the taxpayer was held to have been correctly assessed on the full amount of the dividend. Ratio |
It was also emphasised in Barnes that, notwithstanding the concept of franked dividend income, the income received by the shareholder was not the same income as that of the company. Ratio |
Lord Wright explained at pp 94-95: The English company is taxed on the balance of its profits or gains, that is on its income; the shareholder is taxed on his own income. PRE |
The shareholder is never taxed on the companys fund of profits, but only on the dividend which comes to him in payment of the debt which is created when the company declares the dividend. PRE |
The tax is in every case on the individuals income, not on a fund possessed by another person, the company, even though it is the fund of profits of that company, from which the individual's income or part of it will be paid. ... This principle must not be obscured by reason of the circumstance that in the way already ... |
The fund which is taxed in the hands of the company and the dividend which is declared by the company in favour of the shareholder are separate items for taxation law. PRE |
It is only the latter which is the shareholders income. PRE |
The decision in Gilbertson v Fergusson was overruled in Canadian Eagle Oil Co Ltd v The King [1946] AC 119, decided a few months after the 1945 Convention had been signed. Ratio |
The facts of the case were similar to those in Barnes v Hely Hutchinson, except that the dividends in question were ordinary dividends. Ratio |
There was held to be no basis for implying into the statute the limitation which had been implied by the Court of Appeal in Gilbertson: there was no necessary implication that economic, as distinct from juridical, double taxation was not intended. Ratio |
No sooner had Gilbertson been overruled, however, than Parliament legislated to restore the relief, limited to ordinary dividends paid by an overseas company which had itself paid UK income tax on part of its profits (so preserving the limitations imposed by the decision in Barnes v Hely Hutchinson): Finance Act 1946, ... |
The relief survives, in an amended form, in current legislation. Ratio |
The 1945 Convention Ratio |
The 1945 Convention (Cmd 6902) was negotiated during 1944 and 1945. Ratio |
The background, and the travaux prparatoires, are discussed in Avery Jones, The History of the United Kingdoms First Comprehensive Double Taxation Agreement [2007] BTR 211. Ratio |
The Convention sought to address a number of issues, including double taxation relief. Ratio |
As I have explained, the UK allowed only partial relief, and confined its scope to the Dominions. Ratio |
The US also allowed partial relief, but on a worldwide basis. Ratio |
Apart from the general desire to extend the scope of the relief, there was a specific concern in relation to the taxation of dividend income, at a time of substantial UK investment in the US (and vice versa) and historically high rates of taxation in both countries. Ratio |
The two countries had fundamentally different systems of taxing dividends. Ratio |
The UK, as I have explained, had an imputation system, assessing UK companies to income tax (at a standard rate of 50%, plus 5% national defence contribution), and treating their dividends as income which had already been taxed. Ratio |
The US, on the other hand, had a classical corporation tax system: the corporation paid tax on its profits (at a rate of 40%), and dividends were paid to shareholders under the deduction of a withholding tax (at a rate of 30%). Ratio |
Given the prevailing rates, the taxation of dividends received by UK shareholders in US corporations, without relief in respect of US taxation of the profits out of which the dividends were paid (except to the limited extent permitted under the Gilbertson principle), presented a serious problem. Ratio |
There was a similar problem for US shareholders in UK companies: they had been held by the US Supreme Court in Biddle v Commissioner 302 US 573 (1938) not to qualify for foreign tax credit relief in respect of the income tax paid by the UK company, since they had not paid the tax (an exception being made for US corpora... |
The structure of the 1945 Convention, followed in the 1966 amendments and in the 1975 Convention, was to avoid double taxation primarily by means of distributive provisions allocating the right to tax specified categories of income to one or other of the contracting states. Ratio |
Provisions of that kind covered, in particular, the industrial and commercial profits of enterprises engaged in business in one of the contracting states (article 3), and dividends derived from US corporations and UK companies (article 6). Ratio |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.