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Situations where income continued to be taxable in both countries were addressed by article 13. Ratio |
Article 6 of the 1945 Convention sought to achieve parity of tax treatment for UK shareholders in US corporations, and for US shareholders in UK companies, by reducing the withholding tax on dividends paid to the former to 15% (so that the effective tax charge imposed by the US was 40% on the profits of the corporation... |
As I have explained, article 13 of the 1945 Convention addressed double taxation relief in situations where income might be taxed in both contracting states. Ratio |
Article 13(1) addressed the position in the US: Subject to section 131 of the United States Internal Revenue Code as in effect on the first day of January, 1945, United Kingdom tax shall be allowed as a credit against United States tax. STA |
For this purpose, the recipient of a dividend paid by a corporation which is a resident of the United Kingdom shall be deemed to have paid the United Kingdom income tax appropriate to such dividend if such recipient elects to include in his gross income for the purposes of United States tax the amount of such United Ki... |
The first sentence set out the general principle. Ratio |
Section 131 of the US Internal Revenue Code was the provision which had been in issue in the case of Biddle. Ratio |
It allowed foreign tax credit relief in respect of income taxes paid or accrued during the taxable year to [a] foreign country. Ratio |
The second sentence resolved the particular problem which had previously existed in relation to relief for US shareholders in UK companies, by deeming them to have paid the UK income tax paid by the company on its profits. Ratio |
This effectively reversed the decision in Biddle, and so enabled US shareholders to benefit from the general principle stated in the first sentence. Ratio |
Article 13(2) addressed the position in the UK: Subject to such provisions (which shall not affect the general principle hereof) as may be enacted in the United Kingdom, United States tax payable in respect of income from sources within the United States shall be allowed as a credit against any United Kingdom tax payab... |
Where such income is an ordinary dividend paid by a United States corporation, such credit shall take into account (in addition to any United States income tax deducted from or imposed on such dividend) the United States income tax imposed on such corporation in respect of its profits, and where it is a dividend paid o... |
The first sentence established a general principle that US tax on income from sources within the US was allowable as a credit against UK tax on that income, in other words the same income. Ratio |
The second sentence dealt with the particular case of dividend income, and required such credit the credit against UK tax on the same income - to take into account, in addition to any withholding tax deducted from the dividend, the US tax paid by the corporation on the profits out of which the dividends were paid. Rati... |
This approach, in deeming the tax on the profits of the corporation to have been charged on the shareholders income, followed the imputation approach adopted in the UK case law since Gilbertson v Fergusson. Ratio |
The remainder of the second sentence dealt specifically with preference shares, and limited the relief to any additional participation in profits above the fixed rate payable, in accordance with the decision in Barnes v Hely Hutchinson. Ratio |
Article 13(2) thus introduced a new general relief for US taxes paid on the same income, and applied it to dividend income in accordance with the approach then adopted in UK tax law to relief for UK taxes paid by overseas corporations. Ratio |
UK shareholders in US corporations thus benefited under article 13(2) from similar relief to that accorded to US shareholders in UK companies under article 13(1). Ratio |
Article 13(2) required income to have a source within the US in order to be eligible for relief. Ratio |
The 1945 Convention contained provisions deeming particular types of income to have their source within the UK or the US, in articles 3(3) and 13(3). Ratio |
The 1966 Protocol Ratio |
In 1965, the UK tax regime in relation to dividends changed fundamentally, with the introduction of corporation tax. Ratio |
Relief based upon an imputation system became inappropriate. Ratio |
The 1945 Convention was accordingly amended by the 1966 Protocol, to which effect was given by the Double Taxation Relief (Taxes on Income) (USA) Order 1966 (SI 1966/1188). Ratio |
The new article 6, as inserted by the 1966 Protocol, sought to achieve parity of tax treatment for UK shareholders in US corporations, and for US shareholders in UK companies, by subjecting the dividends in each case to a withholding tax of not more than 15%. Ratio |
position in the US, provided: In relation to double taxation relief, the new article 13(1), dealing with the ... Subject to the provisions of the law of the United States regarding the allowance as a credit against United States tax of tax payable in a territory outside the United States (which shall not affect the gen... |
The first part of that provision (down to paid, where it first appears) repeated the general principle established by the 1945 Convention. Ratio |
The withholding tax imposed by the UK on dividend income would fall within its scope. Ratio |
In the remainder of the provision, the general relief for dividends, in respect of UK tax on company profits, which had appeared in the 1945 Convention was not repeated. Ratio |
The rationale of that relief - the imputation system - no longer applied in a situation where UK tax was charged on the dividend itself. Ratio |
An exception was however made, in the concluding clause, for cases where the shareholder was a company with a substantial trade investment in the company paying the dividend. Ratio |
The new article 13(2), dealing with double taxation relief in the UK, provided: (2) Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof), (a... |
Comparing the 1966 version of article 13(2) with the 1945 version, there are a number of significant differences. Ratio |
First, the introduction of the words in parentheses in para (2)(a) made it clear that the only credit to be allowed in the case of US dividends was in respect of the withholding tax, which fell within the scope of the general principle (United States tax payable whether directly or by deduction), and that credit was no... |
That followed logically from the UKs abandonment of the imputation system. Ratio |
Secondly, para (2)(b) created an exception for cases where the shareholder was a company with a substantial trade investment in the company paying the dividend. Ratio |
Article 13(2) thus continued to provide similar relief, under UK law, to that provided under US law in terms of article 13(1). Ratio |
A third change was the use of the phrase computed by reference to, in article 13(2), in place of the words payable in respect of, which had been used in the 1945 version. Ratio |
The modified wording was introduced following the decision of the House of Lords in Duckering v Gollan [1965] 1 WLR 680. Ratio |
The case concerned a double taxation agreement between the UK and New Zealand, which contained a provision in similar terms to article 13(2) of the 1945 Convention, allowing a credit against UK tax payable in respect of that income. Ratio |
The taxpayer was liable to UK tax on his income, including income arising in New Zealand, for the year 1958- 1959. Ratio |
The tax was computed, on a preceding year basis, by reference to his income in 1957-1958. Ratio |
He had not paid tax in New Zealand which had been computed by reference to that income: as a result of a change in tax law there, his New Zealand tax for 1957-1958 had been computed on a preceding year basis, by reference to his income arising in 1956-1957, and his tax for 1958-1959 had been computed on a current year ... |
He successfully sought a credit against his UK tax for 1958-1959 for the tax paid in New Zealand in 1958-1959, on the basis that he had paid tax in both countries in respect of the same income, despite the fact that the income by reference to which his tax liability was computed in the two jurisdictions was not the sam... |
In the light of that decision, the 1966 Protocol used the phrase computed by reference to. Ratio |
The 1975 Convention Ratio |
The 1975 Convention was subsequently entered into in order to address matters unrelated to the issues which I have been discussing (including, in particular, the introduction in the UK of advance corporation tax in 1973). Ratio |
Article 1(3) introduced a new provision: Notwithstanding any provision of this Convention except paragraph 4 of this article, a contracting state may tax its residents ... and its nationals as if this Convention had not come into effect. STA |
Article 1(4) provides that nothing in article 1(3) affects the application of a number of specified provisions, including article 23. STA |
The net result is that income may be taxed on the basis of residence or nationality (except where otherwise specified in article 1(4)), as well as on the basis of one of the distributive articles, but double taxation is then to be avoided by applying article 23. STA |
The distributive articles include provisions covering business profits (article 7) and dividends (article 10). Ratio |
The latter provision retains the 15% ceiling on withholding tax. Ratio |
Article 23(1), dealing with double taxation relief in the US, provides: In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or national of the ... |
With some minor differences of expression, this provision is in substance the same as article 13(1) of the 1945 Convention as amended by the 1966 Protocol. STA |
Article 23(2), dealing with double taxation relief in the UK, provides: (2) Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (as it may be amended from time to time without changing the gene... |
These provisions repeat almost verbatim the terms of article 13(2) of the 1945 Convention, as revised by the 1966 Protocol. STA |
The only change is the deletion of the references to chargeable gains. STA |
It is also relevant to note article 23(3): For the purposes of the preceding paragraphs of this article, income or profits derived by a resident of a contracting state which may be taxed in the other contracting state in accordance with this Convention shall be deemed to arise from sources within that other contracting... |
This provision is of wider scope than article 13(3) of the 1945 Convention, but has the same function of enabling it to be determined whether income has its source within the UK or the US for the purpose of applying article 23(1) and (2). STA |
The first ground of appeal Ratio |
In relation to the first ground of appeal, the argument advanced on behalf of Mr Anson focused on the provision made in article 23(2)(a) in respect of dividends. Ratio |
The argument runs as follows. Ratio |
When UK tax is payable on a dividend received from a US corporation, and US tax has been paid by the corporation on the profits out of which the dividend was paid, there can be no question of the UK tax being computed by reference to the same profits or income as the profits of the corporation, if the source of the inc... |
A dividend is a paradigm case of income which does not have the same source, under UK or US tax law, as the profits out of which it is paid. Ratio |
If the question whether income is the same is to be determined by applying domestic law, there is therefore no need for article 23(2)(a) to contain a provision expressly excluding underlying tax that is to say, tax paid by a corporation on the profits out of which a dividend is paid - from the scope of the relief: it w... |
There appear accordingly to be two possibilities. Ratio |
One is that the provision in relation to dividends adds nothing of substance. Ratio |
The second is that the existence of that provision implies that the underlying tax on dividends would otherwise be within the scope of the relief, and that the identity of income is not therefore determined according to domestic law. Ratio |
The first possibility is not initially attractive, since it is a general principle of treaty interpretation ut res magit valeat quam pereat. Ratio |
Following the jurisprudence of the International Court of Justice (eg United Kingdom v Albania (Corfu Channel) [1949] ICJ 1, 24), the court would be reluctant to conclude that a provision in an agreement made between two governments was otiose, if that conclusion could reasonably be avoided. Ratio |
The point is strengthened when regard is had to article 23(2)(b). Ratio |
Where a dividend is paid by a US corporation to a corporation resident in the UK which controls at least 10% of its voting power, article 23(2)(b) provides that the credit shall take into account, in addition to any US tax creditable under para (2)(a), the US tax payable by the corporation in respect of the profits out... |
The words the credit refer back to the credit described in para (2)(a), which is a credit against any United Kingdom tax computed by reference to the same profits or income by reference to which the United States tax is computed. Ratio |
Since it is that credit which is to take into account the underlying tax, the apparent implication is that the UK tax paid by the shareholder on his dividend is computed by reference to the same profits or income, within the meaning of the Convention, as the US tax paid by the corporation on the profits or income out o... |
So runs the argument. Ratio |
If article 23(2) is considered in isolation from the remainder of the Convention, and without regard to the context, this is indeed a powerful argument. Ratio |
As I have explained, however, article 23(2) replicates article 13(2) of the 1945 Convention, as amended by the 1966 Protocol. Ratio |
The history of the provision makes it clear that the express treatment of underlying tax on dividends reflected the changes necessitated by the UKs adoption of corporation tax in place of the previous imputation system. Ratio |
Relief for underlying tax had previously been allowed, providing similar relief in the UK to that available in the US under article 13(1). Ratio |
Once the imputation system was abandoned, relief for underlying tax logically went with it. Ratio |
The words in parentheses in article 23(2)(a) of the 1975 Convention served to make clear the alteration in the relief available. Ratio |
There is nothing in the context to suggest that they were intended to have any wider implication. Ratio |
On the contrary, the context suggests that article 23(2) was intended to provide similar relief to that available in the US under article 23(1), as had been the case under the 1945 Convention; and it was always clear from the Biddle decision that the US did not afford relief for underlying tax unless the Convention pro... |
The argument, and this ground of appeal, must therefore be rejected. Ratio |
The second ground of appeal: sources Ratio |
In relation to the second ground of appeal, an argument was advanced on behalf of the Commissioners concerning the meaning of the word sources, as used in article 23(2)(a). Ratio |
Given that the paragraph is concerned with relief against UK tax, they argued, the word sources must be intended to bear the same meaning as it bears in UK tax law. Ratio |
It was therefore necessary to determine the source of the income taxed in each jurisdiction in accordance with UK tax law. Ratio |
That was also consistent, they argued, with article 3(2) of the 1975 Convention, which provides: As regards the application of this Convention by a contracting state any term not otherwise defined shall, unless the context otherwise requires and subject to the provisions of article 25 (Mutual agreement procedure), have... |
Since the expressions sources was not defined by the Convention, it was submitted that it must be given the meaning which it had under UK tax law. Ratio |
This argument is inconsistent with the sense in which the word sources is used in article 23(3). Ratio |
That provision explains how the expression, profits or income from sources within the United States, in article 23(2), is to be applied. Ratio |
The general rule is that income or profits derived by a resident of a contracting state which may be taxed in the other contracting state in accordance with this Convention shall be deemed to arise from sources within that other contracting state. Ratio |
As I have explained, one has to look elsewhere in the Convention in order to discover whether particular profits or income may be taxed in the US in accordance with the Convention, and are therefore profits or income from sources within the United States for the purposes of article 23(1) and (2). Ratio |
Articles 6 to 22 of the Convention contain distributive provisions allocating taxing powers between the UK and the US in relation to a range of different types of profits and income, and different categories of taxpayer. Ratio |
This has nothing to do with the schedular source doctrine of UK tax law. Ratio |
It is only where the United States taxes on the basis of citizenship that article 23(3) refers, exceptionally, to sources ... as determined under the laws of the United Kingdom. Ratio |
As Arden LJ observed in Bayfine UK v Revenue and Customs Comrs [2011] EWCA Civ 304; [2012] 1 WLR 1630, para 23, article 23(3) contains its own rule as to how source [is] to be determined, save where tax has been imposed on the basis of citizenship. PRE |
The case of Bayfine concerned the question whether a UK company was entitled under article 23(2)(a) to a credit, to set against UK tax on its profits, in respect of the US tax which had been paid by its US parent on the same profits. Ratio |
The Commissioners are recorded as having submitted in that case that domestic law did not apply to source for the purpose of article 23, because article 23 contained its own comprehensive clause for defining source: it was a free-standing treaty concept which applied for all the purposes of that article. Ratio |
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