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That submission was accepted by the Court of Appeal, subject to the exception in respect of taxation on the basis of US citizenship. Ratio |
The same reasoning disposes of the Commissioners argument that article 3(2) of the 1975 Convention requires the term sources to be given the meaning which it bears under UK tax law. Ratio |
Article 3(2) directs that, unless the context otherwise requires, any term not otherwise defined is to be given by each contracting state the meaning which it has under the laws of that contracting state. Ratio |
As I have explained, however, article 23(3) explains how the source of profits or income is to be determined for the purposes of article 23, and that explanation is unrelated to the source doctrine of UK tax law. Ratio |
Memec PRE |
Further arguments were advanced by both parties on the basis of the case of Memec. Ratio |
That case concerned a double taxation agreement between the UK and Germany, originally entered into in 1964 and amended by protocol in 1970, which contained a provision in almost identical terms, mutatis mutandis, to article 13(2) of the 1945 Convention between the UK and the US as amended by the 1966 Protocol. PRE |
The only difference was that the voting control required to qualify for exceptional relief in respect of underlying tax on dividends, under the equivalent of article 23(2)(b) of the 1975 Convention, was 25% rather than 10%. PRE |
The provision was therefore for all material purposes also similar to article 23(2) of the 1975 Convention. PRE |
The taxpayer, Memec plc (Plc), was a partner in a German silent partnership (stille Gesellschaft). PRE |
The partnership had no separate legal personality, but was a contractual arrangement under which Plc had the right to receive a share of the profits of the business carried on by the other partner, in return for a capital payment. PRE |
The other partner, Memec GmbH (GmbH), was a German company, wholly owned by Plc. PRE |
It alone carried on the business of the silent partnership. PRE |
It alone owned the assets of the business, and the income from those assets as it accrued. PRE |
It had wholly owned subsidiaries, which were also German companies. PRE |
The subsidiaries paid dividends to GmbH, and that income formed the principal source of the profits of the partnership, which were shared between the partners in accordance with their agreement. PRE |
The question was whether Plc could claim credit under the double taxation agreement for German taxes paid by the subsidiaries of GmbH on their trading profits. PRE |
The first point on which issue was joined (and the only one relevant to the present case) was whether the dividends paid by the trading subsidiaries to GmbH should be treated as having been paid by them to Plc. PRE |
It was conceded by the Commissioners that, if that premise were established, relief would then be due. PRE |
The basis of the concession is not recorded in the judgments, but must have been the provision in the UK/German treaty corresponding to article 23(2)(b) of the 1975 Convention (as was submitted on behalf of Mr Anson, and not disputed, in the present appeal). PRE |
What was being sought was relief in respect of underlying tax on the profits out of which dividends were paid. PRE |
Such relief was only available under the equivalent of article 23(2)(b), and was only available under that provision in the case of a dividend paid by a company which is a resident of the Federal Republic to a company which is a resident of the United Kingdom. PRE |
It could hardly have been argued that relief was available under the provision in the treaty corresponding to article 23(2)(a) of the 1975 Convention, since (apart from any other consideration) article 23(2)(a) does not provide relief in respect of the underlying tax on profits out of which dividends are paid. PRE |
The question under the treaty, therefore, was the one arising under the provision corresponding to article 23(2)(b): were the dividends paid by GmbHs subsidiaries paid by a company which is a resident of the Federal Republic to a company which is a resident of the United Kingdom? The critical issue was whether the divi... |
The arguments on that issue focused on the question whether the source of the relevant income of Plc was the dividends from the trading subsidiaries, or its contractual right under the agreement to payment of its share of the partnership profits. PRE |
Another way the argument was expressed was in terms of whether the partnership was transparent, so that its existence could be disregarded in determining whether the dividends were paid by the subsidiaries to Plc. PRE |
In deciding that relief was not available on this basis, Robert Walker J considered that the decisive point was the absence of any proprietary right enjoyed by Plc in the shares of the trading subsidiaries, or in the dividends accruing on those shares. PRE |
The shares and the dividends belonged to GmbH. Plc did not therefore receive, or become entitled to, the dividends paid by the trading subsidiaries. PRE |
Its contractual right to a share of the profits of the partnership must be regarded as a separate source of income. PRE |
In the Court of Appeal, the approach adopted by Peter Gibson LJ was to consider the characteristics of an English or Scottish partnership which made it transparent, and then to see to what extent those characteristics were shared or not by the silent partnership, in order to determine whether it should be treated for c... |
In that regard, it was observed that the absence of a proprietary right in the shares of the subsidiaries, or in the dividends accruing on those shares, was less obviously a point of distinction from a Scottish partnership than an English one. PRE |
A clearer distinction was that, unlike an English or Scottish partnership, Plc and GmbH did not carry on business in common: the business was carried on solely by GmbH. Peter Gibson LJ acknowledged that the absence of what English or Scots law would regard as a partnership was not in itself determinative of transparenc... |
Henry LJ agreed, and Sir Christopher Staughton gave a concurring judgment on this issue. PRE |
The present case is not concerned with a claim to relief under article 23(2)(b). Ratio |
If it were - if, for example, the taxpayer were Anson plc, a UK resident company holding at least 10% of the voting power in the LLC, and the question was whether it was entitled to relief from corporation tax in respect of underlying tax paid in the US by subsidiaries of the LLC then it would be necessary, as in Memec... |
But that is not this case. Ratio |
The issue in this case is not whether the receipts of the LLC from third parties are to be regarded as having been paid to the members of the LLC, but whether the income on which Mr Anson paid tax in the US is the same as the income on which he is liable to tax in the UK. Ratio |
As I shall explain, answering that question involves considering whether income arises to Mr Anson, for the purposes of UK income tax, when his share of profits is allocated to his account, or when he receives distributions of profits. Ratio |
That issue is different from the issue considered in Memec. Ratio |
The answer to the question whether the receipts and expenditure of an entity are paid to and by its members does not necessarily determine whether, when a profit arises in a given accounting period, that profit constitutes the income of the members. Ratio |
The answer to the latter question depends on the respective rights of the entity and its members in relation to the profit, and therefore on the legal regime governing those rights. Ratio |
The correct approach to the present question Ratio |
Article 31(1) of the Vienna Convention requires a treaty to be interpreted 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. Ratio |
It is accordingly the ordinary (contextual) meaning which is relevant. Ratio |
As Robert Walker J observed at first instance in Memec, [1996] STC 1336, 1349, a treaty should be construed in a manner which is international, not exclusively English. PRE |
That approach reflects the fact that a treaty is a text agreed upon by negotiation between the contracting governments. Ratio |
The terms of the 1975 Convention reflect the intentions of the US as much as those of the UK. Ratio |
They are intended to impose reciprocal obligations, as the background to the UK/US agreements from 1945 onwards makes clear. Ratio |
The terms of article 23(2), in particular, broadly reciprocate those of article 23(1), and are important to businesses in the US as well as to the UK investors who may receive dividends or other income from them. Ratio |
In that context, one would be predisposed to favour an interpretation which reflected the ordinary meaning of the words used and the object of the Convention. Ratio |
This is indeed a point which has been repeatedly made, in other cases concerned with the construction of the UK/US double taxation conventions, in the face of narrow and technical constructions: see, for example, Strathalmond v Inland Revenue Comrs [1972] 1 WLR 1511, 1517-1518, and Inland Revenue Comrs v Commerzbank AG... |
In that connection, it is also relevant to note that, by virtue of section 788(3) of the 1988 Act, the arrangements made in a double taxation treaty given effect by an Order made under that section are, subject to the provisions of Part XVIII of the Act (the double taxation provisions), to have effect notwithstanding a... |
The provisions of the 1975 Convention therefore override inconsistent provisions in domestic UK tax legislation, other than those concerned with double taxation relief. Ratio |
It has not been suggested in this appeal that there is any conflict between the 1975 Convention (on any of the interpretations canvassed in argument) and the provisions of Part XVIII of the 1988 Act. Ratio |
Giving the words used in article 23(2)(a) their ordinary meaning, it is necessary to identify the profits or income by reference to which the taxpayers UK tax liability is computed. Ratio |
That is primarily a question of UK tax law (I say primarily, because the meaning of terms used in the Convention may not be a question of UK tax law: United Kingdom tax, for example, is a defined term). Ratio |
It is then necessary to identify the profits or income from sources within the US on which US tax was payable under the laws of the US and in accordance with the Convention. Ratio |
That is primarily a question of US tax law. Ratio |
It is then necessary to compare the profits or income in each case, and decide whether they are the same. Ratio |
The words the same are ordinary English words. Ratio |
It should however be borne in mind that a degree of pragmatism in their application may be necessary in some circumstances if the object of the Convention is to be achieved, for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax i... |
It appears that some potential difficulties of this kind are in practice avoided by the Commissioners accepting that the profits on which foreign tax is computed and in respect of which relief can be claimed are not confined to those arising under UK tax principles in individual UK chargeable periods: see Munro, UK Tax... |
Relief under the Convention in the present case Ratio |
Mr Anson is liable to UK income tax under Case V of Schedule D in respect of income arising from possessions out of the United Kingdom. Ratio |
There is no dispute that he had a possession out of the UK for this purpose, although the parties differ as to how it should be described. Ratio |
More importantly, the parties differ as to the stage at which Mr Ansons income, and therefore a liability to tax, arises. Ratio |
Mr Anson maintains that income arises as profits are earned by the LLC, regardless of whether they are distributed. Ratio |
The income which is liable to tax is therefore Mr Ansons share of the profits. Ratio |
The Commissioners argue that income arises only as and when profits are distributed. Ratio |
If no distributions are made, then on the Commissioners argument no tax liability arises. Ratio |
The income liable to tax is therefore the distributions. Ratio |
There is no doubt that taxpayers can be liable to tax in respect of income to which they are entitled without receiving payment of that income. Ratio |
Examples include the income of an interest-in-possession trust (Baker v Archer-Shee) or of a partnership (Reed v Young [1986] 1 WLR 653-654; [1986] STC 285, 289-290; Padmore v Inland Revenue Comrs [1987] STC 36, 51). Ratio |
The Commissioners distinguish partnerships from the present case on the basis that the business of a partnership is carried on by the partners themselves, who are therefore automatically entitled to the profits. Ratio |
There is a dispute between the parties whether that is a correct analysis of a Scottish partnership, but it is unnecessary to resolve that question in the present appeal. Ratio |
The Commissioners distinguish the case of an interest-in-possession trust on the basis that the business (or other profit-generating activity) is carried on by one person on behalf of another, who is automatically entitled to the profits. Ratio |
The present case is different, it is said, because there is no similar entitlement. Ratio |
Expressing the same idea in a different way, in the case of a partnership or an interest-in-possession trust, the source of the taxpayers income is the business carried on by the firm or the trustees respectively, whereas in the present case, it is said, the source of Mr Ansons income is his rights under the LLC agreem... |
The premise of the Commissioners submissions is that, because the business of the LLC is carried on by the LLC, it necessarily follows that the profits generated by the business belong to the LLC. Ratio |
On that premise, the effect of the LLC agreement must be to require the LLC to transfer its profits to the members. Ratio |
As the Commissioners state in their printed case: If a trader carries on a trade beneficially, the profits belong to him and any instrument which obligates the trader to pay on those profits creates a source for the payee which is a distinct source from that of the trading entitys trade. ... A trader who agrees contrac... |
The profits do not belong to the third party and he is not taxable on them. Ratio |
The difficulty with this argument is that it is contradicted by the findings made by the FTT. Ratio |
It is relevant to note, in the first place, that the rights of a member of the LLC were found to arise from the LLC Act, combined with the LLC agreement. Ratio |
Secondly, that agreement was not a contract between the LLC and its members: the LLC was not a party to it, but was brought into being by it, on the terms set out in it and in the provisions of the LLC Act. Ratio |
It was thus the constitutive document of the LLC. Ratio |
It was against that background that the FTT made findings which contradict the premise that the profits belong to the LLC in the first instance and are then transferred by it to the members. Ratio |
Their conclusion, on the contrary, was that, under the law of Delaware, the members automatically became entitled to their share of the profits generated by the business carried on by the LLC as they arose: prior to, and independently of, any subsequent distribution. Ratio |
As the FTT stated: The profits do not belong to the LLC in the first instance and then become the property of the members. ... Accordingly, our finding of fact in the light of the terms of the LLC operating agreement and the views of the experts is that the members of [the LLC] have an interest in the profits of [the L... |
As I have explained, the evidence as to Delaware law entitled the FTT to make that finding. Ratio |
The Commissioners challenged it in this court, as they did below, on two bases. Ratio |
The first was that the FTT was describing a proprietary right, as the Upper Tribunal had held. Ratio |
Since there was no basis in the evidence for such a finding, the FTT had erred in law. Ratio |
I reject that criticism for the reasons explained at paras 38-40. Ratio |
Secondly, it was argued that the FTTs finding constituted a holding on domestic law, not a finding of fact on foreign law. Ratio |
I reject that criticism for the reasons explained in para 51. Ratio |
If, then, Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits previously vested (in some sense) in the LLC, it follows that his income arising in the US was his share of the profits. Ratio |
That is therefore the income liable to tax under UK law, to the extent that it is remitted to the UK. Ratio |
There is no dispute as to the income which was taxed in the US: that was Mr Ansons share of the profits of the LLC. Ratio |
Mr Ansons liability to UK tax is therefore computed by reference to the same income as was taxed in the US. Ratio |
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