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It was a neat solution which evidently appealed to the juge rapporteur, who (according to the informal transcript with which the Supreme Court has been supplied) put to counsel for the UK a series of points, starting with this very simple question: does such an exemption system not in fact come down to as Mr Lyal said,... |
The reasoning was the same as the Commissions. Ratio |
Subsequently various questions were put by Advocate General Jskinen to Mr Lyal for the Commission. Ratio |
The Advocate General expressed some doubt whether the Commissions proposed solution was really consistent with the CJEUs previous judgment. Ratio |
He suggested that it would seem to work if there was equivalence of both the domestic and the overseas nominal and effective tax rates, but pointed to a risk of distortion if the nominal and effective tax rates were similar in one state, but diverged significantly in the other. Ratio |
Mr Lyals response was: Yes, my Lord, thats quite right. Ratio |
Thats a danger. Ratio |
It is a danger that can be minimised, if what I said a moment ago about recognizing only the type of tax benefits or discounts or manners of calculation that are recognized in the state of residence of the parent. Ratio |
The practical likelihood of the problem is to some extent limited to the extent that there is something of a correlation between higher taxes, higher company tax rates and lots of discounts, and equally a correlation between lower company tax rates and broad tax bases. Ratio |
So, if there is a source company in Slovakia, say, which has set their tax at, whatever their rate now is, 17%, perhaps, one can be pretty sure that its 17% on accounting profits. Ratio |
And thirdly, this is after all said to be a rough equivalent because the only other practical option that I can see for a rough equivalent of the domestic exemption is exemption for foreign-source dividends as well which would compound the problem that your Lordship refers to. Ratio |
That is to say you would not only have the freedom from taxation represented by the difference between the lower rate, the lower effective rate and [?in] the source state, but also the difference between the statutory rate in the UK and the lower statutory rate. Ratio |
So, again, the problem that your Lordship advances is certainly a correct one, but in circumstances in which the resident state applies an exemption system, we need to find something that gives substantive equivalent taxation for inbound dividends, a measure of which focuses on the actual tax, the effective rate of tax... |
Against this background, the CJEU in FII ECJ II addressed the problem as follows. Ratio |
First, it pointed out (paras 43 to 48) that the tax rate applied to foreign- sourced dividends would be higher than that applied to domestic-sourced dividends, and their equivalence compromised, if the resident company generating the dividends was subject to either a nominal or an effective rate of tax below that to wh... |
On this basis, it explained that in its judgment in FII ECJ I, para 56, the reference to the tax rates related to the nominal rate of tax while the reference to the different levels of taxation by reason of a change to the tax base related to the effective levels of taxation. Ratio |
The CJEU in FII ECJ II, after stating why such discrimination could not be justified under EU law as necessary to preserve the cohesion of the domestic tax system, then adopted use of the FNR as an acceptable solution in the following paragraphs: 61. Ratio |
The tax exemption to which a resident company receiving nationally-sourced dividends is entitled is granted irrespective of the effective level of taxation to which the profits out of which the dividends have been paid were subject. Ratio |
That exemption, in so far as it is intended to avoid economic double taxation of distributed profits, is thus based on the assumption that those profits were taxed at the nominal rate of tax in the hands of the company paying dividends. Ratio |
It thus resembles grant of a tax credit calculated by reference to that nominal rate of tax. Ratio |
62. Ratio |
For the purpose of ensuring the cohesion of the tax system in question, national rules which took account in particular, also under the imputation method, of the nominal rate of tax to which the profits underlying the dividends paid have been subject would be appropriate for preventing the economic double taxation of t... |
It is to be observed in this connection that in the Haribo 63. case [2011] ECR I-305, para 99, the court, after pointing out that the member states are, in principle, allowed to prevent the imposition of a series of charges to tax on dividends received by a resident company by applying the exemption method to nationall... |
64. Ratio |
It is true that calculation, when applying the imputation method, of a tax credit on the basis of the nominal rate of tax to which the profits underlying the dividends paid have been subject may still lead to a less favourable tax treatment of foreign-sourced dividends, as a result in particular of the existence in the... |
However, it must be held that, when unfavourable treatment of that kind arises, it results from the exercise in parallel by different member states of their fiscal sovereignty, which is compatible with the Treaty 65. Ratio |
In light of the foregoing, the answer to the first question is that articles 49FEU and 63FEU must be interpreted as precluding legislation of a member state which applies the exemption method to nationally-sourced dividends and the imputation method to foreign-sourced dividends if it is established, first, that the tax... |
These paragraphs are generally stated, and there is no reason why they should not be as applicable to portfolio holdings as they are to non-portfolio holdings. Ratio |
There is no hint of any distinction between portfolio and non-portfolio holdings. Ratio |
If any had been intended, one would have expected it to be mentioned, particularly when the same juge rapporteur was active in all four of the key decisions, covering between them both types of holding. Ratio |
Instead, in para 63 of FII ECJ II, quoted above, reliance is actually placed on Haribo, a case of portfolio holdings, in support of the use of the FNR. Ratio |
The reliance may, as Mr David Ewart QC for HMRC submitted, be misplaced, achieving a coherence in the development of the jurisprudence that is more apparent than real - because the reference to FNR in Haribo was in the context of a simplified method permitted by the Austrian tax authorities to show the tax actually pai... |
But that is presently irrelevant. Ratio |
What matters is that the CJEU in FII ECJ II presented its development of the law in the context of non-portfolio holdings as being in line with, and supported by, its previous jurisprudence in the context of portfolio holdings. Ratio |
It is inconceivable that it contemplated any material distinction in the principles applicable to both. Ratio |
It follows that, subject to one reservation, the CJEUs jurisprudence establishes clearly that the credit for foreign dividends in the present case should be by reference to the FNR, rather than by reference to the actual or effective tax incurred overseas. Ratio |
The one reservation arises from the assumption made throughout the discussion in FII ECJ II, that, in the Commissions words (para 20 above): to exempt domestic dividends in effect amounts to giving credit for the full amount of tax at the statutory rate even where this full amount has not been paid; or in Judge Lenaert... |
This assumption is readily understandable, if one also assumes that the domestic company which is the source of and distributes the dividend has an effective tax rate less than the nominal tax rate, while the receiving company which is exempted from tax would, but for the exemption, pay tax at the full nominal rate. Ra... |
There is then a benefit from the exemption, which would have no parallel if the credit in respect of overseas-sourced dividends was by reference only to the actual tax incurred overseas. Ratio |
However, in the UK domestic context, there appears to be no reason to think that companies receiving domestically-sourced dividends are any less able to reduce the effective tax rate they would have borne on such dividends than are the companies from which the dividend is sourced. Ratio |
In other words, the evidence appears to have been that all UK companies are generally taxed at an effective level below the nominal rate. Ratio |
That being so, the domestic exemption does not confer a benefit at the nominal rate, but at their effective rate. Ratio |
It follows that to give a credit for overseas dividends at the FNR may confer a benefit on overseas dividends, compared with domestic dividends. Ratio |
By way of example, given by HMRC, one can suppose an overseas waters edge company with a nominal tax rate of 20% and an effective rate of 10%, which makes a profit after tax of 100 and distributes a dividend of 100. Ratio |
The UK recipient company has a nominal rate of 30%, but an effective tax rate of 20%. Ratio |
One would expect the UK company to bear a 10% charge on the dividend to reflect the higher tax rate charged in the UK (and that is so, whether one is looking at and comparing the nominal or the effective tax rate in this connection). Ratio |
But a tax credit can necessarily only reduce the tax which would actually otherwise be charged. Ratio |
Here, since the UK companys effective tax rate is only 20%, the effect of giving credit to the UK company for the FNR of 20% is in fact to eliminate any UK tax charge. Ratio |
Does this reservation about the rationale and solution adopted by the CJEU mean that we should once again refer the case back to the CJEU, for it to reconsider once again whether its approach is appropriate? In our opinion, it does not. Ratio |
It is clear that the CJEU was well aware that the adoption of the FNR would not eliminate all inequities or incongruities: see the Commissions written observations, para 34, cited in para 22 above, the Advocate Generals question put to Mr Lyal and Mr Lyals answer cited in para 24 above and the CJEUs own judgment, para ... |
There could, depending on the incidence of nominal and effective tax rates, be swings and roundabouts in the equivalence achieved by a mixed system of domestic exemption combined with overseas credits. Ratio |
But the ideal alternative of a comparison between two tax systems to ensure equivalence (subject only to each states right to set its own nominal tax levels) was consciously rejected as wholly impractical. Ratio |
In these circumstances, such inequity as may arise from the reservation discussed in the previous three paragraphs is not in our view a reason for referring the matter yet again to the CJEU. Ratio |
The prospect that the CJEU would, at this stage in history, contemplate revising yet again its jurisprudence appears to us negligible to the point where it can be discarded. Ratio |
We turn finally to the two further issues which HMRC suggest should be taken into account, and should lead to or encourage the making of a reference. Ratio |
The short answer in relation to each is that permission to raise it before the Court of Appeal was specifically refused by that court: [2016] EWCA Civ 376; [2016] STC 1798. Ratio |
In these circumstances, there is no constitutional basis for consideration of either before the Supreme Court: Access to Justice Act 1999, section 54(4), Supreme Court Practice Direction No 1 para 1.2.5. Ratio |
Issue I at first instance might have been wide enough to embrace one or both of issues 4 CA and 6 CA, since it asked inter alia what the appropriate amount of any tax credit required was, but in fact neither issue was raised at the trial before Henderson J. Issue 6 CA was first raised six weeks after the trial by lette... |
Issue 4 CA only emerged as ground 2 in HMRCs Grounds of Appeal to the Court of Appeal. Ratio |
The Court of Appeal expressly refused permission to appeal to it on Issues 4 and 6 CA, and the declaration it made read simply that (para 99): the effect of the rulings of the CJEU is that the foreign dividend should be afforded equivalent treatment, taking the form of the imputation method according to which credit sh... |
This declaration does not address or require the Supreme Court to address either of Issues 4 and 6 CA. Ratio |
(In the event, the Supreme Court has not even been asked to address the question whether the Court of Appeal was right to declare that credit required to be given for the higher of the effective and nominal foreign rate, that issue being we were told of no present relevance, but reserved for a further instalment of the... |
Issue IV Ratio |
It is however appropriate at this point to deal with Issue IV which is before the Supreme Court. Ratio |
That is whether, if PAC had no entitlement under EU law to a credit by reference to the FNR, effect should, in the light of what is said to be the impossibility of showing the tax actually borne by its portfolio holdings, be given to the CJEUs judgments either: (a) by disapplying the DV charge; or (b) by allowing PAC t... |
The short answer to this issue is that it does not arise or need answering, having regard to our conclusion that PAC is entitled to credit in respect of overseas-sourced dividends by reference to the FNR. Ratio |
Issue II: Introduction ARG |
PAC seeks restitution, on the ground of unjust enrichment, of an amount calculated on the basis of compound interest, in respect of each category of claim which has succeeded. ARG |
The amounts on which interest is sought, and the periods over which it is submitted that interest should be compounded, are as follows: (a) unlawfully levied ACT which was subsequently set off against lawfully levied MCT, from the date of payment by PAC to the date of set- off; (b) all other unlawfully levied tax (incl... |
the time value of utilised ACT (resulting from (a) above), from the PAC submits that the interest should be compounded at conventional rates calculated by reference to the rates of interest, and rests, applicable to borrowings by the Government in the market during the relevant period, that being the approach favoured ... |
HMRC have accepted that compound interest is payable in respect of the utilised ACT falling within category (a) above, since that is what the House of Lords decided in Sempra Metals. ARG |
PAC submits that the principles set out in Sempra Metals entail that the same approach should also apply to the amounts falling within categories (b) and (c) above. ARG |
HMRC, on the other hand, submit that only simple interest should be awarded, in accordance with section 35A of the Senior Courts Act 1981 (the 1981 Act), inserted by the Administration of Justice Act 1982, section 15(1) and Schedule 1, Part I. An award of interest on that basis would, they argue, be compatible with the... |
Although the difference between simple and compound interest is modest in the present case, the point also arises in other cases which are pending against HMRC, and the total amount at stake, on HMRCs estimate, is of the order of 4-5 billion. Ratio |
The point is also one of considerable importance from a legal perspective, since it raises some fundamental issues in the law of unjust enrichment. Ratio |
The approach of the courts below PRE |
In a careful judgment, Henderson J held that compound interest should be awarded in respect of all three categories of claim, on the basis that, applying the reasoning of the majority in Sempra Metals, PAC was entitled on the ground of unjust enrichment to compound interest on all its claims: [2013] EWHC 3249 (Ch); [20... |
His Lordship subsequently followed that decision in other proceedings, concerned with the recovery of VAT paid under a mistake: Littlewoods Retail Ltd v Revenue and Customs Comrs [2014] EWHC 868 (Ch); [2014] STC 1761, para 417. PRE |
That paragraph was then expressly approved by the Court of Appeal in the Littlewoods proceedings: Littlewoods Ltd v Revenue and Customs Comrs [2015] EWCA Civ 515; [2016] Ch 373; [2015] STC 2014, paras 203-204. PRE |
When the present case reached the Court of Appeal, it dismissed the appeal on this issue on the basis that it was bound by its previous decision in the Littlewoods case. RLC |
So the only detailed consideration of this issue, in the context of the present case, has been that of Henderson J. Ratio |
It is only necessary to add that, following the decision of this court in the Littlewoods proceedings (Littlewoods Ltd v Revenue and Customs Comrs [2017] UKSC 70; [2017] 3 WLR 1401), which reversed the decision of the Court of Appeal, it is no longer argued that there is a right to compound interest under EU law. Ratio |
A preliminary point Ratio |
As a preliminary point, PAC submits that HMRC should not be permitted to advance an argument to the effect that the opportunity to use money mistakenly paid is not a benefit obtained at the expense of the person who made the mistaken payment. ARG |
They point out that HMRC did not advance any argument along these lines at the trial before Henderson J in 2013. ARG |
On the contrary, it was conceded in advance of the trial that PAC was entitled to compound interest in respect of the claims in category (a), following Sempra Metals, and that position was maintained in the agreed Statement of Facts and Issues. ARG |
Although HMRC do not seek to withdraw that concession, PAC submits that the proposed argument challenges the reasoning in Sempra Metals, and therefore the basis on which the concession was made. ARG |
Against this background, it is submitted that HMRC should not be permitted to advance this argument for the first time in this court. ARG |
In so far as HMRC wish to advance submissions questioning the soundness of the reasoning in Sempra Metals, the court is not inclined to prevent them from doing so, in the particular circumstances of this case. Ratio |
As will be explained, there have been some significant developments in the law of unjust enrichment since the trial before Henderson J, and indeed since the present appeal was brought. Ratio |
In particular, the concept of a benefit being obtained at the expense of the claimant, and the related concept of a transfer of value, were considered by this court only relatively recently. Ratio |
In this appeal, PAC invites the court to extend the reasoning in Sempra Metals beyond the scope of that decision itself, albeit PAC submits that the extension is the logical consequence of that decision. Ratio |
The appeal therefore involves analysing the reasoning in Sempra Metals, and unavoidably requires the court to consider whether that reasoning is consistent with the approach which it has more recently adopted, so as to form part of a coherent body of law. Ratio |
As we explain later, there is indeed a difficulty involved in reconciling Sempra Metals with this courts more recent case law. Ratio |
Accordingly, even if HMRC had not wished to subject the decision in Sempra Metals to critical analysis, that is an exercise which this court could not have avoided. Ratio |
In addition, it is important to bear in mind that this appeal has to be decided in the context of a group litigation order, and also that the point of law which HMRC wish to argue is undoubtedly one of general public importance. Ratio |
We do not consider that allowing these matters of law to be argued involves unfairness to PAC. Ratio |
The essence of HMRCs argument was set out in the written case which they submitted in advance of the hearing of the appeal, although, as often happens, the argument was refined during the hearing. Ratio |
What did Sempra Metals decide? PRE |
The issue in Sempra Metals was how effect should be given in domestic law to the judgment of the CJEU in the Metallgesellschaft case (Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98) EU:C:2001:134; [2001] Ch 620; [2001] ECR I-1727) (Sempra Metals Ltd being the same company, under a new... |
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