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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Bayfine UK v HMRC [2010] EWHC 609 (Ch) (23 March 2010) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2010/609.html Cite as: [2010] STI 1284, [2010] EWHC 609 (Ch), [2010] STC 1379, 12 ITL Rep 935, [2010] BTC 467 |
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
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Bayfine UK |
Appellants |
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- and - |
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HMRC |
Respondents |
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David Ewart QC and Richard Vallat (instructed by the General Counsel and Solicitor to HMRC) for the Respondents
Hearing dates: 10th & 11th December 2009
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Crown Copyright ©
Peter Smith J :
INTRODUCTION
ISSUES ARISING ON THE APPEAL
1) Unilateral relief pursuant to section 790 Income and Corporation Taxes Act 1988 ("ICTA 1988") in respect of the US Federal Income Tax paid by Bayfine DE Inc ("BDE") in respect of the BUK Profit ("Issue 1").2) Relief under the Double Taxation Relief (Taxes on Income) (the United States of America) Order 1980 ("the Treaty") in respect of the US Federal Income Tax paid by BDE in respect of the BUK profit ("Issue 2").
- The third issue was that BUK sought:
3) Affirmation that the Commissioners' Decision under section 795A ICTA 1988 in favour of BUK should be upheld on additional grounds. The Commissioners sought to uphold the Special Commissioners decision on the additional ground that the section 795A issue should be determined in their favour ("Issue 3").
BACKGROUND
THE TWO AGREEMENTS
a. $339,000,000 if 3 month USD LIBOR-BBA on the Trigger Date was greater than 6.77942%; or
b. $1,000,000 if the USD LIBOR-BBA on the Trigger Date was less than or equal to 6.77942%
a. $339,000,000 if 3 month USD LIBOR-BBA was greater than 6.77942% at 10am on the Trigger Date; or
b. $1,000,000 if 3 month USD LIBOR-BBA was less than or equal to 6.77942% in return for a portfolio of US treasuries to be delivered by Mecklenberg Park as above to BUK on the Settlement Date with an aggregate principal amount of $170,000,000.
TREATMENT OF TRANSACTIONS IN RETURNS
DETERMINATION BY COMMISSIONERS
DECISION ON OUTSTANDING ISSUES
ISSUE 1 UNILATERAL RELIEF
"790.— Unilateral relief.
(1) 1To the extent appearing from the following provisions of this section, relief from income tax and corporation tax in respect of income and chargeable gains shall be given in respect of tax payable under the law of any territory outside the United Kingdom by allowing that tax as a credit against income tax or corporation tax, notwithstanding that there are not for the time being in force any arrangements under section 788 providing for such relief.
(2) Relief under subsection (1) above is referred to in this Part as "unilateral relief".
(3) 2Unilateral relief shall be such relief as would fall to be given under Chapter II of this Part if arrangements [in relation to]3 the territory in question containing the provisions specified in [subsections (4) to (10C)]4 below were in force by virtue of section 788, but subject to any particular provision made with respect to unilateral relief in that Chapter; and any expression in that Chapter which imports a reference to relief under arrangements for the time being having effect by virtue of that section shall be deemed to import also a reference to unilateral relief.
(4) 5Credit for tax paid under the law of the territory outside the United Kingdom and computed by reference to income arising or any chargeable gain accruing in that territory shall be allowed against any United Kingdom income tax or corporation tax computed by reference to that income or gain (profits from, or remuneration for, personal or professional services performed in that territory being deemed for this purpose to be income arising in that territory).
(5) Subsection (4) above shall have effect subject to the following modifications, that is to say—
(a) where the territory is the Isle of Man or any of the Channel Islands, the limitation to income or gains arising in the territory shall not apply;
(b) where arrangements [in relation to]3 the territory are for the time being in force by virtue of section 788, credit for tax paid under the law of the territory shall not be allowed by virtue of subsection (4) above in the case of any income or gains if any credit for that tax is allowable under those arrangements in respect of that income or those gains; and
(c) credit shall not be allowed by virtue of subsection (4) above for overseas tax on a dividend paid by a company resident in the territory unless—
(i) the overseas tax is directly charged on the dividend, whether by charge to tax, deduction of tax at source or otherwise, and the whole of it represents tax which neither the company nor the recipient would have borne if the dividend had not been paid; or
(ii) the dividend is paid to a company within subsection (6) below; or
(iii) the dividend is paid to a company to which section 802(1) applies and is a dividend of the kind described in that subsection."
a. The counter party and, as it turned out, the debtor, was a US resident operating out of its US office
b. The Second Debt Contract was governed by US law and it fell to be enforced in the US
c. The Second Debt Contract was executed in the US
d. The Second Debt Contract related to US situs assets being US Treasuries (and contained provision for settlement in US currency)
ISSUE 2
"(1) Except as specifically provided herein, this Convention is applicable to persons who are residents of one or both of the Contracting States.
(2) A corporation which is both a resident of the United Kingdom within the meaning of paragraph (1)(a)(ii) of Article 4 (Fiscal residence), and a resident of the United States within the meaning of paragraph (1)(b)(ii) of Article 4 shall not be entitled to claim any relief or exemption from tax provided by this Convention except that such corporation may claim the benefits of Article 23 (Elimination of double taxation) with respect to the petroleum revenue tax referred to in paragraph (2)(b) of Article 2 (Taxes covered), of Article 24 (Non-discrimination) and of Article 28 (Entry into force).
(3) Notwithstanding any provision of this Convention except paragraph 4 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Fiscal residence)) and its nationals as if this Convention had not come into effect.
(4) Nothing in paragraph (3) of this Article shall affect the application by a Contracting State of:
(a) Articles 9 (Associated enterprises), 23 (Elimination of double taxation), 24 (Non-discrimination), and 25 (Mutual agreement procedure); and
(b) Articles 19 (Government service), 20 (Teachers), 21 (Students and trainees) and 27 (Effect on diplomatic and consular officials and domestic laws), with respect to individuals who are neither nationals of, nor have immigrant status in, that State".
"ARTICLE 3 General definitions
(1) In this Convention, unless the context otherwise requires:
(a) the term "corporation" means a United States corporation, a United Kingdom corporation, or any body corporate or other entity of a third State which is treated as a body corporate for tax purposes by both Contracting State;
(b)
(i) the term "United States corporation" means a corporation (or any unincorporated entity treated as a corporation for United States tax purposes) which is created or organised under the laws of the United States or any State thereof or the District of Columbia; and
(ii) the term "United Kingdom corporation" means any body corporate or unincorporated association created or organised under the laws of the United Kingdom, but does not include a partnership, a local authority, or a local authority association;
(c) the term "person" includes an individual, a corporation, a partnership, an estate, a trust and any other body of persons;
(d) the term "enterprise of a Contracting State" means an industrial or commercial undertaking carried on by a resident of a Contracting State;
(e) the term "international traffic" means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State;
(f) the term "competent authority" means :
(i) in the case of the United States, the Secretary of the Treasury or his delegate, and
(ii) in the case of the United Kingdom, the Commissioners of Inland Revenue or their authorised representative;
(g)
(i) the term "United States" means the United States of America; and
(ii) when used in a geographical sense, the States thereof and the District of Columbia.
Such term also includes:
(aa) the territorial sea thereof, and
(bb) the seabed and subsoil of the submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which the United States exercises sovereign rights, in accordance with international law, for the purpose of exploration for and exploitation of the natural resources of such areas, but only to the extent that the person, property, or activity to which the Convention is being applied is connected with such exploration or exploitation;
(h)
(i) the term "United Kingdom" means Great Britain and Northern Ireland, including any area outside the territorial sea of the United Kingdom which in accordance with international law has been or may hereafter be designated, under the laws of the United Kingdom concerning the Continental Shelf, as an area within which the rights of the United Kingdom with respect to the seabed and subsoil and their natural resources may be exercised;
(i) the term "Contracting State" means the United States or the United Kingdom, as the context requires;
(j) the term "third State" means any State or territory other than the United States or the United Kingdom and the term "enterprise of a third State" shall be construed accordingly;
(k) the term "nationals" means :
(i) in relation to the United Kingdom, all citizens of the United Kingdom and Colonies, British subjects under sections 2, 13(1) or 16 of the British Nationality Act 1948, and British subjects by virtue of section 1 of the British Nationality Act 1965, provided they are partial within the meaning of the Immigration Act 1971, so far as these provisions are in force on the date of entry into force of this Convention or have been modified only in minor respects so as not to affect their general character;
(ii) in relation to the United States, United States citizens.
(2) 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 the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of this Convention.
"ARTICLE 22 Other income
(1) Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.
(2) The provisions of paragraph (1) shall not apply if the person deriving the income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Articles 7 (Business profits), 14 (Independent personal services), or 17 (Artistes and athletes), as the case may be, shall apply.
ARTICLE 23 Elimination of double taxation
(1) 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 United States as a credit against the United States tax the appropriate amount of tax paid to the United Kingdom; and, in the case of a United States corporation owning at least 10 per cent of the voting stock of a corporation which is a resident of the United Kingdom from which it receives dividends in any taxable year, the United States shall allow credit for the appropriate amount of tax paid to the United Kingdom by that corporation with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid to the United Kingdom, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources outside of the United States) provided by United States law for the taxable year. For the purposes of applying the United States credit in relation to tax paid to the United Kingdom:
(a) the taxes referred to in paragraphs (2) (b) and (3) of Article 2 (Taxes covered) shall be considered to be income taxes;
(b) the amount of 5 or 15 per cent, as the case may be, withheld under paragraph (2) (a) (i) or (ii) of Article 10 (Dividends) from the tax credit paid by the United Kingdom shall be treated as an income tax imposed on the recipient of the dividend; and
(c) that amount of tax credit referred to in paragraph (2) (a) (i) of Article 10 (Dividends) which is not paid to the United States corporation but to which an individual resident in the United Kingdom would have been entitled had he received the dividend shall be treated as an income tax imposed on the United Kingdom corporation paying the dividend.
(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 general principle hereof):
(a) 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 profits out of which the dividend is paid) shall be allowed as 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;
(b) in the case of a dividend paid by a United States corporation to a corporation which is resident in the United Kingdom and which controls directly or indirectly at least 10 per cent of the voting power in the United States corporation, the credit shall take into account (in addition to any United States tax creditable under (a)) the United States tax payable by the corporation in respect of the profits out of which such dividend is paid.
(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 State, except that where the United States taxes on the basis of citizenship, the United Kingdom shall not be bound to give credit to a United States national who is resident in the United Kingdom on income from sources outside the United States as determined under the laws of the United Kingdom and the United States shall not be bound to give credit for United Kingdom tax on income received by such national from sources outside the United Kingdom, as determined under the laws of the United States.
(4) The provisions of this Article shall not affect the taxation by the United States of foreign oil and gas extraction income and foreign oil related income as provided in the Tax Reduction Act of 1975.
CONCLUSION OF THE COMMISSIONERS
"64. We consider that the way out of the circle in which both States tax on a residence basis and on a literal reading of the Treaty both give credit is to consider who has the stronger taxing right. Undoubtedly this is the UK. We are taxing a UK resident on (who we found in relation to Unilateral Relief) UK source income, that is to say taxing on a residence plus source basis. The US is disregarding the UK tax payer but impliedly acknowledging that the UK has the better right to tax by saying that its taxation is by virtue of the saving clause. …… accordingly the first taxing right is with the UK. There is no credit to be given because at that stage there is no US tax because the saving clause only comes in to operation if the Treaty (excluding the saving clause) prevents the US from taxing".
ISSUE 3 : SECTION 795A OF THE TAXES ACT 1988
"795A.— Limits on credit: minimisation of the foreign tax.
(1) The amount of credit for foreign tax which, under any arrangements, is to be allowed against tax in respect of any income or chargeable gain shall not exceed the credit which would be allowed had all reasonable steps been taken—
(a) under the law of the territory concerned, and
(b) under any arrangements [in relation to]2 that territory,
to minimise the amount of tax payable in that territory.
(2) The steps mentioned in subsection (1) above include—
(a) claiming, or otherwise securing the benefit of, reliefs, deductions, reductions or allowances; and
(b) making elections for tax purposes.
(3) For the purposes of subsection (1) above, any question as to the steps which it would have been reasonable for a person to take shall be determined on the basis of what the person might reasonably be expected to have done in the absence of relief under this Part against tax in the United Kingdom".
DISCUSSION
a. The idea that a person can be required to mitigate by not doing the transaction is simply untenable. No one would ever obtain any relief.
b. The idea that the disregard of the existence of the UK tax relief means that (in this case) the impact of that is considered in the other state's law and thus (in this case) would lead to a disregard of the transaction in its entirety is equally untenable.
c. The purpose of the disregard is simply to require the transaction that gives rise to the tax liability to be considered on the basis of the transaction taking place in the other state. The tax payer then must take all reasonable steps to reduce that foreign tax liability. By requiring the availability of the relief in the UK to be disregarded it means that one simply looks at the transaction by the tax payer in respect of the relevant foreign jurisdiction and the tax laws applicable thereto. The removal of the presence of the credit is to ensure that a tax payer pursues all steps that are necessary to mitigate the foreign tax and cannot fail to do things because it is aware it can recoup the tax payable overseas by applying it against its tax bill in the UK. An example will suffice. Suppose a tax payer received a higher assessment for tax that was appealably wrong. As part of the mitigation exercise it would be required to expend money to challenge the decision. It cannot simply choose not to appeal because it can recoup its losses by not appealing against the credit available in the UK.
d. It is equally clear that one looks at the taxpayer and looks at all steps that that taxpayer can reasonably take. That in my view will extend to any third parties that a taxpayer can reasonably compel to take steps in order to reduce the tax liability which otherwise it would incur in the foreign state. Another example will suffice. Suppose hypothetically a tax liability could be reduced by a subsidiary of the taxpayer serving a notice or doing some other act within its power. It seems to me plain that the taxpayer which controls the subsidiary would be in a position to compel it to do something and must do so, so as to reduce its tax liability.
e. The amount of tax payable in the foreign state is calculated by reference to the transaction as it is. Absent an anti-avoidance challenge or a challenge to the genuineness of the transaction (and there is none in this case) it is not open to HMRC in my view to say that other parties which are not compellable by the taxpayer could serve notices or do other things which would reduce the foreign based tax bill. I do not see how it can be reasonable to take into account something which is beyond the control of the taxpayer in question. If the taxpayer has officers which are identical to officers in other companies in respect to the transaction there may be a possibility of arguing that the taxpayer is in a position reasonably to mitigate its loss. However as I have said that does not extend in my view to altering the transaction. One looks at the tax which arises as a result of the transaction and sees what steps can be reasonably required of the taxpayer in order to reduce that bill.
CONCLUSION