[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] | ||
England and Wales Court of Appeal (Civil Division) Decisions |
||
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Bayfine UK v HM Revenue and Customs [2011] EWCA Civ 304 (23 March 2011) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2011/304.html Cite as: [2011] STC 717, 13 ITL Rep 747, [2012] 1 WLR 1630, [2011] BTC 242, [2011] STI 1208, [2012] Bus LR 796, [2011] EWCA Civ 304 |
[New search] [View without highlighting] [Printable RTF version] [Buy ICLR report: [2012] Bus LR 796] [Buy ICLR report: [2012] 1 WLR 1630] [Help]
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
PETER SMITH J
Strand, London, WC2A 2LL |
||
B e f o r e :
LORD JUSTICE PITCHFORD
and
LORD JUSTICE TOMLINSON
____________________
BAYFINE UK |
Respondent |
|
- and - |
||
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS |
Appellants |
____________________
Jonathan Peacock QC & Mr Francis Fitzpatrick (instructed by Slaughter and May) for the Respondent
Hearing dates : 18-19 November 2010
____________________
Crown Copyright ©
Lady Justice Arden :
The nature of the issues on this appeal
Background
Decision of the Special Commissioners
Judgment of the judge
Formulation of the issues
Issue 1: Is HMRC bound to give relief to BUK under the provisions of the Treaty?
Issue 2: If not, is HMRC bound to allow unilateral relief under section 790 of the 1988 Act?
Issue 3: Was relief restricted by section 795A of the 1988 Act to the extent that BDE could take steps to reclaim UK tax paid in the US?
Issue 1: Is HMRC bound to give relief to BUK under the provisions of the Treaty?
1.1 Interpretation of double taxation treaties
"(1) It is necessary to look first for a clear meaning of the words used in the relevant Article of the convention, bearing in mind that "consideration of the purpose of an enactment is always a legitimate part of the process of interpretation": per Lord Wilberforce ([1981] AC 251 at 272) and Lord Scarman (at 294). A strictly literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty: per Lord Fraser (at 285) and Lord Scarman (at 290). A literal interpretation may be obviously inconsistent with the purposes of the particular Article or of the treaty as a whole. If the provisions of a particular Article are ambiguous, it may be possible to resolve that ambiguity by giving a purposive construction to the convention looking at it as a whole by reference to its language as set out in the relevant United Kingdom legislative instrument: per Lord Diplock (at 279).
(2) The process of interpretation should take account of the fact that—
"The language of an international convention has not been chosen by an English parliamentary draftsman. It is neither couched in the conventional English legislative idiom nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than is an Act of Parliament which deals with purely domestic law. It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd v. Babco Forwarding & Shipping (UK) Limited, [1978] AC 141 at 152, 'unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation': per Lord Diplock (at 281–282) and Lord Scarman (at 293)."
(3) Among those principles is the general principle of international law, now embodied in art 31(1) of the Vienna Convention on the Law of Treaties, that "a treaty should be interpreted in good faith and 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". A similar principle is expressed in slightly different terms in McNair's The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is "the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances". It is also stated in that work (p 366) that references to the primary necessity of giving effect to "the plain terms" of a treaty or construing words according to their "general and ordinary meaning" or their "natural signification" are to be a starting point or prima facie guide and "cannot be allowed to obstruct the essential quest in the application of treaties, namely the search for the real intention of the contracting parties in using the language employed by them"."
"1. 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."
"Desiring to conclude a new Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains;"
1.2: Relevant provisions of the Treaty
"There are two main categories of income: (1) in some cases (art 7 business profits in the absence of a permanent establishment, art 8 shipping and air transport profits, art 11 interest, art 12 royalties, art 18 pensions, art 19 Government service, art 20 teachers, art 21 students and trainees, art 22 other income) income is taxable in one State only; and (2) in other cases (art 6 income from immovable property, art 7 business profits where there is a permanent establishment in the other State, art 10 dividends, art 14 independent personal services, art 15 dependent personal circumstances, art 17 artistes and athletes) income can be taxed in both States, in the case of dividends with a reduction in the source State's taxation, but the residence State has to give relief for the source State tax."
"The business profits of an enterprise of the Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State though a permanent establishment situated therein. …."
"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 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."
"(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) paragraph (4) of Article 4 (Fiscal residence), paragraph (2) of Article 8 (Shipping and air transport), and 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."
1.3 The parties' submissions
1.4 Conclusions on Issue 1
"49. …The effect of art 1(4) is to give the US resident (not it seems a national because of the words 'derived by a resident') taxed by the saving clause the benefit of the Treaty source rule, in the same way as for a US resident taxed in the normal way without the saving clause.
50. The implication of art 1(4) is that if the US taxes under the saving clause as if the Treaty had not come into effect, the specific exception for art 23, and the consequent change in the source of the income by the deemed source rule, means that the giving of credit by the state invoking the saving clause is in contemplation of the Treaty. The state invoking the saving clause on account of residence will be a second residence state and its taxing rights are subsidiary to the residence state applying the Treaty without the saving clause. .."
"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 (as we have 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 taxpayer, but impliedly acknowledging that the UK has the better right to tax by saying that its taxation is by virtue of the saving clause. (If the experts had said that the US taxed because the US was taxing a US corporation (defined to be a resident under the Treaty) on US domestic source income and art 7 (or 22) prevented the UK from taxing, so that we were dealing with a case of two equally competing claims to tax both on a source plus residence basis, the result might be different, and we say nothing about it.) 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 into operation if the Treaty (excluding the saving clause) prevents the US from taxing.
65. The fact that art 1(4) provides that art 23 is applicable even though the saving clause allows taxation as if the Treaty had not come into effect, demonstrates the secondary nature of taxation by virtue of the saving clause either as a secondary residence state, or, if it taxation on the basis of citizenship, that is secondary to taxation on the basis of residence. For the purpose of credit by the US the deemed source rule moves the source to the UK. For this limited purpose the UK has become the source state, although strictly it is the source plus residence state, and the US is now the residence, but not the source, state. The US should therefore give credit for the UK tax, as the experts agree it will once the tax has been paid in the UK. Since art 1(4) refers expressly to art 23 the order of credit must be that if the US taxes by virtue of the saving clause it gives credit for the UK tax. It cannot be said that now that the US has taxed under the saving clause one can go back to the beginning and argue that the UK should give credit first."
"2. Source of Income and Availability of an FTC [Federal Tax Credit]
The Experts are in agreement that under the rules of the Code, the BUK Contract Income would likely have a U.S. source. The Experts are also in agreement that if the BUK Contract Income may be taxed in the United Kingdom under the Treaty and is, in fact, so taxed (i.e., no double tax relief is granted in the U.K.), then this rule of the Code would be overridden by paragraph 3 of Article 23 of the Treaty, with the result that the BUK Contract Income would have been treated as foreign source income for FTC purposes and that therefore an FTC would have been available (under the Part I Assumption where the application of various anti-abuse doctrines is not likely). The Experts also agree that the impact of paragraph 3 of Article 23 of the Treaty on whether the United Kingdom is required to grant double tax relief is a matter of U.K. interpretation."
Issue 2: If not, is HMRC bound to allow unilateral relief under section 790 of the 1988 Act?
"790 Unilateral relief
(1) To 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) Unilateral relief shall be such relief as would fall to be given under Chapter II of this Part if arrangements in relation to the territory in question containing the provisions specified in subsections (4) to (10C) 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) Credit 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 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.."
"793A No double relief etc
(1) Where relief in respect of an amount of tax that would otherwise be payable under the law of a territory outside the United Kingdom may be allowed—
(a) under arrangements made in relation to that territory, or
(b) under the law of that territory in consequence of any such arrangements,
credit may not be allowed in respect of that tax, whether the relief has been used or not.
(2) Where, under arrangements having effect by virtue of section 788, credit may be allowed in respect of an amount of tax, credit by way of unilateral relief may not be allowed in respect of that tax.
(3) Where arrangements made in relation to a territory outside the United Kingdom contain express provision to the effect that relief by way of credit shall not be given under the arrangements in cases or circumstances specified or described in the arrangements, then neither shall credit by way of unilateral relief be allowed in those cases or circumstances."
Issue 3: Was BDE bound to take steps to reclaim UK tax paid and was BUK bound to pay that tax by virtue of section 795A of the 1988 Act?
"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 made in relation to 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."
Conclusions on Issue 3
Disposal of the Issues
Issue 1: Is HMRC bound to give relief to BUK under the provisions of the Treaty?
I would answer this Issue: No.
Issue 2: If not, is HMRC bound to allow unilateral relief under section 790 of the 1988 Act?
I would answer this Issue: No.
Issue 3: Was relief restricted by section 795A of the 1988 Act to the extent that BDE could take steps to reclaim UK tax paid in the US?
In my judgment, in the light of my answer to Issue 2, this does not arise, but if it does I would answer this Issue: No.
Lord Justice Pitchford:
Lord Justice Tomlinson: