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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Hill Samuel Investments Ltd v Revenue & Customs [2009] UKSPC SPC00738 (20 February 2009) URL: http://www.bailii.org/uk/cases/UKSPC/2009/SPC00738.html Cite as: [2009] STC (SCD) 315, 11 ITL Rep 734, [2009] STI 695, [2009] UKSPC SPC738, [2009] UKSPC SPC00738 |
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Spc00738
DOUBLE TAXATION RELIEF – effect of s 795A Taxes Act 1988 – whether the reasonable steps include entering into a different transaction – no – appeal allowed
THE SPECIAL COMMISSIONERS
HILL SAMUEL INVESTMENTS LIMITED Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS Respondents
Special Commissioners: DR JOHN F. AVERY JONES CBE
EDWARD SADLER
Sitting in public in London on 9 February 2009
David Milne QC and Rupert Baldry, counsel, instructed by Linklaters LLP, for the Appellant
David Ewart QC and Mr Richard Vallat, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
HSIL and background
(1) Hill Samuel Investments Limited ("HSIL") is, and was at all relevant times, a private limited company incorporated in England and Wales and resident in the UK for the purposes of UK tax.
(2) HSIL was at all relevant times, a direct 100 per cent. subsidiary of Lloyds TSB Bank Plc ("LTSB Bank"), which was at all relevant times, a direct 100 per cent. subsidiary of Lloyds TSB Group Plc ("LTSB"), a public limited company incorporated in England and Wales and listed on the London Stock Exchange.
(3) HSIL's claim for double taxation relief arises from its being a partner in two separate and unrelated partnerships, each of which was established under the laws of Delaware in the US: "US Partnership A" and "US Partnership B" (each a "US Partnership" and together the "US Partnerships").
(4) Although there was no relationship between the two US Partnerships, they were both structured in similar ways, as illustrated in figures 1 and 2 below, which show the structure of the US Partnerships prior to and following HSIL becoming a partner.
Structure Diagrams
Figure 1 - structure diagram of the US Partnerships prior to HSIL becoming a partner
.png)
Figure 2 - structure diagram of the US Partnerships with HSIL as a partner
.png)
Detailed description of the transactions
This description of HSIL's involvement in the US Partnerships (the "Transactions") is in three sections:
(a) Section A describes the US Partnerships and the income which arose to the US Partnerships during the year ended 31 December 2000 (the "2000 Period") and the year ended 31 December 2001 (the "2001 Period") (together the "Periods");
(b) Section B describes the US Federal Income Tax ("US Tax") treatment of the Transactions; and
(c) Section C describes what the US Tax treatment of the Transactions would have been had the US Partnerships not made elections for US Tax purposes, known as "check-the-box" elections (each an "Election"), to be treated as corporations for US Tax purposes.
Section A - the US Partnerships and the income which arose to the US Partnerships during the Periods
The US Partnership A Transaction ("Transaction A")
The establishment of US Partnership A
(5) US Partnership A is a general partnership which was established under the laws of Delaware between "US Manager Partner A" and "US Partner A" pursuant to a general partnership agreement dated 28 September 1999 ("US Partnership Agreement A").
(6) US Manager Partner A and US Partner A are, and were at all relevant times, limited liability companies established under the laws of Delaware, resident for tax purposes in the US and direct 100 per cent. subsidiaries of "US Co A".
(7) US Co A is, and was at all relevant times, a corporation established under the laws of Delaware, resident for tax purposes in the US and an indirect subsidiary of "US Counterparty A".
(8) None of US Manager Partner A, US Partner A, US Co A and US Counterparty A is or has at any time been related to any member of the LTSB group.
(9) US Partnership A elected to be treated as a corporation for US Tax purposes by means of a check-the-box election ("Election A") made on 21 October 1999 and effective from 14 October 1999[1].
(10) At no time was any person other than US Manager Partner A entitled to make Election A on behalf of US Partnership A.
(11) Prior to HSIL's investment in US Partnership A, the assets of the partnership consisted of US$1000.
HSIL becoming a partner in US Partnership A
(12) By a procurement agreement dated 28 December 1999 US Co A agreed with US Partnership A that it would procure a third party to (or would itself) be admitted as a partner of US Partnership A and make a contribution of £350 million to the capital of US Partnership A.
(13) By an invitation letter dated 28 December 1999 US Co A invited HSIL to become a partner in US Partnership A and make a £350 million contribution to the capital of US Partnership A ("US Partnership A Interest").
(14) By an admission agreement dated 31 January 2000 ("Admission Agreement A") US Manager Partner A and US Partner A agreed to admit HSIL as a general partner of US Partnership A upon a contribution to the capital of US Partnership A of £350 million being made by HSIL. The capital accounts of the partners following HSIL becoming a partner were US Manager Partner A US$88,128,258.40 (11.95%), US Partner A US$81,349,161.60 (11.03%) and HSIL US$568,225,000.00 (equivalent to £350m) (77.02%).
(15) US Manager Partner A and US Partner A made various factual representations and warranties to HSIL in accordance with Admission Agreement A, including that Election A had been made previously.
(16) Pursuant to Admission Agreement A and an amended version of US Partnership Agreement A dated 31 January 2000, US Partnership A's profits and losses were allocated 95 per cent. to HSIL, 2.6 per cent. to US Manager Partner A, and 2.4 per cent. to US Partner A.
(17) US Partnership A subscribed US$737,702,420 of its capital for shares in a US company that invested in publicly traded debt securities ("FASIT Prefs"), which carried the right to a fixed monthly dividend payable in sterling on the first business day of each month and which comprised the "regular interests" of a corporation that qualified as a Fixed Asset Securitisation Investment Trust (a "FASIT") for US Tax purposes.
(18) Substantially all of US Partnerships A's income while HSIL was a partner was derived from the source described in paragraph 17 above.
(19) By an agreement dated 31 January 2000 ("Retirement Agreement A") HSIL agreed to retire from, and US Co A agreed to be admitted to, US Partnership A on a date falling on or around 31 December 2004, subject to provisions providing for such retirement and admission to take place earlier in specified circumstances. Retirement Agreement A provided for US Co A to pay to HSIL, on the date of such retirement and admission, £350 million (being the capital contributed to US Partnership A by HSIL) subject to certain adjustments. Retirement Agreement A acknowledged that under Delaware partnership law, HSIL was and remained a partner of US Partnership A and was entitled to receive distributions from US Partnership A for its own account at all times on or prior to HSIL's retirement pursuant to Retirement Agreement A.
The 2000 Period
(20) During the part of the 2000 Period for which HSIL was a partner[2]:
(a) US Partnership A's income (before tax) totalled US$45,208,462 (the "2000 A Income"). The 2000 A Income represented dividends on the FASIT Prefs of US$45,241,702 less expenses of US$33,240;
(b) US Partnership A was subject to, and paid, US Tax of US$15,822,962 on the 2000 A Income;
(c) HSIL's proportionate share of the 2000 A Income was US$42,948,039 (the "2000 HSIL A Income"); and
(d) HSIL received the 2000 HSIL A Income net of its proportionate share of US Tax, which was US$15,031,814, i.e. it received £18,415,833[3].
The 2001 Period
(21) During the 2001 Period[4]:
(a) US Partnership A's income (before tax) totalled US$47,059,848 (the "2001 A Income"). The 2001 A Income represented US$47,094,563 of dividends on the FASIT Prefs less expenses of US$34,715;
(b) US Partnership A was subject to, and paid, US Tax of US$16,470,947 on the 2001 A Income;
(c) HSIL's proportionate share of the 2001 A Income was US$44,706,856 (the "2001 HSIL A Income"); and
(d) HSIL received the 2001 HSIL A Income net of its proportionate share of US Tax which was US$15,647,400, i.e. it received £20,090,000[5].
The US Partnership B Transaction ("Transaction B")
The establishment of US Partnership B
(22) US Partnership B is a general partnership which was established under the laws of Delaware between "US Manager Partner B" and "US Partner B" pursuant to a general partnership agreement dated 16 December 1998 ("US Partnership Agreement B").
(23) US Manager Partner B and US Partner B are, and were at all relevant times, limited liability companies established under the laws of Delaware, resident for tax purposes in the US and direct 100 per cent. subsidiaries of "US Co B".
(24) US Co B is, and was at all relevant times, a corporation established under the laws of Delaware resident for tax purposes in the US and an indirect subsidiary of "US Counterparty B".
(25) None of US Manager Partner B, US Partner B, US Co B and US Counterparty B is or has at any time been related to any member of the LTSB group.
(26) US Partnership B elected to be treated as a corporation for US Tax purposes by means of a check-the-box election ("Election B") made on 20 January 1999 and effective from 16 December 1998.[6]
(27) At no time was any person other than US Manager Partner B entitled to make Election B on behalf of US Partnership B.
HSIL becoming a partner in US Partnership B
(28) By an invitation letter dated 2 May 2000 US Co B invited HSIL to become a partner in US Partnership B and make a £350 million contribution to the capital of US Partnership B ("US Partnership B Interest").
(29) By an admission agreement dated 2 May 2000 ("Admission Agreement B") US Manager Partner B and US Partner B agreed to admit HSIL as a general partner of US Partnership B upon a contribution to the capital of US Partnership B of £350 million being made by HSIL. US Manager Partner B then made a capital repayment to US Co B following which the capital accounts of the partners were US Manager Partner B US$158,605,180 (20.77%), US Partner B US$53,591,630 (7.02%) and HSIL US$551,250,000.00 (equivalent to £350m) (72.21%).
(30) As a condition to HSIL becoming a partner in US Partnership B, US Co B made various factual representations and warranties to HSIL relating to the state of US Co B, US Partner B, US Manager Partner B and US Partnership B, including that Election B had been made previously.
(31) Pursuant to Admission Agreement B and an amended version of US Partnership Agreement B dated 2 May 2000, US Partnership B's profits and losses were allocated 99 per cent. to HSIL, 0.75 per cent. to US Manager Partner B, and 0.25 per cent. to US Partner B.
(32) US Partnership B:
(a) subscribed US$225,000,000 of its capital for shares in a US company that invested in US real estate assets ("REIT Prefs"), which carried the right to a fixed quarterly dividend payable on the 15th April, 15th June, 15th September and 15th December; and
(b) invested US$540,616,520 of its capital in an interest in certain let commercial property (the "Property"), on which the lessee of the Property was required to make rental payments quarterly on the same dates as in 32.1 above at all relevant times.
(33) All of US Partnerships B's income while HSIL was a partner was derived from the two sources described in paragraph 32 above. The investment in the Property had already been made prior to HSIL's admission as a partner.
(34) By an agreement dated 2 May 2000 ("Retirement Agreement B") HSIL agreed to retire from, and US Co B agreed to be admitted to, US Partnership B on a date falling on or around 31 March 2005 subject to provisions providing for such retirement and admission to take place earlier in specified circumstances. Retirement Agreement B provided for US Co B to pay to HSIL, on the date of such retirement and admission, £350 million (being the capital contributed to US Partnership B by HSIL) subject to certain adjustments. Retirement Agreement B acknowledged that under Delaware partnership law HSIL was and remained a partner of US Partnership B and was entitled to receive distributions from US Partnership B for its own account at all times on or prior to HSIL's retirement pursuant to Retirement Agreement B.
The 2000 Period
(35) During the 2000 Period:
(a) for the part of the year for which HSIL was a partner, US Partnership B's income (before tax) totalled US$28,726,000 (the "2000 B Income"). The 2000 B Income represented US$18,346,000 derived from the Property and US$10,720,000 of dividends on the REIT Prefs, net of a US$340,000 foreign exchange related loss;
(b) US Partnership B was subject to, and paid, US Tax of US$13,556,379 on the income for the full calendar year. US$10,054,000 was attributable to the period 2 May to 31 December;
(c) HSIL's proportionate share of the 2000 B Income was US$28,439,000 (the "2000 HSIL B Income"); and
(d) HSIL received the 2000 HSIL B Income net of its proportionate share of US Tax, which was US$9,953,000, i.e. it received US$18,486,000[7].
The 2001 Period
(36) During the 2001 Period:
(a) US Partnership B's income (before tax) totalled US$42,986,988 (the "2001 B Income"). The 2001 B Income represented US$27,085,505 derived from the Property and US$16,041,544 of dividends on the REIT Prefs, net of a US$140,061 foreign exchange related loss;
(b) US Partnership B was subject to, and paid, US Tax of US$15,045,446 on the 2001 B Income;
(c) HSIL's proportionate share of the 2001 B Income was US$42,557,118 (the "2001 HSIL B Income"); and
(d) HSIL received the 2001 HSIL B Income net of its proportionate share of US Tax, which was US$14,894,991, i.e. it received US$27,662,127[8].
Section B - The US Tax Treatment of the Transactions
Transaction A
(37) For US Tax purposes, at all relevant times:
(a) US Co A was a corporation resident in the US and was not treated as part of US Counterparty's consolidated group;
(b) US Manager Partner A and US Partner A were each treated as transparent entities (i.e., as branches of US Co A) and were both therefore treated as branches of US Co A;
(c) as a result of Election A having been made, US Partnership A was treated as a corporation resident in the US rather than a partnership; and
(d) US Co A did not elect to file a consolidated US Tax return with US Partnership A.[9] Accordingly, each of US Co A and US Partnership A was severally liable for US Tax liabilities on its own income.[10]
Prior to HSIL becoming a partner
(38) Prior to HSIL becoming a partner in US Partnership A, US Co A was treated for US Tax purposes as owning all of the equity interests in US Partnership A.
Following HSIL becoming a partner
(39) Following HSIL becoming a partner in US Partnership A the US Tax treatment did not follow the legal form: US Co A was treated for US Tax purposes as if (a) it owned HSIL's interest in US Partnership A, i.e. it were the equity owner instead of HSIL; and (b) it had borrowed from HSIL an amount equal to HSIL's contribution to the capital of US Partnership A.[11] The interest rate on the deemed loan was treated as an amount determined by reference to the terms of Retirement Agreement A. US Co A accrued deductions in respect of the deemed interest independently of the income being earned by or withdrawn from US Partnership A.
The treatment of the income
(40) In accordance with the treatment set out above, the 2000 A Income and the 2001 A Income (together the "A Income"), including the 2000 HSIL A Income and the 2001 HSIL A Income, was treated for US Tax purposes as being income of US Partnership A.
(41) Consequently, US Partnership A was liable for US Tax on that income and the A Income was subject to US Tax at the rate of 35 per cent., as set out at paragraphs 20 and 21 above.
(42) US Partnership A filed its own US Tax returns for the 2000 Period and the 2001 Period and paid the US Tax it was legally liable for [12].
(43) Since a loan was treated as having been made from HSIL to US Co A[13], US Co A was treated as having borrowed an amount equal to HSIL's capital contribution and withdrawals of profit from US Partnership A by HSIL were treated as distributions paid to US Co A followed by payments by US Co A to HSIL under the deemed loan. Similarly, payment by US Co A to HSIL under Retirement Agreement A was treated as payment of any remaining interest and principal in respect of the deemed loan[14].
(44) By reason of US Co A's deemed ownership of HSIL's interest in US Partnership A for US Tax Purposes, any net A Income deemed to be distributed to US Co A by US Partnership A was not subject to any additional US Tax in US Co A's hands[15].
US Co
(45) For US Tax purposes, US Co A had received net taxable income of US$494,854 for the 2000 Period and net taxable income of US$125,642 for the 2001 Period. In each case, the gross income reflected in those amounts was primarily attributable to assets and activities unrelated to its being a partner in US Partnership A.
(46) US Co A was liable for, and paid, US Tax of US$173,199 for the 2000 Period and US$43,975 for the 2001 Period.
Transaction B
(47) For US Tax purposes, at all relevant times:
(a) US Co B was a corporation resident in the US and was not treated as part of US Counterparty's consolidated group;
(b) US Manager Partner B and US Partner B were each treated as transparent entities (i.e., as branches of US Co B) and were both therefore treated as branches of US Co B;
(c) as a result of the Election having been made, US Partnership B was treated as a corporation resident in the US rather than a partnership; and
(d) US Co B did not elect to file a consolidated US Tax return with US Partnership B.[16] Accordingly, each of US Co B and US Partnership B was severally liable for US Tax liabilities on their own income. [17]
Prior to HSIL becoming a partner
(48) Prior to HSIL becoming a partner in US Partnership B, US Co B was treated for US Tax purposes as owning all of the equity interests in US Partnership B.
Following HSIL becoming a partner
(49) Following HSIL becoming a partner in US Partnership B the US Tax treatment did not follow the legal form: US Co B was treated for US Tax purposes as if (a) it owned HSIL's interest in US Partnership B, i.e. it were the equity owner instead of HSIL; and (b) it had borrowed from HSIL an amount equal to HSIL's contribution to the capital of US Partnership B.[18] The interest rate on the deemed loan was treated as an amount determined by reference to the terms of Retirement Agreement B. US Co B accrued deductions in respect of the deemed interest independently of the income being earned by or withdrawn from US Partnership B.
The treatment of the income
(50) In accordance with the treatment set out above, the 2000 B Income and the 2001 B Income (together the "B Income"), including the 2000 HSIL B Income and the 2001 HSIL B Income, was treated for US Tax purposes as being income of US Partnership B.
(51) Consequently, US Partnership B was liable for US Tax on that income and the Income was subject to US Tax at the rate of 35 per cent., as set out at paragraphs 35 and 36 above.
(52) US Partnership B filed its own US Tax returns for the 2000 Period and the 2001 Period and paid the US Tax it was legally liable for. [19]
(53) Since a loan was treated as having been made from HSIL to US Co B,[20] US Co B was treated as having borrowed an amount equal to HSIL's capital contribution and withdrawals of profit from US Partnership B by HSIL were treated as distributions paid to US Co B followed by payments by US Co B to HSIL under the deemed loan. Similarly, payment by US Co B to HSIL under Retirement Agreement B was treated as payment of any remaining accrued interest and principal in respect of the deemed loan[21].
(54) By reason of US Co B's deemed ownership of HSIL's interest in US Partnership B for US Tax Purposes, any net B Income deemed to be distributed to US Co B by US Partnership B was not subject to any additional US Tax in US Co B's hands.[22]
US Co
(55) For US Tax purposes, US Co B had received net taxable income of US$211,217,493 for the 2000 Period and net taxable income of US$330,698,556 for the 2001 Period. In each case, the gross income reflected in those amounts was primarily attributable to assets and activities unrelated to its being a partner in US Partnership B.
(56) US Co B was liable for, and paid, US Tax of US$73,926,123 for the 2000 Period and US$115,744,495 for the 2001 Period.
Part C - The US Tax treatment of the Transactions had the Counterparties not made the Elections
Transaction A
(57) At all relevant times for US Tax purposes:
(a) US Co A, US Manager Partner A and US Partner A would each have been treated as described in paragraphs 37 in the same manner as was the case with the Election having been made; and
(b) US Partnership A would have been treated as a transparent (or "disregarded") entity and would therefore have been treated as a branch of US Co A. [23]
Prior to HSIL becoming a partner
(58) Prior to HSIL becoming a partner in US Partnership A, US Co A would have been treated for US Tax purposes as owning all of the assets of US Partnership A. [24]
Following HSIL becoming a partner
(59) Following HSIL becoming a partner in US Partnership A US Co A would have been treated for US Tax purposes as if (a) it owned HSIL's interest in US Partnership (as at paragraph 39 above); and (b) it had borrowed from HSIL an amount equal to HSIL's contribution to the capital of US Partnership A[25]. Again, the interest rate on the deemed loan would have been treated as an amount determined by reference to the terms of Retirement Agreement A. US Co A would have accrued deductions in respect of the deemed interest independently of the income being earned by or withdrawn from US Partnership A.
The treatment of the Income
(60) The A Income, including the HSIL A Income, would have been treated for US Tax purposes as income of US Co A. Withdrawals of profit from US Partnership A by HSIL would have been treated as withdrawals of profits by US Co A followed by payments by US Co A to HSIL under the deemed loan, and payment by US Co A to HSIL pursuant to Retirement Agreement A would have been treated as payments of any remaining accrued interest and principal by US Co A on the deemed loan. US Co A would have been entitled to the same deemed interest deductions in respect of that deemed loan that it was entitled to with Election A having been made.
(61) Consequently, the A Income would have been subject to US Tax at the rate of 35 per cent. [26].
(62) In determining US Co A's US tax liability, US Co A would include the gross income from US Partnership A along with all its other items of gross income and include the accrued interest deductions on the deemed loan with all of its other items of deduction. It would not be possible for US Co A to somehow elect for the accrued interest deductions to be set against a specific item of income such as the income from US Partnership A.
US Co A
(63) For US Tax purposes US Co A would have had taxable income of US$45,703,316 for the 2000 Period and taxable income of US$47,185,490 for the 2001 Period.
(64) US Co A would have been liable for US Tax of US$15,996,161 for the 2000 Period and US$16,514,922 for the 2001 Period.
(65) The taxable income of US Co A for each of the part of the 2000 Period when HSIL was a partner and the 2001 Period as stated in paragraph 76 above would have been higher by US$45,208,462 and US$47,059,848 respectively, precisely the amount of taxable income of US Partnership in each of the Periods where the Election was in effect.
(66) The US Tax liability of US Co for each of the part of the 2000 Period when HSIL was a partner and the 2001 Period as stated in paragraph 77 above would have been higher by US$15,822,962 and US$16,470,947 respectively, precisely the amount of the US Tax liability of US Partnership in each of the Periods where the Election was in effect. See paragraphs 20 and 21 above.
Transaction B
(67) At all relevant times for US Tax purposes:
(a) US Co B, US Manager Partner B and US Partner B would each have been treated as described in paragraph 47 in the same manner as was the case with the Election having been made; and
(b) US Partnership would have been treated as a transparent (or "disregarded") entity and would therefore have been treated as a branch of US Co B[27].
Prior to HSIL becoming a partner
(68) Prior to HSIL becoming a partner in US Partnership B, US Co B would have been treated for US Tax purposes as owning all of the assets of US Partnership B[28].
Following HSIL becoming a partner
(69) Following HSIL becoming a partner in US Partnership US Co B would have been treated for US Tax purposes as if (a) it owned HSIL's interest in US Partnership B (as at paragraph 49 above); and (b) it had borrowed from HSIL an amount equal to HSIL's contribution to the capital of US Partnership B[29]. Again, the interest rate on the deemed loan would have been treated as an amount determined by reference to the terms of Retirement Agreement B. US Co B would have accrued deductions in respect of the deemed interest independently of the income being earned by or withdrawn from US Partnership B.
The treatment of the Income
(70) The B Income, including the HSIL B Income, would have been treated for US Tax purposes as income of US Co B Withdrawals of profit from US Partnership B by HSIL would have been treated as withdrawals of profits by US Co B followed by payments by US Co B to HSIL under the deemed loan, and payment by US Co B to HSIL pursuant to Retirement Agreement B would have been treated as payments of any remaining accrued interest and principal by US Co B on the deemed loan. US Co B would have been entitled to the same deemed interest deductions in respect of that deemed loan that it was entitled to with Election B having been made.
(71) Consequently, the B Income would have been subject to US Tax at the rate of 35 per cent. [30].
(72) In determining US Co B's US tax liability, US Co B would include the gross income from US Partnership B along with all its other items of gross income and include the accrued interest deductions on the deemed loan with all of its other items of deduction. It would not be possible for US Co B to somehow elect for the accrued interest deductions to be set against a specific item of income such as the income from US Partnership B.
US Co
(73) For US Tax purposes US Co B would have had taxable income of US$249,950,005 for the 2000 Period and taxable income of US$373,685,544 for the 2001 Period.
(74) US Co would have been liable for US Tax of US$87,482,502 for the 2000 Period and US$130,789,940 for the 2001 Period.
(75) The taxable income of US Co for each of the part of the 2000 Period when HSIL was a partner and the 2001 Period as stated in paragraph 73 above would have been higher by US$28,726,000 and US$42,986,988 respectively, precisely the amount of taxable income of US Partnership in each of the Periods where the Election was in effect.
(76) The US Tax liability of US Co for each of the part of the 2000 Period when HSIL was a partner and the 2001 Period as stated in paragraph 74 above would have been higher by US$10,054,000 and US$15,045,446 respectively, precisely the amount of the US Tax liability of US Partnership in each of the Periods where the Election was in effect. See paragraphs 35 and 36 above.
Chronology of Events
| Date | ||
| Transaction A | Transaction B | |
| 16 December 1998 | US Partnership Established | |
| 16 December 1998 | Effective date of Election | |
| 20 January 1999 | Election made | |
| 28 September 1999 | US Partnership is established | |
| 14 October 1999 | Effective date of Election | |
| 21 October 1999 | Election made | |
| 31 January 2000 | HSIL invests in US Partnership | |
| 2 May 2000 | HSIL invests in US Partnership | |
| During 2000 and 2001 | HSIL receives income from the US Partnership net of US Tax paid by the US Partnership | HSIL receives income from the US Partnership net of US Tax paid by the US Partnership |
"VIII. US TAX CONSEQUENCES IF, IN LIEU OF IMPLEMENTING THE TRANSACTIONS, HSIL HAD MADE LOANS OF £350 MILLION EACH TO US CO A AND US CO B, ASSUMING IN THE FIRST INSTANCE THAT THE ELECTIONS WERE MADE, AND ASSUMING IN THE ALTERNATIVE THAT THE ELECTIONS WERE NOT MADE
The analysis in this Part VIII considers US Tax consequences if HSIL had made loans of £350 million each to US Co A and US Co B, with fixed interest payable at the same rates determined under the Retirement and Acquisition Agreements (i.e., 5.74% per annum payable monthly in relation to Transaction A and 5.5205% per annum payable quarterly in relation to Transaction B), assuming in the first instance that the Elections were made, and assuming in the alternative that the Elections were not made. For convenience, this fact pattern is referred to as Hypothetical 5.
The US Tax consequences of this Hypothetical 5 are the same as those set forth in Section B of the Statement of Facts (if it is assumed that the Elections were made) and Section C of the Statement of Facts (if it is assumed that the Elections were not made). If the loans in Hypothetical 5 were considered separately from the investments in the US Partnerships (or any other use of the loan proceeds or other capital by US Co A or US Co B), the only US Tax consequences would be as follows: (i) US Co A and US Co B would be entitled to deduct the interest payable to HSIL, and (ii) the interest income earned by HSIL would be exempt from US Tax pursuant to the Treaty."
"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 with the government of 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."
(1) One starts with the assumption in sub-s (3) that double taxation relief does not exist in the UK, and asks what reasonable steps would have been taken in the US. His answer is that instead of the partnership arrangements the Appellant would have made a loan to US Company, which is how the transaction is treated in the US. Since the Appellant would then have received interest on which there is no US withholding tax under the US-UK tax treaty (1975) there would be no US tax to credit – in a situation where there was no double tax relief the Appellant would have optimised its position by avoiding a situation where there was double tax.
(2) The Tribunal should find as a fact that in the absence of credit in the UK assumed by sub-s (3) the Appellant would have made a loan to US Company.
(3) Subsection (2) is an inclusive definition of the steps that it would be reasonable for a taxpayer to take. The steps listed relate to action that might be taken after the transaction in case there was doubt about whether they were included.
(4) In substance the documents create a relationship that is close to being a loan. For example, the repayment of the Appellant's partnership capital and the re-purchase of its interest at a pre-determined price is guaranteed, as is the distribution of partnership income; the Appellant is prevented from taking part in the management of the partnership; the partnership income is at a fixed rate and equates to interest.
(5) The person taking the steps need not be the person claiming the relief. Relief can be claimed for income of another person, for example underlying tax and it must be in contemplation of the section that the other person has to take the steps.
(1) The reasonable steps must be steps which were open to the taxpayer who is claiming relief. Parliament can hardly have intended that a person should be deprived of relief under a double tax treaty by the actions, or inactions, of a third party over which he had no control. The only person who might reasonably be expected to act differently in the absence of a relief by sub-s (3) is the person who is actually claiming the relief in question.
(2) The list of steps included in sub-s (2) are all procedural steps which may be taken under the foreign tax regime or under the treaty after the transaction to reduce the amount of tax payable in the foreign territory. Entering into a different transaction is not a "step" at all, and is wholly different from the steps mentioned in sub-s (2). It would also not be reasonable to take a step that fundamentally changed the economics of the commercial deal. Although sub-s (2) is an inclusive definition it is a possible meaning that it "means and includes" the listed items, see Dilworth v Commissioner of Stamps [1899] AC 99 at 105-6. At the least the steps have to be the sort of steps that are listed in sub-s (2).
(3) The steps must reduce the overall amount of foreign tax payable not simply the amount for which credit is available. It cannot mean the creditable tax because the hypothesis in sub-s (3) assumes that there is no creditable tax.
(4) There were no steps which the Appellant could have taken that would have reduced the amount of tax payable in the US on the transactions actually entered into.
"The statutory purpose of that subsection is to determine what steps are reasonable to take. If the UK gives credit for the full amount of foreign tax claimed, if subs (3) had not existed it could be argued that the person was not reasonably required to take steps which will make no difference to his tax position. The purpose is clearly that the UK will not give credit for foreign tax that the person could by taking reasonable steps have reduced. In order to determine what is reasonable subs (3) imposes the hypothesis that no credit is available and so any reduction in foreign tax benefits the person concerned (as opposed to the UK exchequer in the absence of the hypothesis), so that the issue becomes what steps are reasonable for the person to take in order to obtain the benefit to him of the saving of foreign tax."
We have not changed our views. On the third issue, we said that by implication from sub-s (3) the person who has to take the steps must be the person claiming credit. Mr Ewart contends that the section must be wider than that because of the possibility that the steps have to be taken by the taxpayer in the other state, or an election may be required to be a joint election. We agree with this but only insofar as the taxpayer is in a position to influence the taking of the steps by the other person. One of HMRC's examples given in the International Tax Manual at INTM 164140 where the section does not apply is "the case of underlying tax paid by a subsidiary company when the United Kingdom company, which claims the relief for that tax, is not in a position to influence the amount of tax paid." We agree with this approach. A UK parent company is not without influence on its subsidiaries but legally the influence is that of a shareholder who can remove the directors but cannot dictate how the subsidiary will be run. The UK parent company can lean on the directors to carry out its wishes in claiming tax reliefs but ultimately it is a matter for the directors of the subsidiary. We therefore consider that while the person taking the steps may include persons other than the taxpayer claiming relief, the steps must be those that the taxpayer is in a position to influence.
"that the US Group could borrow from [the Appellant], in A, at a rate of 5.74% but because [the Appellant] received that interest tax-free (it was hoped), it was equivalent to a gross receipt of 8.2%. The tax benefit of 2.46% was then shared between the two Groups by way of an interest rate swap that transferred 1.105% (45% of the benefit) back to US Co. So the overall lending arrangement allowed the US Group to borrow at LIBOR minus 1.105%, and [the Appellant] to lend at LIBOR plus 1.355%, the sum total of these margins being the 2.46% tax benefit. Transaction B also involved currency swaps but the net effect was similar; the share in that transaction was 50/50 of the tax benefit."
If one makes the assumption that there is no credit in the UK so that there was no benefit to either party in making a loan we decline to find that they would have entered into a loan transaction at a higher rate of interest to the borrower and a lower receipt by the lender. We consider that the US Company would have said to the Appellant that it was not interested in dealing with the Appellant, and the US Company would have instead approached, say, a Canadian bank to enter into substantially the same transaction as was entered into here.
SC 3102/06
Authorities referred to in skeletons and not referred to in the decision:
Bricom Holdings Ltd v IRC [1997] STC 1179
R v Warner [1969] 2 AC 256
Pepper v Hart [1993] AC 593
R v Environment Secretary, ex p. Spath Holme Ltd [2001] 2 AC 349
Note 1 US Treasury Regulation §304.7701-03. [Back] Note 2 The US$ values in paragraph 20 are taken from the relevant US Tax returns of US Partnership A. [Back] Note 3 Distributions to HSIL were made in sterling. The US$ equivalent was US$27,916,225. [Back] Note 4 The US$ values in paragraph 21 are taken from the relevant US Tax returns of US Partnership A. [Back] Note 5 Distributions to HSIL were made in sterling. The US$ equivalent was US$29,059,456. [Back] Note 6 US Treasury Regulation §304.7701-03. [Back] Note 7 The sterling equivalent (as per HSIL’s tax return) was £12,773,890. [Back] Note 8 The sterling equivalent (as per HSIL’s tax return) was £20,089,997. [Back] Note 9 Internal Revenue Code §1501 (filing of consolidated returns is not mandatory in these circumstances). [Back] Note 10 Internal Revenue Code §11 (tax imposed on the income of a corporation); cf. Treasury Regulation §1.1502-6 (joint and several liability for members of a consolidated tax group for the entire group’s liability); no such joint liability without a consolidated return. [Back] Note 11 Loewenstein v Nebraska, 513 U.S. 123 (1994) (United States Supreme Court held that a sale and repurchase agreement is treated as a loan for U.S. Tax purposes); Revenue Ruling 83-47, 1983-1 C.B. 63 (1983) (a sale and repurchase agreement is treated as a loan for U.S. Tax purposes). The conclusions reached in these authorities were based on an analysis of the economic substance of the subject transactions, which in each case was very closely comparable to the transactions addressed herein. [Back] Note 12 It was in practice US Manager Partner that filed the returns and paid the taxes on behalf of US Partnership, using funds of US Partnership, in accordance with its responsibilities as set out in US Partnership Agreement. [Back] Note 13 See paragraph 39 above. [Back] Note 14 Plantation Patterns, Inc. v Comm 5, 462 F.2d 712 (5th Circuit 1972), cert denied 409 U.S. 1076 (1972) (the payment by a subsidiary of a debt obligation of its sole stockholder was treated as a distribution by the subsidiary to the stockholder and a payment of interest by the stockholder). [Back] Note 15 Internal Revenue Code §243(a)(3) (100 per cent. dividends received deduction for corporate recipient of dividends from 80 per cent. or greater owned corporation). [Back] Note 16 Internal Revenue Code §1501 (filing of consolidated returns is not mandatory in these circumstances). [Back] Note 17 Internal Revenue Code §11 (tax imposed on the income of a corporation); cf. Treasury Regulation §1.1502-6 (joint and several liability for members of a consolidated tax group for the entire group’s liability; no such joint liability without a consolidated return). [Back] Note 18 Loewenstein v Nebraska, 513 U.S. 123 (1994) (United States Supreme Court held that a sale and repurchase agreement is treated as a loan for U.S. Tax purposes); Revenue Ruling 83-47, 1983-1 C.B. 63 (1983) (a sale and repurchase agreement is treated as a loan for U.S. Tax purposes). The conclusions reached in these authorities were based on an analysis of the economic substance of the subject transactions, which in each case was very closely comparable to the transactions addressed herein. [Back] Note 19 It was in practice US Manager Partner that filed the returns and paid the taxes on behalf of US Partnership, using funds of US Partnership, in accordance with its responsibilities as set out in US Partnership Agreement. [Back] Note 20 See paragraph 49 above. [Back] Note 21 Plantation Patterns, Inc. v Comm 5, 462 F.2d 712 (5th Circuit 1972), cert denied 409 U.S. 1076 (1972) (the payment by a subsidiary of a debt obligation of its sole stockholder was treated as a distribution by the subsidiary to the stockholder and a payment of interest by the stockholder). [Back] Note 22 Internal Revenue Code §243(a)(3) (100 per cent. dividends received deduction for corporate recipient of dividends from 80 per cent. or greater owned corporation). [Back] Note 23 Treasury Regulation §301.7701-3(b)(ii) (non-corporate US entity is disregarded as an entity separate from its owner if it has a single owner). [Back] Note 25 See footnote 11. The US Tax analysis under which the Retirement Agreement is treated as a loan is the same whether or not the Election had been made. [Back] Note 26 Internal Revenue Code §11 (corporations are subject to tax at a rate of 35 per cent. with certain exceptions not relevant to the Transaction. [Back] Note 27 Treasury Regulation §301.7701-3(b)(ii) (non-corporate US entity is disregarded as an entity separate from its owner if it has a single owner). [Back] Note 29 See footnote 11. The US Tax analysis under which the Retirement Agreement is treated as a loan is the same whether or not Election had been made. [Back] Note 30 Internal Revenue Code §11 (corporations are subject to tax at a rate of 35 per cent. with certain exceptions not relevant to Transaction. [Back]