Filed: Nov. 18, 1999
Latest Update: Nov. 14, 2018
Summary: 113 T.C. No. 25 UNITED STATES TAX COURT COMPAQ COMPUTER CORPORATION AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 24238-96. Filed November 18, 1999. H, a U.K. corporation, paid a dividend to P, its U.S. parent. Upon payment of the dividend, H, pursuant to the law of the United Kingdom, became liable for and paid advance corporation tax (ACT) and became entitled to a credit against its U.K. corporate tax. H allocated the U.K. credit to its two wholly own
Summary: 113 T.C. No. 25 UNITED STATES TAX COURT COMPAQ COMPUTER CORPORATION AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 24238-96. Filed November 18, 1999. H, a U.K. corporation, paid a dividend to P, its U.S. parent. Upon payment of the dividend, H, pursuant to the law of the United Kingdom, became liable for and paid advance corporation tax (ACT) and became entitled to a credit against its U.K. corporate tax. H allocated the U.K. credit to its two wholly owne..
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113 T.C. No. 25
UNITED STATES TAX COURT
COMPAQ COMPUTER CORPORATION AND SUBSIDIARIES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24238-96. Filed November 18, 1999.
H, a U.K. corporation, paid a dividend to P, its
U.S. parent. Upon payment of the dividend, H, pursuant
to the law of the United Kingdom, became liable for and
paid advance corporation tax (ACT) and became entitled
to a credit against its U.K. corporate tax. H
allocated the U.K. credit to its two wholly owned
subsidiaries, S1 and S2, which used the U.K. credit
against their respective mainstream corporate tax
liabilities. Pursuant to I.R.C. sec. 901(a), P claimed
a foreign tax credit for the ACT paid by H.
Held: Pursuant to Article 23(c)(1) of the U.S.-
U.K. Convention, the payor of the ACT is the
corporation that pays the dividend and corresponding
ACT and not the corporation that uses the corresponding
U.K. credit against its U.K. tax liability.
Accordingly, P is entitled to claim a foreign tax
credit pursuant to I.R.C. sec. 901(a) for the ACT paid
by H. Held, further, the U.K. credit allocated by H to
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S1 and S2 and used by them against their U.K. tax is
not a subsidy within the meaning of I.R.C. sec. 901(i).
Mark A. Oates, John M. Peterson, Jr., James M. O'Brien, Owen
P. Martikan, Paul E. Schick, Robert S. Walton, Tamara L.
Frantzen, Erika S. Schechter, Allen Duane Webber, David A.
Waimon, Lafayette G. Harter, III, and Steven M. Surdell, for
petitioners.
Allan E. Lang, Sandra K. Robertson, and Barbara A. Felker,
for respondent.
OPINION
WELLS, Judge: In the instant case, the parties filed cross-
motions for summary judgment pursuant to Rule 121(a).1 The
issue2 presented by the parties' summary judgment motions is
whether Compaq Computer Corp. (petitioner) is entitled to foreign
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1992, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
2
The instant case involves several issues for which the
parties filed separate briefs. In an opinion issued July 2,
1999, we addressed the issue of whether income relating to
printed circuit assemblies should be reallocated under sec. 482
to petitioner from its Singapore subsidiary for its 1991 and 1992
fiscal years. See Compaq Computer Corp. & Subs. v. Commissioner,
T.C. Memo. 1999-220. In an opinion issued Sept. 21, 1999, we
addressed the issue of whether a foreign tax credit resulting
from certain ADR transactions should be allowed. See Compaq
Computer Corp. & Subs. v. Commissioner, 113 T.C. __ (1999).
- 3 -
tax credits pursuant to section 901(a) for certain U.K. advance
corporation tax (ACT) payments.3
Summary judgment may be granted if the pleadings and other
materials demonstrate that no genuine issue exists as to any
material fact and that a decision may be rendered as a matter of
law. See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.
518, 520 (1992), affd.
17 F.3d 965 (7th Cir. 1994). The record
shows and the parties do not dispute that there is no genuine
issue as to any material fact. Accordingly, we may render
judgment on the issue in the instant case as a matter of law.
See Rule 121(b).
Background
Petitioner is a Delaware corporation with its principal
place of business in Houston, Texas. Petitioner owns 100 percent
of the issued and outstanding stock of Compaq Computer Group,
Ltd. (Compaq U.K.), a corporation organized and existing under
the laws of the United Kingdom. Compaq U.K. owns 100 percent of
the issued and outstanding stock of Compaq Computer
Manufacturing, Ltd. (CCML), and Compaq Computer, Ltd. (CCL)
(hereinafter we will sometimes refer to CCML and CCL collectively
3
The ACT was first introduced by the Finance Act, 1972. The
Income and Corporation Taxes Act, 1988, which was in effect
during the year in issue, made only minor changes with respect to
the ACT. The ACT was abolished, effective for distributions
after Apr. 1, 1999, by the Finance Act, 1998, sec. 31.
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as the U.K. Subs.), which are corporations organized and existing
under the laws of the United Kingdom.
During 1992, a corporation that resided in the United
Kingdom was required to pay tax to the United Kingdom at the rate
of 33 percent on its corporate income (mainstream tax). See
Finance (No. 2) Act, 1992, sec. 21. Additionally, a corporation
that paid a dividend to its shareholders was obligated to pay to
the United Kingdom ACT. See Income and Corporation Taxes Act,
1988, sec. 14(1) (Eng.)
Generally, upon payment of the ACT, a U.K. corporation
becomes entitled to a credit against mainstream tax equal to the
amount of the ACT (corporate offset). See id. sec. 239(1). If
the corporate offset exceeds the amount of the corporation's
mainstream tax, the corporation can carry the corporate offset
back 6 years or forward indefinitely. See id. sec. 239(3) and
(4). A corporation that cannot use the corporate offset in the
current year, rather than carrying the corporate offset back or
forward, can elect to allocate the corporate offset to one or
more of its controlled subsidiaries.4 See id. sec. 240 (1)
One exception to the general terms of the ACT is that a
corporation is not required to pay ACT on "franked investment
4
A subsidiary is controlled if the parent corporation owns
more than 51 percent of the outstanding stock. See Income and
Corporation Taxes Act, 1988, sec. 240(10).
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income", which is a distribution on which ACT has already been
paid. Id. secs. 238(1), 241(1). Additionally, if a controlled
subsidiary makes a distribution to a parent, the parties can
elect whether the subsidiary will pay ACT on the distribution or
the parent will pay ACT on subsequent distributions of such
funds. See id. sec. 247(4)
Additionally, a U.K. shareholder, upon receipt of the
dividend, becomes entitled to a credit (shareholder credit)
against its individual taxes. The shareholder credit is a
portion of the ACT paid by the corporation. See id. sec. 231(1)
Absent a treaty provision to the contrary, the shareholder credit
is not available to nonresidents of the United Kingdom. See id.
The United States and the United Kingdom entered into the
Convention for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and
Capital Gains and Three Protocols, Dec. 31, 1975-Mar. 15, 1979,
U.S.-U.K., 31 U.S.T. (Part 6) 5668, T.I.A.S. 9682 (U.S.-U.K.
Convention). Article 10 of the U.S.-U.K. Convention, 31 U.S.T.
at 5677, provides that shareholders owning more than 10 percent
of the outstanding stock of a U.K. corporation are entitled to a
payment of one-half of the shareholder credit to which an
individual U.K. resident shareholder would have been entitled.
Shareholders owning less than 10 percent of the outstanding stock
of a U.K. corporation are entitled to a payment of the full
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amount of the shareholder credit to which an individual U.K.
resident shareholder would have been entitled.5
5
The relevant parts of Article 10 of the U.S.-U.K. Convention
provide:
Article 10
Dividends
(2) As long as an individual resident in the
United Kingdom is entitled under United Kingdom law to
a tax credit in respect of dividends paid by a
corporation which is resident in the United Kingdom,
paragraph (1) of this Article shall not apply. * * *
(a) In the case of dividends paid by a
corporation which is a resident of the United
Kingdom:
(i) to a United States
corporation which either alone or
together with one or more
associated corporations controls,
directly or indirectly, at least 10
per cent of the voting stock of the
corporation which is a resident of
the United Kingdom paying the
dividend, the United States
corporation shall be entitled to a
payment from the United Kingdom of
a tax credit equal to one-half of
the tax credit to which an
individual resident in the United
Kingdom would have been entitled
had he received the dividend,
subject to the deduction withheld
from such payment and according to
the laws of the United Kingdom of
an amount not exceeding 5 per cent
of the aggregate of the amount or
value of the dividend and the
amount of the tax credit paid to
such corporation;
- 7 -
During 1992, Compaq U.K. declared and paid a dividend of
^11,800,000 to petitioner. As a result of paying the dividend,
Compaq U.K. became liable for and paid ACT in the amount of
^3,933,333. Upon payment of the ACT, Compaq U.K. became
entitled to a corporate offset against its mainstream corporate
income tax. Additionally, pursuant to Article 10 of the U.S.-
U.K. Convention, petitioner became entitled to a payment from the
United Kingdom equal to one-half of the shareholder credit to
which an individual shareholder resident of the United Kingdom
would have been entitled.
Compaq U.K. surrendered the corporate offset to the U.K.
Subs. instead of using it against Compaq U.K. tax. The U.K.
Subs. used the corporate offset to reduce their 1992 U.K.
mainstream tax liability. The U.K. Subs. did not pay any
dividends during 1992.
Petitioner, pursuant to Rev. Proc. 80-18, 1980-1 C.B. 623,
modified by Rev. Proc. 81-58, 1981-2 C.B. 678; and Rev. Proc. 84-
60, 1984-2 C.B. 504, and amplified and clarified by Rev. Proc.
90-61, 1990-2 C.B. 657, did not claim a foreign tax credit for
the unrefunded portion of the ACT paid by Compaq U.K. Following
the opinion of the U.S. Court of Appeals for the Federal Circuit
in Xerox Corp. v. United States, 41 F.3d 647 (Fed. Cir. 1994),
revg.
14 Cl. Ct. 455 (1988), petitioner made an informal claim
- 8 -
for refund for additional foreign tax credits for the ACT
payment. Respondent disallowed the refund.
Discussion
Section 901(a) allows a domestic corporation to claim a
foreign tax credit for taxes "deemed to have been paid under
sections 902 and 960." Section 902 provides, inter alia:
SEC. 902. DEEMED PAID CREDIT WHERE DOMESTIC
CORPORATION OWNS 10 PERCENT OR MORE OF
VOTING STOCK OF FOREIGN CORPORATION.
(a) Taxes Paid by Foreign Corporation Treated as
Paid by Domestic Corporation.--For purposes of this
subpart, a domestic corporation which owns 10 percent
or more of the voting stock of a foreign corporation
from which it receives dividends in any taxable year
shall be deemed to have paid the same proportion of
such foreign corporation's post-1986 foreign income
taxes as--
(1) the amount of such dividends
(determined without regard to section 78),
bears to
(2) such foreign corporation's post-1986
undistributed earnings.
(b) Deemed Taxes Increased in Case of Certain 2nd
and 3rd Tier Foreign Corporations.--
(1) 2nd tier.--If the foreign
corporation described in subsection (a)
(hereinafter in this section referred to as
the "1st tier corporation") owns 10-percent
or more of the voting stock of a 2nd foreign
corporation from which it receives dividends
in any taxable year, the 1st tier corporation
shall be deemed to have paid the same
proportion of such 2nd foreign corporation's
post-1986 foreign income taxes as would be
determined under subsection (a) if such 1st
tier corporation were a domestic corporation.
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The parties disagree as to which corporation is the payor of
the ACT and, consequently, disagree as to whether section 902(a)
or 902(b) applies to the dividend received by petitioner during
1992. Petitioners contend that, for foreign tax credit purposes,
the payor of the ACT is the corporation that pays the dividend
and the corresponding ACT. Petitioners further contend that the
subsequent use or allocation of the corporate offset is
irrelevant. Petitioners, therefore, argue that they are entitled
to a foreign tax credit under section 902(a) because, during
1992, petitioner received a dividend from a 10-percent-owned
subsidiary that paid taxes to a foreign government during 1992.
Respondent disagrees with petitioners' contentions and
argues that, for purposes of the foreign tax credit, the payor of
the ACT is the corporation that uses the corporate offset.
Accordingly, respondent argues that the U.K. Subs., rather than
Compaq U.K., must be viewed as the payors of the ACT in 1992.
Respondent further argues that, because the U.K. Subs. did not
pay a dividend to Compaq U.K. during 1992, no portion of the ACT
paid by the U.K. Subs. can be attributed, pursuant to section
902(b), to the dividend distributed in 1992 by Compaq U.K. to
petitioner.
To support their respective positions, both parties rely on
Article 23 of the U.S.-U.K. Convention, which addresses the
foreign tax credit treatment of the ACT. The relevant portion of
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Article 23 of the U.S.-U.K. Convention, 31 U.S.T. at 5685,
provides:
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), * * * 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:
* * * * * * *
(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.
Petitioners argue that the last sentence of Article 23(1)(c)
specifically designates the unrefunded portion of the ACT as an
income tax imposed on the corporation paying the dividend.
Respondent, on the other hand, argues that such language was
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intended only to designate the taxpayer as the foreign
corporation paying the dividend, as opposed to the domestic
corporation receiving the dividend.
In Xerox Corp. v. United States, 14 Cl. Ct. 455 (1988), the
U.S. Claims Court was presented with the same issue presented in
the instant case. In Xerox, a first-tier U.K. subsidiary
corporation paid a dividend to its U.S. parent corporation and
allocated the corporate offset to second-tier U.K. subsidiary
corporations. See id. at 460-461. The U.S. parent corporation
claimed a foreign tax credit for the unrefunded portion of the
ACT paid by the first-tier subsidiary. See id. The Claims Court
found that the language of the U.S.-U.K. Convention did not
support the taxpayer’s contentions that the ACT paid by the
first-tier subsidiary was creditable to the parent corporation
without regard to the subsequent allocation of the corporate
offset. See id. at 462. Rather, the Claims Court looked to the
Technical Explanation of the U.S.-U.K. Convention (Technical
Explanation), 1980-1 C.B. 455, Rev. Proc. 80-18, 1980-1 C.B. 623,
and the Competent Authority Agreement which resulted from the
exchange of correspondence between Mr. P.W. Fawcett and Mr. P.E.
Coates pursuant to Article 25 of the U.S.-U.K. Convention to
determine the intent of the parties negotiating the U.S.-U.K.
Convention. See id. at 463-466. The Claims Court found that the
intention of the parties negotiating the U.S.-U.K. Convention was
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to treat the ACT as a separate tax only until the corporate
offset was used; thereafter, the ACT must be viewed as subsumed
into the mainstream tax. See id. at 467-468. The Claims Court
further held that once a corporation allocated the corporate
offset to its subsidiary, the subsidiary was to be considered the
payor of the ACT for foreign tax credit purposes. See id. at
468.
On appeal, the U.S. Court of Appeals for the Federal Circuit
reversed the Claims Court. The Court of Appeals held that the
language of the U.S.-U.K. Convention was clear and allowed a
foreign tax credit for the unrefunded portion of the ACT without
regard to the use of the corporate offset. See Xerox Corp. v.
United States, 41 F.3d at 660. The Court of Appeals also noted
that various statements made by parties negotiating the treaty
supported its reading of the treaty language. See id. at 654.
As discussed in further detail below, we agree with the holding
of the Court of Appeals for the Federal Circuit that the plain
meaning of the treaty language provides that the payor of the ACT
is the corporation that pays the dividend and the corresponding
ACT, and that the subsequent use or allocation of the corporate
offset does not alter this conclusion.
Regarding the interpretation of treaties, the Supreme Court
has stated that "[T]reaties are the subject of careful
consideration before they are entered into, and are drawn by
- 13 -
persons competent to express their meaning and to choose apt
words in which to embody the purposes of the high contracting
parties." Rocca v. Thompson, 223 U.S. 317, 332 (1912).
Consequently, "The clear import of treaty language controls
unless 'application of the words of the treaty according to their
obvious meaning effects a result inconsistent with the intent or
expectations of its signatories.'" Sumitomo Shoji Am., Inc. v.
Avagliano,
457 U.S. 176, 180 (1982) (quoting Maximov v. United
States,
373 U.S. 49, 54 (1963)).
In the instant case, we conclude that the clear import of
the language of the U.S.-U.K. Convention favors petitioners’
position. The treatment of the ACT shareholder credit was an
important issue resolved by the U.S.-U.K. Convention. See S.
Exec. Rept. 95-18, at 2 (1978), 1980-1 C.B. 411, 412 ("Of
particular significance are the new provisions contained in the
proposed treaty (1) which provide for a refund by the U.K. to
U.S. portfolio and direct shareholders receiving dividends from
British corporations of Advance Corporation Tax (ACT) paid by the
distributing corporation (Article 10) and allow a U.S. foreign
tax credit for the one-half of the ACT which is not refunded to
U.S. direct corporate investors (Article 23)"). As the corporate
offset is an important facet of the ACT regime, we believe that,
had the high contracting parties intended for the shareholder
credit to be linked to the corporate offset, Article 23(1)(c)
- 14 -
would have specifically provided for such a link. The high
contracting parties, however, chose to treat the ACT as imposed
on "the corporation paying the dividend", and we adhere to that
language in our interpretation of the treaty.
Moreover, we find that the general structure of the U.S.-
U.K. Convention evidences the signatories' intent not to link the
availability of the shareholder credit to the corporate offset.
Pursuant to Article 10(2), the United Kingdom is required to
refund or pay to a 10-percent U.S. shareholder one-half of the
ACT to which an individual U.K. resident shareholder would have
been entitled. Such a refund is available to the 10-percent U.S.
shareholder regardless of the use the U.K. corporation makes of
the corporate offset.
Respondent argues that the U.S.-U.K. Convention is silent
with respect to situations where the corporate offset is
allocated to a subsidiary, and, therefore, the identity of the
payor of the ACT must be resolved pursuant to the first sentence
of Article 23(1): "In accordance with * * * the law of the
United States". That law, respondent contends, is contained in
the Technical Explanation.
The Technical Explanation, although it does not address the
issue of the allocation of the corporate offset, states:
ACT which reduces mainstream tax in any year or
years shall be attributable to any accumulated profits
of the year or years for which the mainstream tax is
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reduced. Where ACT is used to offset mainstream tax,
the offset will be viewed as a refund of the ACT
initially allowed as a credit and as a tax paid in
respect of the year for which the ACT is applied as an
offset. Consequently, a reduction in the foreign tax
credit for the year from which the ACT is carried must
be made in accordance with section 905(c) of the Code.
[Technical Explanation, 1980-1 C.B. at 473.]
The Technical Explanation's view of the ACT, as a tax, originally
imposed but then refunded, upon the use of the corporate offset,
is the basis of Rev. Proc. 80-18, 1980-1 C.B. at 625, which, in
turn, states in relevant part:
Paragraph 1(c) of Article 23 provides, in
addition, that the one-half of the ACT paid by a United
Kingdom corporation that is not refunded to a U.S.
direct investor and that would be credited or refunded
to a United Kingdom individual resident is treated as
an income tax imposed on the distributing United
Kingdom corporation (rather than the U.S. shareholder).
Under United Kingdom law, a United Kingdom corporation
that pays ACT may, however, transfer to a related
United Kingdom corporation the right to apply ACT
against mainstream tax liability. Thus, for example, a
United Kingdom subsidiary of a United Kingdom
corporation may benefit from the parent's ACT payment
by offsetting part or all of the ACT against its own
liability for United Kingdom mainstream tax. In such a
case, for U.S. foreign tax credit purposes and pursuant
to Article 23, the parent corporation has not paid or
accrued the unrefunded ACT offset against the
subsidiary's mainstream tax and has contributed to the
capital of the subsidiary an amount equal to the
unrefunded ACT offset. The subsidiary is considered to
have paid or accrued only mainstream tax paid or
accrued in excess of the ACT offset, plus the amount of
unrefunded ACT so offset.
According to respondent, the allocation of the corporate offset
to a subsidiary must be viewed as a capital contribution of the
unrefunded ACT from the parent to the subsidiary and, at such
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time as the subsidiary applies the offset against its own
liability for mainstream tax, payment by the subsidiary of the
unrefunded portion of the ACT.
The Technical Explanation was not available to both
contracting parties in the negotiation of the U.S.-U.K.
Convention. Rather, it was prepared by the Department of the
Treasury (Treasury) to aid Congress during the ratification
process in understanding the U.S.-U.K. Convention. With regard
to the Technical Explanation's approach to the ACT, S. Exec.
Rept. 95-18, supra at 36-37, 1980-1 C.B. at 429, states:
The Treasury's technical explanation also set
forth a complex set of rules and examples intended to
be used for purposes of determining the earnings to
which ACT payments by a U.K. corporation are to be
attributed for purposes of computing the indirect U.S.
foreign tax credit.
* * * * * * *
These rules raise difficult and complex issues. In
recommending the ratification of the proposed treaty,
the Committee does not intend that these rules
necessarily serve as a model for future treaties.
Further, in recommending the ratification of the
treaty, the Committee does not intend to adopt or
reject the amplifications of the foreign tax credit
rules contained in the Treasury technical explanation.
* * *
As to the Technical Explanation, the Court of Appeals for the
Federal Circuit, in Xerox Corp. v. United States, 41 F.3d at 655-
656, commented: "One may debate the meaning of this cool
treatment of the Technical Explanation. What is clear, however,
- 17 -
is that the Treasury's position was not embraced by the Senate."
In the same vein, it is well established that a revenue procedure
is not a law binding upon the Court but is merely a statement of
the Commissioner's position. See Helvering v. New York Trust
Co., 292 U.S. 455, 468 (1934); Casanova Co. v. Commissioner,
87
T.C. 214, 223 (1986). Accordingly, we conclude that neither the
Technical Explanation nor Rev. Proc. 80-18, supra, is to be
considered "the law of the United States" for the purposes of the
first sentence of Article 23(1) of the U.S.-U.K. Convention.
Consequently, we hold that they present no reason for us to
deviate from the intention of the high contracting parties as
evidenced by the structure of the U.S.-U.K. Convention and by the
plain meaning of the language of Article 23(c)(1).6
Moreover, despite respondent's contentions to the contrary,
we conclude that it is proper to consider the proposition that
the corporation that pays the dividend and the corresponding ACT
is the payor of the ACT for purposes of the foreign tax credit as
6
Respondent has argued alternatively that the signatories to
the U.S.-U.K. Convention intended to link the shareholder credit
to the corporate offset and that such intent is evidenced in the
positions taken by the Technical Explanation, Rev. Proc. 80-18,
1980-1 C.B. 623, and the Competent Authority Agreement. We note
that those documents were created after the negotiation of the
U.S.-U.K. Convention and that only Rev. Proc. 80-18, supra,
directly discusses the corporate offset. Accordingly, we are
unpersuaded that the high contracting parties intended a result
contrary to the clear language and structure of the U.S.-U.K.
Convention.
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being "In accordance with the provisions and subject to the
limitations of the law of the United States." In Biddle v.
Commissioner, 302 U.S. 573, 382-383 (1938), the Supreme Court
articulated the rule that, for U.S. foreign tax credit purposes,
the taxpayer is the party who is liable for and charged with the
payment of tax. That mandate has been incorporated into the
regulations at section 1.901-2(f)(1), Income Tax Regs. In the
instant case, the ACT is levied on the corporation that pays the
dividend, regardless of whether that corporation or its
subsidiary will make use of the corporate offset. Accordingly,
it is appropriate to consider the corporation that actually pays
the dividend, and that is liable for payment of the ACT, as the
payor of the ACT for foreign tax credit purposes regardless of
the use of the corresponding U.K. credit.7
7
Respondent has further argued that, by disregarding the
corporate offset in determining the payor of the ACT for foreign
tax credit purposes, a U.K. corporation which is a subsidiary of
a U.S. corporation could, theoretically, receive a dividend from
one of its 10th-level subsidiaries. Pursuant to the Income and
Corporation Taxes Act, 1988, sec. 247, that 10th-level subsidiary
could choose not to pay ACT on that dividend. The U.K.
subsidiary could then in turn remit that dividend to its U.S.
parent, pay the ACT, and allocate the corporate offset to the
10th-level subsidiary. The U.S. parent could then claim a
foreign tax credit for the ACT paid by its U.K. subsidiary,
notwithstanding that, had the ACT been paid by the 10th-level
subsidiary, the ACT would not be creditable pursuant to the
limitation of sec. 902(b). Respondent's hypothetical is not
based upon the facts of the instant case, and we decline to rule
on it.
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Lastly, respondent contends that, notwithstanding the treaty
provisions, a foreign tax credit is not available to petitioner
because use of the corporate offset by the U.K. Subs. results in
a subsidy within the meaning of section 901(i). The relevant
parts of section 901(i) provide:
SEC. 901(i). Taxes Used to Provide Subsidies.--
Any income, war profits, or excess profits tax shall
not be treated as a tax for purposes of this title to
the extent--
(1) the amount of such tax is used (directly
or indirectly) by the country imposing such tax to
provide a subsidy by any means to the taxpayer, a
related person (within the meaning of section
482), or any party to the transaction or to a
related transaction, and
(2) such subsidy is determined (directly or
indirectly) by reference to the amount of such
tax, or the base used to compute the amount of
such tax.
Section 1.901-2(e), Income Tax Regs., provides that a subsidy
could include a credit provided to the taxpayer or to a related
party. Section 1.901-2(e)(ii), Income Tax Regs., however,
further explains: "The term 'subsidy' includes any benefit
conferred, directly or indirectly, by a foreign country to one of
the parties enumerated in paragraph (e)(3)(i)(A) of this section.
Substance and not form shall govern in determining whether a
subsidy exists."
- 20 -
Section 1.901-2(e)(4), Income Tax Regs., discusses the
treatment of multiple levies, which are not considered subsidies,
and provides:8
(4) Multiple levies--(i) In general. If, under
foreign law, a taxpayer's tentative liability for one
levy (the "first levy") is or can be reduced by the
amount of the taxpayer's liability for a different levy
(the "second levy"), then the amount considered paid by
the taxpayer to the foreign country pursuant to the
second levy is an amount equal to its entire liability
for that levy, and the remainder of the amount paid is
considered paid pursuant to the first levy. This rule
applies regardless of whether it is or is not likely
that liability for one such levy will always exceed
liability for the other such levy. * * *
We do not disagree with the regulation's prescription that
substance rather than form controls the determination of whether
a credit is a subsidy. Accordingly, we conclude that, under the
rules of section 1.901-2(e)(4), Income Tax Regs., the ACT is
comparable to a second levy, and the U.K. mainstream tax is
comparable to a first levy. The amount paid by a corporation to
the United Kingdom as ACT is therefore fully creditable, and the
mainstream tax incurred by a U.K. corporation would be creditable
only to the extent that it exceeded the ACT already paid. By
analogy, we conclude that the allocation of the corporate offset
8
We note that sec. 1.901-2(e)(4)(ii), Income Tax Regs., is
reserved for integrated tax systems. The inclusion of such
reserved space within the section on multiple levies instead of
within the section on subsidies indicates that Treasury must also
believe that such systems are closer to multiple levies than
subsidies.
- 21 -
to a subsidiary corporation reduces the amount of the subsidiary
corporation's mainstream tax which would be creditable but does
not act as a subsidy.
Additionally, we are unable to conclude that the corporate
offset is the type of benefit which was intended to be covered by
the subsidy rules of section 901(i). The House of
Representatives Committee on Ways and Means in H. Rept. 99-426,
at 351 (1985), 1986-3 C.B. (Vol. 2) 1, 351, explained the reason
for the enactment of section 901(i) as follows:
As indicated above, a Treasury regulation denies a
foreign tax credit for foreign taxes used directly or
indirectly as a subsidy to the taxpayer. Absent this
rule, the U.S. Treasury would, in effect, bear the cost
of tax subsidy programs instituted by foreign countries
for the direct or indirect benefit of their residents
and certain nonresidents who do business with their
residents. The committee is informed that some U.S.
lenders and other U.S. taxpayers take tax return
positions that are inconsistent with this rule. The
committee does not believe that foreign tax credits
should be allowed for foreign taxes which, while
ostensibly imposed, are effectively rebated by the
levying country by means of a government subsidy to the
taxpayer, a related party, or a party to a transaction
with the taxpayer. To eliminate any uncertainty in
this area, the committee believes that the Treasury
regulation disallowing foreign tax credits for taxes
used as a subsidy to the taxpayer should be codified.
In the instant case, the U.S. Treasury does not bear the cost of
ACT corporate offset. To the contrary, to the extent that the
ACT corporate offset reduces the mainstream tax of a U.K.
corporation, a U.S. taxpayer will be entitled to a lower foreign
tax credit with respect to the mainstream tax. Accordingly,
- 22 -
allowing a foreign tax credit for the ACT paid by a first-tier
subsidiary, even if that corporation allocates the corporate
offset to one of its subsidiaries, results in no extra burden
upon the U.S. Treasury.
On the basis of the foregoing analysis, we hold that,
pursuant to Article 23(c)(1) of the U.S.-U.K. Convention, the
payor of the ACT is the corporation that pays the dividend and
the corresponding ACT, regardless of that corporation's use of
the corporate offset or allocation of that offset to one of its
subsidiaries.9 Accordingly, section 902(a) applies to the
dividend received by petitioner in 1992. Petitioner, therefore,
is entitled to a foreign tax credit under section 901(a) for the
payment of the ACT. We have considered the parties' remaining
arguments and find them irrelevant or unnecessary to reach.
To reflect the foregoing, and the prior opinions in the
instant case,
An appropriate order will
be issued.
9
We have been able to ascertain the intent of the signatories
from the plain meaning of the language of Article 23 as well as
from the structure of the U.S.-U.K. Convention itself.
Consequently, we have not relied on extraneous statements made by
the various parties to the treaty negotiations and attached to
petitioners' motion.
