Supreme Court resolves circuit split on creditability of U.K. tax


In a unanimous decision, the U.S. Supreme Court held that the United Kingdom’s windfall profits tax imposed on newly privatized businesses was creditable against U.S. taxes under Sec. 901 ( PPL Corp., No.12-43 (U.S. 5/20/13)). In doing so, the Court reversed the Third Circuit’s decision (665 F.3d 60 (3d Cir. 2011)) and, to a certain extent, adopted the reasoning of the Fifth Circuit in Entergy Corp., 683 F.3d 233 (5th Cir. 2012) (although that case was not before the Court).  


Under Sec. 901(b)(1), taxpayers can claim a credit for “the amount of any income, war profits, and excess profits taxes paid or accrued . . . to any foreign country.” The regulation promulgated to interpret Sec. 901   combines the statutory terms, “income, war profits, and excess profits tax,” into one concept: income tax. A foreign assessment is an income tax if it has the “predominant character . . . of an income tax in the U.S. sense” (Regs. Sec. 1.901-2(a)(1)(ii)).

A foreign assessment has the predominant character of a tax if it is “likely to reach net gain in the normal circumstances in which it applies.” An assessment is “likely to reach net gain” if it meets three requirements: the realization, gross receipts, and net income requirements (Regs. Sec. 1.901-2(b)(1)). The realization requirement provides that a taxpayer must have received the income before being obligated to pay taxes on it. The gross receipts and net income requirements concern the tax base, i.e., the amount on which the tax is levied.
Supreme Court decision

The unanimous decision, written by Justice Clarence Thomas (a concurring opinion was filed by Justice Sonia Sotomayor), stated that the U.K. windfall profits tax, which was imposed on companies after they were privatized, was not, as the British government claimed, a tax on the difference between the value at which the companies were sold and the value for which they should have been sold. The Court found that the way a foreign government characterizes a tax has no bearing on the “U.S. creditability analysis” (slip op. at 5).

The Court then explained that the Third Circuit had adopted the U.K.’s characterization of the tax and, on that basis, found that the tax failed the gross receipts and realization tests because it taxed some artificial valuation instead of profits (slip op. at 7). The taxpayer, however, emphasized that the tax was a tax on the actual profits earned by the company, no matter what the British government said.

The Court agreed with the taxpayer “that the predominant character of the windfall tax is that of an excess profits tax, a category of income tax in the U.S. sense” and was therefore creditable (slip op. at 8). Thomas then engaged in a complicated mathematical reformulation of the tax to demonstrate that the tax was a tax on the profits actually earned. In response to the IRS’s objection to the rearrangement of the U.K. tax formula, the Court emphasized that it was not bound by the U.K.’s characterization, especially since the U.K.’s method of calculating the tax was artificial. Accordingly, the Court followed “substance over form and recognize[d] that the windfall tax is nothing more than a tax on actual profits above a threshold” (slip op. at 11).

Sally P. Schreiber ( ) is a JofA senior editor.


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