Opinion ID: 683244
Heading Depth: 2
Heading Rank: 2

Heading: The Renegotiated Tax Treaty

Text: 14 On enactment of the Finance Act of 1972, the United States requested renegotiation of the existing tax treaty. The purpose was to obtain the benefit of the shareholder tax credit for United States investors who receive dividends from United Kingdom companies, thereby avoiding double taxation of the same profits. See S.Exec.Rep. No. 95-18, 95th Cong., 2nd Sess., 22-24, 32-37 (1978), reprinted in 1980-1 C.B. 411, 420-21, 426-29; Statement of Assistant Secretary of the Treasury Laurence N. Woodworth, July 19, 1977, before the Senate Foreign Relations Committee, id. at 86, 89-90, reprinted in 1980-1 C.B. at 433, 435-36. 15 The renegotiated tax treaty was signed on December 31, 1975, and amended by diplomatic notes on April 13, 1976, First Protocol of August 26, 1976, Second Protocol of March 31, 1977, and Third Protocol of March 15, 1979, together comprising the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, 31 U.S.T. 5668 (hereinafter the Treaty), reprinted in 1980-81 C.B. at 394. As was explained to the Senate during the ratification proceedings, Articles 10 and 23 of the Treaty were designed to resolve the problems presented by the interaction of the U.S. system of corporate taxation and the new hybrid system adopted by the United Kingdom in 1973 [the Finance Act of 1972] which in part integrates corporate and shareholder taxation. S.Exec.Rep. No. 95-18 at 4, reprinted in 1980-81 C.B. at 413. 16 Treaty Article 10 is retroactive only to April 6, 1975, and thus does not apply to the ACT paid on Xerox's 1974 dividends. However, it is a guide to the purpose of the Treaty and the intent of its terms. The relevant portion is:Article 10--Dividends 17       18 (2)(a) In the case of dividends paid by a corporation which is a resident of the United Kingdom: 19 (i) to a United States corporation which either alone or together with one or more associated corporations controls, directly or indirectly, at least 10 percent 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; 20 The tax credit in Article 10 is paid to the United States corporate shareholder for the tax period in which the ACT is paid or accrued by the United Kingdom corporation on the dividend distribution; that is, the period in which the United Kingdom shareholder would have received a credit under Section 86. This credit is not defeasible by subsequent events concerning how the United Kingdom corporation uses its Section 85 offset, as the government asserts for the tax credit in Article 23. 21 Treaty Article 23 is retroactive to April 1, 1973. With only Article 23 in force in 1974, it was agreed that a 1974 tax credit for the ACT paid by RXL in 1974 on the dividends to Xerox, if the credit were held to be available to Xerox, would apply to all the ACT at issue. Article 23--Elimination of Double Taxation 22 23(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 principles 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 percent 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: 23 (a) the taxes referred to in paragraphs (2)(b) and (3) of Article 2 (Taxes Covered) shall be considered to be income taxes; 24 (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 25 (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. 26 Thus for dividends distributed to a United States shareholder corporation, Article 10 provides that half of the ACT paid in the United Kingdom is repaid as a tax credit by the United Kingdom, and Article 23 provides that the remainder is allowed as a United States tax credit as if the ACT were an income tax in the United Kingdom. 27 The government's position is that the Article 23 tax credit for ACT paid is not available to a United States shareholder corporation until or unless the Section 85 offset has been used in the United Kingdom to offset mainstream corporation tax; that is, that the tax credit provided in Article 23(1)(c) is an interim or provisional credit, which in Xerox's case was withdrawn when RXL surrendered its Section 85 offset to its subsidiaries. The Court of Federal Claims so held.