Opinion ID: 683244
Heading Depth: 2
Heading Rank: 1

Heading: The Purpose of the Treaty

Text: 30 The stated purpose of the renegotiation, and the stated purpose of Article 23, is the elimination of double taxation of United Kingdom corporate distributions of dividends to United States shareholders. As explained by Paul W. Oosterhuis, an attorney for the Senate Joint Committee on Taxation, generally favorable tax credit rules is an important concession to the United Kingdom which will make U.S. direct investment in the United Kingdom more attractive. (quotes in Snap-On Tools, Inc. v. United States, 26 Cl.Ct. 1045, 1069 (1992), aff'd, 26 F.3d 137 (Fed.Cir.1994) (Table)). It is not disputed that the ACT on the dividends paid by RXL to Xerox in 1974 is subject to Article 23 of the Treaty. 31 Article 23 provides that the United States shall allow credit for the appropriate amount of tax paid to the United Kingdom. It was stipulated in the Claims Court that Article 23(1)(c) provides a tax credit to the United States shareholder for ACT paid by the United Kingdom corporation, by treating the ACT as an income tax imposed on the United Kingdom corporation paying the dividend. The government's position, as we have stated, is that the Treaty permits the United States to reverse that tax credit unless or until the ACT is set off against mainstream corporation tax in the United Kingdom. 32 The Treaty does not mention such a condition on the allowance of foreign tax credit in the United States for ACT paid in the United Kingdom. Xerox argues that this omission is strong evidence that this restrictive condition was not intended by the signatories, for so dramatic a change in the effect of the Treaty--in this case defeating the purpose of avoiding double taxation on profits--should not be inferred by silence. Xerox argues that if the downstream disposition of the Section 85 offset were controlling of the availability of the benefit for which the Treaty was renegotiated, the Treaty could not have omitted stating this condition explicitly. Xerox states that the plain meaning of the Treaty, in the context of its purpose, does not permit its interpretation to require this modification. 33 Article 10 is relevant to understanding the plain meaning of the Treaty, as we have mentioned, because its provision, whereby the United Kingdom pays half of the tax credit for the ACT directly to the United States shareholder, is not dependent on whether or when the United Kingdom corporation or its United Kingdom subsidiaries uses the Section 85 offset against mainstream corporation tax. Indeed, no such dependency has been suggested by the government for Article 10. 34 United Kingdom shareholders receive the ACT credit whether or not the ACT offset is used, surrendered, or saved by the British payor of the dividend. Stipulated Fact 30 in the Claims Court record is that a United Kingdom shareholder is entitled to the benefit of the U.K. shareholder credit in respect to the period in which the qualifying distribution is made, without regard to whether or how the U.K. company uses the ACT in that accounting period or in any other accounting period. This weighs against the government's argument that the Article 23 credit must be interpreted as not available to the United States shareholder until the occurrence of some subsequent event in the United Kingdom. 35 The government states that the United States always intended to restrict the availability of the ACT credit to United States taxpayers on the basis here asserted, and that this position was known to and was accepted by both signatories. In support, the government relies on the Treasury's Technical Explanation issued in 1977 and Revenue Procedure 80-18, documents we shall discuss post. In opposition, Xerox relies on the plain language of the treaty itself, its ratification history, and testimony of the chief negotiators for the United States and the United Kingdom. The 1986 Competent Authority Agreement is relevant, as are the provisions of the United States tax code with respect to foreign tax credits.