Opinion ID: 619605
Heading Depth: 2
Heading Rank: 2

Heading: The Tax Base

Text: The parties offer dueling perspectives on the base of the windfall tax. In the Commissioner's view, the tax base is what the U.K. statute says it is: the difference between two imputed values of each affected company. The first value is the company's profit-making value, defined as its average annual profit during its initial period (that is, average profit per day over the initial period, multiplied by 365) times 9, the assumed price-to-earnings ratio. The second value is the company's flotation value, the amount for which the U.K. Government sold the company to investors. Neither value represents the company's gross receipts, nor does the tax base account for recognizable costs and expenses such as employee costs. Thus, the Commissioner contends, the windfall tax fails to meet either the gross receipts or the net income requirement under the U.S. regulation. In PPL's view, looking through the form of the tax to its substance reveals that the [t]ax [i]s, in substance, a tax on profits, specifically on excess profits. PPL Br. at 43 (citation and internal quotation marks omitted). Our classification of a foreign tax hinges on its economic substance, not its form. See Boulware v. United States, 552 U.S. 421, 429, 128 S.Ct. 1168, 170 L.Ed.2d 34 (2008) ([T]ax classifications. . . turn on `the objective economic realities of a transaction rather than. . . the particular form the parties employed'; a `given result at the end of a straight path is not made a different result. . . by following a devious path.') (citations omitted). PPL's expert testimony purports to establish that initial-period profit would satisfy the gross receipts and net income requirements. In our view, PPL's formulation of the substance of the U.K. windfall tax is a bridge too far. No matter how many of PPL's proposed simplifications we may accept, we return to a fundamental problem: the tax base cannot be initial-period profit alone unless we rewrite the tax rate. Under the Treasury Department's regulation, we cannot do that. PPL's proposal and its fatal flaw are best understood in algebraic terms. Once again, the U.K. statute computes each company's tax thus: