In Peninsular & Oriental Steam Navigation Company v HMRC [2015] UKUT 312, the UT found that a scheme devised to artificially enhance double tax treaty relief did not work.
P&O, a UK company, was the parent of an international group. The principal holding company for the group, P&O Australia Ltd (POAL), was a wholly owned subsidiary of P&O, and held 99% of the shares in P&O Liena. POAL had declared an interim dividend of A$75,000,000, which had been paid to P&O.
The group had then implemented arrangements to ensure that the underlying tax attached to a payment of dividends to Liena was transferred by operation of the relevant provisions (mainly ICTA 1988 ss790 and 799) to a dividend paid by Liena to POAL. The tax was then transferred again to the dividend paid by POAL to P&O, so that all of it would be treated as foreign tax.
P&O argued that the fact that the company which had paid the original dividend to Liena had not itself incurred the tax was irrelevant, as the amount of underlying tax for which double tax relief was available was determined by the mixer cap.
Under ICTA 1988 s 790 (6), ‘any tax in respect of its profits paid ... by the company paying the dividend shall be taken into account in considering whether any, and if so what, credit is to be allowed’. The UT stressed that s 790 (6), like s 799 (1), referred to ‘tax paid’ and could not apply to deemed tax; therefore, where there was no foreign tax, there was also no tax which could be taken into account. Furthermore, the mixer cap of s 799(1A) did not come into play if the gateway in s 799(1) was closed. Finally, the first POAL dividend could not realistically be said to represent dividends which were not even in contemplation when it was declared and paid so that the required tracking of underlying tax required by ICTA 1988 s 806 was not possible.
Why it matters: The taxpayers (and their advisers) seemed to have relied on a mechanistic approach to the legislation, so that a Ramsay challenge would be unlikely to succeed. The scheme was, though, defeated because ‘it did not work’ without the need for a recharacterisation under Ramsay.
According to HMRC, 'around £14m in double taxation relief has been protected, with a further £140m likely from around 20 similar cases'. This win follows on from a similar recent win, involving Next Brand.
In Peninsular & Oriental Steam Navigation Company v HMRC [2015] UKUT 312, the UT found that a scheme devised to artificially enhance double tax treaty relief did not work.
P&O, a UK company, was the parent of an international group. The principal holding company for the group, P&O Australia Ltd (POAL), was a wholly owned subsidiary of P&O, and held 99% of the shares in P&O Liena. POAL had declared an interim dividend of A$75,000,000, which had been paid to P&O.
The group had then implemented arrangements to ensure that the underlying tax attached to a payment of dividends to Liena was transferred by operation of the relevant provisions (mainly ICTA 1988 ss790 and 799) to a dividend paid by Liena to POAL. The tax was then transferred again to the dividend paid by POAL to P&O, so that all of it would be treated as foreign tax.
P&O argued that the fact that the company which had paid the original dividend to Liena had not itself incurred the tax was irrelevant, as the amount of underlying tax for which double tax relief was available was determined by the mixer cap.
Under ICTA 1988 s 790 (6), ‘any tax in respect of its profits paid ... by the company paying the dividend shall be taken into account in considering whether any, and if so what, credit is to be allowed’. The UT stressed that s 790 (6), like s 799 (1), referred to ‘tax paid’ and could not apply to deemed tax; therefore, where there was no foreign tax, there was also no tax which could be taken into account. Furthermore, the mixer cap of s 799(1A) did not come into play if the gateway in s 799(1) was closed. Finally, the first POAL dividend could not realistically be said to represent dividends which were not even in contemplation when it was declared and paid so that the required tracking of underlying tax required by ICTA 1988 s 806 was not possible.
Why it matters: The taxpayers (and their advisers) seemed to have relied on a mechanistic approach to the legislation, so that a Ramsay challenge would be unlikely to succeed. The scheme was, though, defeated because ‘it did not work’ without the need for a recharacterisation under Ramsay.
According to HMRC, 'around £14m in double taxation relief has been protected, with a further £140m likely from around 20 similar cases'. This win follows on from a similar recent win, involving Next Brand.
