Legal & General Assurance Society Limited (LGAS) received income from investments in the form of dividends and interest. The bulk of this foreign income was received after the deduction of foreign withholding tax at source. The foreign tax withheld was deducted at various rates, the amount of which depended on the country in which the foreign income arose.

The UK equivalent of Schedule 24 Paragraph 4(1) Taxes Consolidation Act 1997 (TCA 97) [section 797 ICTA 88] states ,‘The amount of the credit for foreign tax which under any arrangements is to be allowed against corporation tax in respect of any income or chargeable gain (“the relevant income or gain”) shall not exceed the corporation tax attributable to the relevant income or gain …’.

The Inland Revenue argued that the decision in George Wimpey International Ltd v Rolfe 62 TC 597 indicated that the purpose of treaty or unilateral relief provisions is to avoid double taxation on the same fund of income. It was submitted that the fund chargeable to corporation tax which is exactly identifiable with the foreign income was not the whole Case I profits but so much of the company’s Case I profits as is referable or attributable on Case I principles to the foreign income. The Inland Revenue contended that one should start with the allocation of expenses to give a mini-Case I computation of the profit referable to the foreign income.

Example 1. Calculation of foreign tax credits

Foreign Case I receipt (per foreign tax system)	100.00
Foreign withholding tax	(20.00)
Post-foreign tax Case I receipt	80.00
Foreign tax credit that falls to be allowed	20.00
Foreign Case I receipt entering computation	100.00
UK Case I receipts	4,900.00
Foreign Case I receipts	100.00
Total gross income chargeable under Case I	5,000.00
Deductions	(4,500.00)
Case I profit	500.00
UK tax at 33%	(165.00)
Post-tax profit	335.00

The Inland Revenue contended that the maximum credit should be £3.3, i.e. the tax on £10. This is the same proportion of the profit as the foreign income bore to the total receipts, i.e. £500*£100/£5000=£10. LGAS contended that the full foreign withholding tax of £20 should be allowed because corporation tax of more than £20 was charged on the Case I income.

The Special Commissioners considered the Wimpey decision where it was interpreted that for the purpose of obtaining credit on branch profits it was necessary, where there was a single trade, to have a profitable overall result. The Special Commissioners in the instant case concluded that ‘the principle in Wimpey is therefore “the necessity … of exactly identifying the fund charged to overseas tax with a fund chargeable also to UK tax”. This is done on a schedular basis, and on the facts of that case, unlike a life assurance company, the investment income was not a receipt used in computing the trading profit. … The issue in this appeal is essentially whether, if there had been a profit, one credits the foreign tax against any tax paid on income taxed under the appropriate schedule, here Case I, or whether one goes further and does a mini-Case I computation in order to ascertain the part of the profit referable to the foreign income. Since the foreign branches made profits, at least when computed by their own territories, and the Case I loss was a loss of the worldwide trade, it was necessary to look at the results of the worldwide trade and not a part of it because there was no UK tax payable on the results of the worldwide trade. The issue in this case is whether the same approach would apply if there had been a profit.’

It was noted that a similar issue had been considered by the Special Commissioner in Yates v GCA International Ltd (1991) 64 TC 37 which concerned a credit for Venezuelan tax. In that instance Inland Revenue calculations, based on an apportionment of net Case I income were accepted. However, the Special Commissioners declined to follow that decision as the point of law had been more fully argued before them.

In their view, ‘the issue is whether “United Kingdom tax computed by reference to the same profits, income or chargeable gains” (or the equivalent unilateral relief wording) is the Case I profit computed by including the foreign dividend plus any other income falling within the computation of the profit, or whether it is a profit computed by including solely the foreign income and setting against it a proportion of the deductible expenses. We regard the words “computed by reference to” as important and we consider that these refer to an actual computation made on a schedular basis (as decided in Wimpey) rather than one made specifically for the purpose of calculating the relief.’ The Special Commissioners concluded that they could not read into a UK treaty or unilateral relief wording which would restrict relief by requiring a profit to be computed by reference to the foreign income only.

The Inland Revenue’s contention that the ‘relevant income or gain’ must be interpreted as being the UK taxable measure of income or gains was accepted but this did not determine the matter. Since the relevant income or chargeable gain in this case was the actual Case I profit, in the Special Commissioners opinion, all that the UK equivalent of Schedule 24 TCA 97 achieved was to limit the credit to the average rate of corporation tax on that profit. In the above example, the Case I profit is £500. As the credit of £20 does not exceed the UK tax of £165 the Special Commissioners indicated that the full £20 credit would be allowed.

A secondary issue in this case was whether double taxation relief fell to be computed on the life assurance profits as a whole or separately on the pension business forming part of the life assurance business. The Inland Revenue unsuccessfully contended that the foreign tax credit applicable to the pension business should be denied.

In view of the similarities between the Irish and UK legislation, this decision, while not legally binding, may have application in Ireland.

From an Irish perspective it is also curious to note that the ‘agreed example’ referred to in the case might not give the result suggested by the Inland Revenue, i.e. a tax credit of £3.3 even if the Inland Revenue approach was adopted. In view of the additional tax deduction available for the foreign tax withheld (£20), it would appear that the tax credit would be nil.

This case involved a fully argued point of law. If both parties consent, an appeal from this decision may go directly to the Court of Appeal. As such, the Special Commissioners decision will not represent the final say on the matter.