Aozora Tribunal Case on Double Tax Relief: Taxpayer Win

The case involved the ability of a UK company (UKCo) to obtain unilateral credit relief for US withholding tax (WHT) suffered on interest received by UKCo on a loan to its US subsidiary. The WHT was suffered because UKCo was not a ‘qualified person’ entitled to treaty benefits under Article 23 (Limitation of Benefits) of the US/UK double tax treaty (DTT). If successful, HMRC’s position would have resulted in double taxation of the same income (and greater taxation than if no double tax treaty had existed at all). The decision will be of interest to other UK companies whose claims for unilateral credit relief have been disallowed by HMRC on the basis that a limitation of benefits article in a relevant DTT (made on or after 21 March 2000) denies treaty relief. 

As UKCo was not a qualified person, it was unable to qualify for the nil WHT rate under the interest article of the DTT. Moreover, although the structure was not motivated by WHT ‘treaty-shopping’, the Internal Revenue Service (IRS) refused to exercise its discretion to permit UKCo to access treaty benefits under Article 23(6).

Not being a qualified person, UKCo was also unable to claim credit relief for the US WHT under Article 24 of the DTT. Therefore, the key question was whether UKCo could instead obtain unilateral credit relief under UK domestic law.

A specific UK domestic rule (in s.793A(3) ICTA 1988, now s.11(3) TIOPA 2010) denies unilateral relief if a relevant DTT (made on or after 21 March 2000) contains an ‘express provision’ to the effect that credit relief shall not be given under the DTT in cases or circumstances specified or described in the DTT.

HMRC argued that Article 23 of the US/UK DTT was such a provision, and that s.793A(3) therefore precluded UKCo from claiming unilateral credit relief.

If correct, this approach would have resulted in:

• Double taxation of the interest income in the US and the UK (save to the extent UKCo could instead expense the US WHT against its taxable income); and
• Greater overall taxation than would have existed if there had been no DTT at all (in which case, unilateral credit relief would have been available in the UK).

Moreover, this position contradicted HMRC’s published guidance at the time (which confirmed that s.793A(3) was restricted to a narrow range of circumstances which would not apply in the present case). The taxpayer previously sought to hold HMRC to this guidance via judicial review but was unsuccessful in this claim (in front of the High Court and the Court of Appeal).

However, in its decision of 12 April 2021, the First-tier Tribunal (FTT) agreed with the taxpayer that Article 23 was not an ‘express’ provision denying credit relief (because, to meet this description, a provision must set out explicit circumstances in which credit relief is not available, whereas Article 23 simply determines whether or not a UK resident company can access treaty benefits at all), and that UKCo should therefore be entitled to unilateral credit relief.