Nec Semi-Conductors Ltd. & Ors v Inland Revenue

A double taxation agreement does not automatically become wholly part of domestic law when implemented under Income and Corporation Taxes Act 1988, section 788. Section 788(3) incorporates treaty provisions only so far as they provide for the matters listed in that subsection. A non-discrimination provision may prohibit discriminatory treatment internationally without conferring an enforceable domestic right.

Relief from advance corporation tax is not relief from corporation tax in respect of income or chargeable gains. Accordingly, a treaty provision preventing discrimination in the availability of group income elections did not give the affected companies a domestic right to restitution. Restrictions on dividends paid to parents in third countries, existing at 31 December 1993, were also preserved by article 57(1) of the EC Treaty.

United Kingdom subsidiaries of Japanese and United States parent companies claimed restitution of advance corporation tax paid on dividends. They argued that the denial of group income elections breached non-discrimination provisions in the United Kingdom’s double taxation agreements with Japan and the United States, as implemented by section 788 of the Income and Corporation Taxes Act 1988.

Alternatively, they argued that the tax regime infringed articles 56(1) and 56(2) of the EC Treaty and asked the court to refer questions to the CJEC under article 234. The central issues were whether the treaty provisions had domestic legal effect and whether article 57(1) preserved the relevant restrictions.

1. Claims dismissed. The request for a reference to the CJEC under article 234 of the EC Treaty was also refused.
2. The non-discrimination provisions were properly construed as comparing a United Kingdom subsidiary of a non-resident parent with a similar United Kingdom subsidiary of a United Kingdom parent. The inability of the former to make a group income election, and the resulting obligation to pay ACT, constituted taxation or a connected requirement which was other and more burdensome.
3. That international-law conclusion did not give the claimants enforceable domestic rights. Section 788(3) used limiting words. It incorporated treaty arrangements only so far as they provided for relief from income tax or corporation tax in respect of income or chargeable gains, or for the other matters listed in the subsection.
4. ACT was a species of corporation tax, but it was not corporation tax in respect of income or chargeable gains. ACT arose from the making of a qualifying distribution, regardless of whether the company had taxable income or chargeable gains. Its possible later set-off against mainstream corporation tax did not alter its character when the liability arose.
5. Section 788(3)(b) did not assist. It concerned the taxation of non-residents receiving income from United Kingdom sources, whereas the claims concerned the treatment of United Kingdom residents paying dividends to non-residents. The relevant treaty effect was therefore outside section 788(3), and could not support restitution in the domestic courts.
6. The court accepted that the ACT provisions were restrictions on capital movements and payments for the purposes of article 56, assuming the claimants’ characterisation. Article 57(1), however, preserved restrictions existing on 31 December 1993 concerning direct investment involving third countries. Its wording applied to the provisions of article 56 as a whole, including both subsections.
7. There was no sufficient doubt requiring a reference. The court declined to decide several hypothetical remedy and limitation issues, including the effect of President of India v La Pintada Compania Navigacion SA, because they did not arise for decision.