Anson v Commissioners for Her Majesty’s Revenue and Customs

Credit under a double taxation convention for tax computed by reference to the same profits or income requires three steps. The court identifies the income taxed in each jurisdiction under the law applicable there, then compares the two amounts using the ordinary and contextual meaning of “the same”. A pragmatic comparison may be necessary where accounting or tax rules differ.

Where the law governing a foreign entity gives a member an automatic entitlement to a share of profits as they arise, those profits may constitute the member’s income before distribution. Ownership of the entity’s underlying assets is not decisive. Treaty provisions must be interpreted internationally, in good faith and in the light of their object and purpose, rather than through exclusively domestic tax concepts.

Anson v Commissioners for Her Majesty’s Revenue and Customs concerned a UK-resident, non-domiciled member of a Delaware limited liability company. The company was treated as a partnership for US tax purposes. The member paid US federal and Massachusetts taxes on his allocated share of its profits and remitted the balance to the United Kingdom.

The First-tier Tribunal held that Delaware law gave the members an automatic entitlement to profits as they arose and allowed double taxation relief: [2010] UKFTT 88 (TC). The Upper Tribunal reversed that decision: [2011] UKUT 318 (TCC); [2011] STC 2126. The Court of Appeal dismissed the taxpayer’s appeal: [2013] EWCA Civ 63; [2013] STC 557.

The central issue was whether the UK tax and US tax were computed by reference to the same profits or income under the applicable double taxation conventions and section 790(4) of the Income and Corporation Taxes Act 1988.

1. The appeal was allowed unanimously. Lord Reed delivered the judgment, with which Lord Neuberger, Lord Clarke, Lord Sumption and Lord Carnwath agreed. The taxpayer’s UK and US liabilities were computed by reference to the same income. He therefore qualified for double taxation relief under article 23(2)(a) of the UK/US Double Taxation Convention 1975. The materially equivalent provisions of the 2001 Convention and section 790(4) of the Income and Corporation Taxes Act 1988 produced the corresponding result.

2. A treaty must be interpreted in accordance with articles 31 and 32 of the Vienna Convention on the Law of Treaties. The court must ascertain the parties’ common intention objectively from the ordinary meaning of the terms, their context and the treaty’s object and purpose. The interpretation must be international rather than exclusively English.

3. Article 23(2)(a) required the court to identify the profits or income by reference to which UK tax was computed, identify the profits or income on which US tax was payable, and compare them. “The same” bears its ordinary meaning. Pragmatism may be required where differences between national accounting or tax rules prevent exact matching.

4. Article 23(3) supplied the relevant treaty rule for determining whether income arose from a US source. The domestic UK schedular source doctrine was inapplicable. Article 3(2) did not import that doctrine because the treaty context provided its own source rule.

5. The rights of the members under the Delaware legislation and constitutive agreement were questions of foreign law and therefore questions of fact. The First-tier Tribunal was entitled to find that each member automatically became entitled to an allocated share of the profits as they arose, before and independently of distribution. That entitlement did not require a proprietary interest in the company’s underlying assets. Profits and assets were distinct concepts.

6. The taxpayer’s UK income therefore arose when his share of the profits was allocated, rather than when cash was distributed. That share was also the income taxed in the United States. Memec plc v Inland Revenue Comrs [1998] STC 754 was distinguishable because it concerned underlying tax on dividends and whether dividends received by one entity could be treated as paid to another.

7. The alternative argument based on the dividend provisions of article 23(2) was rejected. Their historical context showed that the parenthetical exclusion of underlying tax reflected the United Kingdom’s abandonment of the imputation system. It did not establish that corporate profits and a shareholder’s dividend were otherwise necessarily the same income.

1. United Kingdom Supreme Court: Allowed the taxpayer’s appeal unanimously and restored the First-tier Tribunal’s conclusion: [2015] UKSC 44.
2. Court of Appeal: Dismissed the taxpayer’s appeal, holding that the relevant income was the distribution rather than the company’s profits: [2013] EWCA Civ 63; [2013] STC 557.
3. Upper Tribunal: Allowed the Commissioners’ appeal and reversed the First-tier Tribunal’s decision on double taxation relief: [2011] UKUT 318 (TCC); [2011] STC 2126.
4. First-tier Tribunal: Held that the taxpayer was taxed on the same income in both countries and was entitled to double taxation relief: [2010] UKFTT 88 (TC).