Aozora - Unilateral Credit For US Withholding Tax Allowed Even Where No Treaty Relief Available

• Published date: 01 July 2021
• Subject Matter: Tax, Tax Treaties, Income Tax, Tax Authorities, Withholding Tax
• Law Firm: Reynolds Porter Chamberlain
• Author: Mr Harry Smith

In Aozora GMAC Investments Ltd v HMRC [2021] UKFTT 99 TC, the First-tier Tribunal (FTT) has held that section 793A(3), Income and Corporation Taxes Act 1988 (ICTA), did not prevent a UK taxpayer obtaining unilateral relief from UK tax in respect of US withholding tax despite failing to qualify for treaty relief.

Background

Aozora GMAC Investments Ltd (Aozora) was a UK-resident subsidiary of a Japanese bank. Aozora itself had two subsidiaries in the US, one of which, in November 2006, borrowed from it $217,770,000 for a little over 10 years at a fixed annual interest rate of 12%.

Interest income accrued on the loan for the periods ending March 2007 to March 2009, and the US subsidiary withheld US tax from each payment, as required by US law. In March 2008, Aozora applied to the US tax authorities for relief under the US-UK double tax treaty (the DTT), but the application was refused on the basis that the limitation of benefits clause in the DTT applied.

Unable to access relief from withholding at source in the US, Aozora claimed unilateral relief by way of credit under section 790, ICTA. HMRC issued closure notices on the basis that section 793A(3), ICTA, prevented Aozora from obtaining relief.

Aozora appealed to the FTT.

Legislation

Article 11 of the DTT provides that interest arising in one Contracting State and beneficially owned by a resident of the other is taxable only in the other state (where the taxpayer is resident).

Article 24(4)(a) of the DTT provides that in certain circumstances, US tax payable in the US shall be allowed as a credit against any UK tax computed by reference to the same profits, income or chargeable gains.

Article 23(1) of the DTT provides that the benefits of the DTT apply (subject to limited exemptions) only to a 'qualified person' fulfilling certain conditions.

Section 790, ICTA, provided, at the material time, that unilateral relief was to be given in respect of tax payable on income and chargeable gains to the extent taxed overseas by allowing a credit against UK income tax or corporation tax. Section 793A, ICTA, operates to deny unilateral relief in circumstances where certain double tax treaties (including the DTT) allow credit in respect of an amount of tax. In particular, section 793A(3) provides that: "Where arrangements made in relation to a territory outside the United Kingdom contain express provision to the effect that relief by way of credit shall not be given under the arrangements in cases or circumstances...