I've just read through the actual judgement on this see
Not a light read but looking at the detail I think the judgement is much better for life companies than I originally thought.
Obviously the best position would have been for the High Court to have decided that foreign portfolio dividends were exempt from tax. Justice Henderson, however decided that exemption was not appropriate and that instead the claimants should obtain credit relief for underlying tax. See paragraphs 103 and 104 of the judgement.
But reading the judgement it seems that although the claimants are receiving relief for underlying tax its not underlying tax as we know it. Instead it seems to be the one of two amounts. Firstly underlying tax calculated on usual principles, that is you need to know how much tax the company paying the dividend suffered on the profits giving rise to the dividend. And secondly underlying tax at the nominal rate i.e. the mainstream rate of corporation tax in the country paying the dividend.
This idea of underlying tax being calculated at the nominal rate seems to be derived from the Haribo case and the argument is that a credit system is only equivalent with a exemption system where the underlying tax that is included in the credit calculation is at the nominal rate. An example might help to illustrate. Say the mainstream corporation tax rate in a country is 30% and a company receiving the dividend is taxed at this rate. But say the company paying the dividend only pays tax at 20%. In an exemption system the tax suffered on the dividend is 20, in an underlying tax credit system giving relief for actual tax the tax is 30 as the tax is topped up to the 30% rate when the receiving company accounts for the dividend. In an underlying tax credit system with nominal rates the tax is 20 as it is assumed that the paying company was taxed at the full rate so there is no top up.
But as per paragraphs 95 and 96 of the judgement despite the availability of relief for underlying tax based on a nominal tax rate a UK company is still able to claim credit relief for underlying tax at the actual rate if this is higher than credit relief calculated on a nominal basis. But the total credit for foreign tax including any withholding tax is limited to the UK tax paid on the dividend.
So say there is a dividend of £100 that has suffered withholding tax of nil. The nominal rate of tax in the country paying the dividend is 20%, the actual tax on profits for the dividend paying company is £10 and the UK tax on the dividend is 35. Then the credit relief is the lower of the UK tax on the dividend and the higher of the nominal tax or the actual tax. In this case the tax credit is 20 (as nominal is 20 which is higher than the actual which is less than the UK tax on the dividend). But in most cases the underlying tax will be greater than the UK tax so effective exemption.
In my first post on this topic I suggested that the judge may not have fully appreciated all of the practicalities of establishing a claim for credit relief. This was most unfair as quite a lot of the judgement is on the practical issues . On the nominal element of credit relief Mr Justice Henderson makes it clear that a light touch is the order of the day. He approves the approach adopted by the Prudential which was to use publicly available data to establish a tax rate for each dividend paying country and then use that tax rate to calculate the nominal underlying tax. This part of the decision is at paragraph 111 and includes the following wording
"I do not think it would be reasonable to expect perfect accuracy; and if there are any minor imperfections in the tables, it would in my judgment better accord with the EU principle of effectiveness to use the flawed figures rather than reject them entirely or insist on yet further investigations"
However, on the issue of underlying credit relief for actual tax the decision is a lot tougher and essentially prohibits companies from taking any shortcuts. In practical terms this would make it pretty much impossible to support a claim for actual underlying tax as it requires the cooperation of the company paying the dividend.
So in summary I would say the decision is.
- No exemption for foreign dividends.
- But relief for underlying tax.
- Underlying tax is equal to the greater of a nominal basis or an actual basis
- But subject to the limit that credit relief cannot exceed UK tax payable on dividend.
- And in practice it would be near impossible to claim credit relief for actual underlying tax
The decision also looks at a number of insurance specific issues. These are as follows.
- Treatment of foreign dividends in FA 89 section 89 calculation (paragraph 133 - 135 of judgement).
That is can the shareholders share of foreign dividends referable to BLAGAB be used to reduce the NC1 profit? The judgement is yes they can but this relief is by credit rather than exemption. I'm at a bit of a loss to see what exactly this means. Might it be like this.
Say foreign income 100.
Foreign tax available for credit 30.
I-E profit 1,000
NC1 result 50.
UK tax shareholder profits 30%
UK ax policyholder 20%
Then foreign credit is limited to UK tax = 50/1000*100*30% = 1.5 + 950/1000*100*20% = 19.
So credit relief is £20.5
- Ability to make additional section 242 claims
The judgement was that such claims could not be altered to include foreign dividends see paragraph 143 of the judgement.
Elections under 438 (6) ICTA
That is could the claimants elect for the shareholders share of dividends attributable to pension business to be exempted from inclusion in the pension business business computation. The judgement is that the treatment of such dividends is discriminatory but that relief should be available by way of credit relief rather than exemption. As with the FA 89 section 89 point above not quite sure how this work in practice.
Paragraph 156 of the judgement also covers third country portfolio dividends which includes the following "I can see no reason to exclude any third countries from the relief sought by the claimants"
Paragraphs 162 onwards of the judgement concerns remedies. I've nothing very useful to say about this; except that the Revenue seems to have lost on all substantive points.
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