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Saturday, 13th April 2024
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Tax payers may be eligible for increased foreign tax credits Back  
A UK High Court judgement has suggested that the credits given against Irish tax, in respect of foreign tax borne on income, have been understated. Were the case to be followed in Ireland, some taxpayers, especially in the financial services area, may be entitled to significant tax refunds.
The issue
An Irish taxpayer in receipt of income from abroad may suffer foreign tax. This foreign tax can be credited against Irish tax where a double tax agreement permits. Additionally, in the case of dividends from substantial shareholdings, software royalties, and certain trading interest, the right to a credit for foreign tax is granted even in the absence of a treaty. This latter entitlement is known as 'unilateral relief'.
Seamus Hand


Domestic legislation imposes a limit on the amount of credit given for foreign tax. Traditionally, the practice has been to apply this limit based on the amount of corporation tax payable by the company which is attributable to the specific receipt that suffered the foreign tax. The difficulty with this understanding is that particularly in the UK, and to a lesser extent in Ireland, no rules are typically provided in the legislation to enable the amount of corporation tax payable by the company to be attributed to a particular receipt.

The case
Legal & General Assurance Society Ltd contested this understanding of the legislation in the UK. They claimed that the limit to the amount of foreign tax credit relief, in the case where the foreign tax was borne on a trading receipt, was the corporation tax attributable to the overall income from the trade, and not merely that portion of that corporation tax which could be attributed to the particular receipt. That view has now been upheld by the UK High Court.

The UK High Court was able to point to prior case law that supports the argument of Legal & General. The Court also seems to have been considerably influenced by the absence in the legislation of any rules for attributing the corporation tax on the profits of the trade to any particular receipt of the trade. The Court took the view that if such an exercise were required by the legislation, it would have provided rules showing how that was to be done. The Court placed little emphasis on the OECD commentary on the OECD Model Treaty both because the precise wording of many UK double tax agreements are not identical to the OECD Model Treaty wording, and because the relevant UK legislation predated the OECD commentary.

The High Court decision in the UK may be subject to appeal. The arguments put forward by the taxpayer and by the Revenue each seem to have some merit, and while the arguments of the taxpayer appear to have greater technical merit, the Revenue may rely on the fact that their arguments are in line with what had been the common understanding of the legislation.

The law in Ireland
The relevant law relating to the limit on foreign tax credits in Ireland is similar to that of the UK, but not identical. The Irish legislation was originally modelled on the UK legislation but has been amended over the years so that it now has differences in detail from the UK legislation. For that reason, it cannot be assumed that an Irish Court would arrive at the same conclusion on the Irish legislation as the UK Court has arrived at in relation to the UK legislation. However, there are arguments to support the UK position in Ireland as the legislation appears to have the same meaning on the critical issue in both countries.

The Irish legislation has three principle divisions. Provision is made to give effect to relief under double tax agreements; unilateral credit relief is provided in relation to dividends from substantial shareholdings; and separately foreign tax credit relief is provided in relation to certain trading interest receipts. The three divisions of the legislation are not identically worded. The provisions relating to trading interest contain a rule which enables the amount of corporation tax attributable to a particular interest receipt to be determined. In contrast, such a rule is not provided in relation to unilateral relief for dividends, nor was it provided in relation to treaty based relief until the Finance Act 2006.

The provisions of the Finance Act 2006, in inserting a rule into the legislation which appears to be intended to enable corporation tax to be attributed to a particular receipt, suggests that the D?il understood that that was the manner in which the law should operate. It is, however, a well-established rule of interpretation that an amendment of legislation on a misunderstanding of its true meaning does not change the original meaning of the legislation. As originally drafted, Schedule 24 did not have a rule that enabled corporation tax to be attributed to a particular receipt of a trade. That is the same position as in the UK. In the UK, that absence of a rule was a major factor in causing the Court to conclude that no such attribution was required by the legislation. Arguably, therefore, this is also the correct interpretation of the Irish legislation and the amendments made in the Finance Act 2006 cannot change the original meaning, either as regards past years or potentially as regards future years. Should Legal & General win its case in the UK, a similar challenge will and should be made by some taxpayer in Ireland.

Many financial institutions will have suffered restrictions on their entitlement to credit relief for foreign taxes and they may now have an interest in making protective claims to reopen past tax years. The reopening of past tax years is subject to time limits and, therefore, taxpayers contemplating the impact of the Legal & General case in Ireland may need to take early action.

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