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Discrimination and Tax Law - A Setback For Taxpayers

Sunday, 01 July 2007   (0 Comments)
Posted by: Author: Prof. Emil Bricker
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Discrimination and Tax  Law  - A Setback For  Taxpayers

The House of Lords handed down a significant judgment in Boake Allen Ltd and Others v Commissioners for HMRC (2007 UKHL 25) on 23 May 2007.This case is significant as it dealt with alleged discriminatory conduct on the part of the United Kingdom revenue authorities with reference to the treatment of  ACT  (similar to  secondary  tax  in  South Africa). 

In  particular, in  terms  of  the  ACT legislation, a UK subsidiary could not make an election so as to avoid the payment of ACT in circumstances where Its holding company was a non-resident.It was argued  that, because  a  UK subsidiary could make this election in circumstances  where  its holding company constituted  a  UK  holding company, the  inability  to do so  in circumstances  where  its holding company was a non-resident parent discriminated against foreign holding companies.In  other words,  a  UK subs~diary could not pay a dividend to its foreign holding company without avoiding ACT, whereas it could pay a dividend to its UK holding company by making the relevant election. 

This argument is similar to the argument that has been raised by South African taxpayers in the context of the group relief provisions contained in the Income Tax Act insofar as it relates to group relief.In other words, due to the fact that it is not possible for a South African subsidiary to make  use  of  the  group relief exemptions when it pays a dividend to a non-resident holding company, taxpayers argue that this is discriminatory when it compares the position of a south African subsidiary paying a dividend to its South African  holding  company. 

The House of  Lords held that these provisions are not discriminatory in view of the fact that the legislative framework is  different  in  the  context  of  ACT compared  with  the  discriminatory provisions contained in double taxation treaties.The argument of the UK revenue authorities was accepted that the ACT liability was  merely  shifted  from  a subsidiary to a parent.In other words, one cannot campare the scenario of a UK group with t I! at of a trans-national group.Interestingly, it was also indicated that ACT did not constitute a tax on income, resulting in it not being covered by the relevant treaty. 

The judgment of the House of  Lords is significant in view of the fact that many South African taxpayers have prepared themselves to raise an argument that a number of provisions contained in the Income Tax Act are discriminatory to the extent that they result in a different tax treatment depending on whether or not one  is dealing with  a South African holding company compared to a foreign holding company. The decision of the House of  Lords  is that much more surprising in view of the fact that all lower courts held in favour of the taxpayer.The decision may well result in a number of taxpayers reconsidering their position.In other words, the intention a not to discriminate against non-resident holding companies, but to preserve a scenario that STC is to be payable at some stage.

Source: Prof. Emil Bricker( TaxTALK)



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