Double Taxation Relief - Legal and General Case and Related Issues

In the recent past, there has been discussion amongst tax practitioners regarding the impact of the decision in the case of Legal & General Assurance Society Limited v Commissioners for Her Majesty's Revenue and Customs (HMRC) [2006] EWHC 1770, on the computation of Double Taxation Relief [DTR] for Irish tax purposes. The enactment of Sec 63 Finance Act 2006 has further extended the discussion. The purpose of this article is to deal with the matter from a Revenue perspective.

Legal and General Case

It has been suggested that the above case can be interpreted in such a way as to permit the offset of DTR against income generally, as opposed to foreign income specifically. No basis for such interpretation is to be found in the report of the case; in fact, the decision would appear to affirm the view that double tax relief can be available only to the extent that income has suffered double taxation. In this connection, one should note paragraph 39 of the Chancery Division judgement and, in particular, the following extract:

It is clear that that phrase when used in Sec 795(2) must mean the income computed for the purposes of foreign tax grossed up under paragraphs (a) and (b) by the amount of foreign tax or underlying foreign tax. It seems to me that Sec 797 is to be construed as placing a ceiling on the credit for foreign tax obtainable by a taxpayer, which equates to the United Kingdom corporation tax, at the appropriate rate, (here 33%), chargeable on the income received from abroad grossed up by any tax deducted at source or underlying tax which it suffered at source.

This view is again confirmed in the actual ruling on the first point at issue - see paragraph 42 (the point on which Legal and General were successful):

If double taxation is to be eliminated in circumstances similar to those of the example, it must follow that the taxpayer should be entitled to credit against the UK corporation tax thrown up by its computation, for foreign tax paid in the relevant period of assessment, such credit to be limited only so that the foreign tax cannot exceed the UK tax which would have been chargeable on that income.

Based on the above, the only issue which was ruled on by the Court was the question as to whether the 'gross' or 'net' basis should apply in the granting of double taxation relief; and it was found, in the UK context, that the gross basis could apply because 'income' was not so defined under UK statute as to permit application of a net basis. The position in Ireland is fundamentally different and has been since the mid 1990s. The definition of 'income' per Schedule 24 refers back to the definition in accordance with the Taxes Acts - which, in the Case 1 context, clearly means gross receipts less expenses. Therefore the net basis is the only basis that was open in Ireland, and this continues to be the case subsequent to the Legal and General decision because of the construction of the Irish legislation.

Section 63 Finance Act 2006

Prior to the amendment in FA 2006, even though the net basis applied, there was no direction as to how expenses were to be set against gross receipts and therefore it was open to argue that in certain cases 'attribution' rather than 'turnover' should apply in arriving at net income. As a matter of practice the 'turnover' basis generally applied in the absence of a case for an alternate attribution of expenses. The 2006 amendment settles the 'turnover'/'attribution' issue going forward, but has no implication as to the correctness of the net basis in prior years.