Court of Appeal rules no UK relief for US tax paid by parent of tick-the-box company

The Court of Appeal has upheld HMRC's appeal in Bayfine against the decision of the High Court concerning the availability of treaty relief or unilateral relief in the UK – Bayfine v HMRC [2011] EWCA Civ 304.

The profit on which Bayfine UK (BUK) is taxed in the UK falls within article 7 of the treaty. However, the treaty contains a savings clause (article 1(3)) that enables the US to depart from the provisions of the treaty and tax BUK's US parent on the same income. The Court of Appeal determined that the savings clause could only be brought into play if none of the articles mentioned in article 1(4), including article 23, would be robbed of their purpose.  The Court of Appeal concluded that if article 23 was to be interpreted as requiring both the UK and the US to give relief for tax paid in the other country, not only would this be circular but it would be contrary to its purpose, which is to prevent double taxation and avoid the evasion of tax, not to give double relief. It was not, therefore, possible for the US to apply the savings clause. The argument in the lower courts had centred around which country had primary taxing rights. The Court of Appeal focused instead on the interpretation of the savings clause and article 23 of the treaty and concluded that, in relation to the profits of BUK, the US was under an obligation to give credit in respect of UK tax paid, but the UK was not obliged to give credit for the US tax paid by BUK's parent company.

The Court of Appeal also found that HMRC was not bound to grant unilateral relief under what was section 790 of the Income and Corporation Taxes Act 1988 in respect of tax that had failed to qualify for relief under the treaty. The purpose of that section was to provide relief in relation to sources of income not covered by a treaty. It was not to override the provisions of a treaty.