- and - The Commissioners of Inland Revenue

Transcription

1 [2003] EWHC 2813 (Ch) IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION Case No: HCO & others Royal Courts of Justice Strand, London WC2A 2LL Date: 24 November 2003 Before: THE HONOURABLE MR JUSTICE PARK Between: NEC Semi-Conductors Limited and other test claimants Claimant - and - The Commissioners of Inland Revenue Defendants Graham Aaronson QC, David Cavender and Paul Farmer (instructed by Dorsey & Whitney) for the claimants Ian Glick QC, David Ewart and Kelyn Bacon (instructed by the Solicitor of Inland Revenue) for the defendants Hearing dates : October & 3 6 November Judgment

2 Abbreviations, glossary, dramatis personae etc Mr Justice Park: 1. These are as follows. ACT Advance corporation tax Bush Boake Allen Several United Kingdom subsidiaries of a United States parent company include Bush Boake Allen in their names. They are test cases for the present judgment CJEC The Court of Justice of the European Communities DMG Deutsche Morgan Grenfell Group plc v IRC [2003] EWHC 1779 (CH), [2003] STC 1017 GLO Group litigation order, as respects which see the Civil Procedure Rules rr to Hoechst case, the; Hoechst United Kingdom Ltd v IRC [2003] EWHC 1002 (CH) sometimes simply Hoechst Imputation system, the Inland Revenue Kleinwort Benson MCT Metallgesellschaft/Hoech st The system which applied in the United Kingdom between 1973 and 1999 for the taxation of dividends, normally requiring companies which paid dividends to pay ACT and conferring tax credits on shareholders who or which received dividends The Inland Revenue of the United Kingdom; the Commissioners of Inland Revenue The House of Lords decision in Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 Mainstream corporation tax The combined cases in the CJEC of Metallgesellschaft Ltd and others v Commissioners of Inland Revenue and the Attorney General (Case C-397/98) and (1) Hoechst AG (2) Hoechst United Kingdom Ltd v Commissioners of Inland Revenue and the Attorney General (Case C-410/98). The judgment of the CJEC was delivered on 8 March 2001 and is reported at [2001] STC 452 NEC Semi-Conductors A United Kingdom subsidiary of a Japanese parent company; a test case Ltd for this judgment OECD, the The Organisation for Economic Co-operation and Development Pirelli Pirelli Cable Holding NV and others v IRC [2003] EWHC 250, [2003] STC 250 S or section Usually a reference to a section number of the Income and Corporation Taxes Act 1988 Statutory references See s or section Surplus ACT See paragraph 45 below Woolwich Woolwich Equitable Building Society v IRC [1993] AC 70 Overview 2. Between 1973 and 1999 the imputation system regulated the taxation treatment of dividends paid by companies resident in the United Kingdom. When such a company paid a dividend the general rule was that it had to pay ACT to the Revenue. There was an exception if the company was a 51 per cent-plus subsidiary of a holding company which was also resident in the United Kingdom. In that case the two companies could make a group income election, and as long as the election was in force the subsidiary did not have to pay ACT. If, however, the United Kingdom company was a subsidiary of a non-resident company the two companies could not make a group income election. The compatibility of this rule with the EC Treaty was challenged in the mid to late 1990s, and in Metallgesellschaft/Hoechst the CJEC held that, as between a United Kingdom subsidiary and a parent company in another member state, the rule was incompatible with the present article 43 of the Treaty (then numbered article 52). Consequential questions were referred back to

3 the English courts to decide, and this led to the making of a group litigation order, a GLO. This is the third case which I have heard pursuant to the GLO. The previous two were Pirelli and DMG. (The Hoechst case was also consequential on an aspect of the Metallgesellschaft/Hoechst decision, but it was not within the ambit of the GLO.) All the cases have involved questions concerned with claims for compensation or restitution by United Kingdom subsidiaries of non-united Kingdom parent companies in respect of ACT which they paid. All the cases until this one have involved dividends flowing from United Kingdom subsidiaries to parent companies established in other member states of the European Community. In this case, however, the parent companies are resident outside the European Community. Restitution for ACT paid is claimed on two alternative grounds. 3. The first ground relies on the proposition that the relevant United Kingdom law, or more precisely the manner in which it was operated by the Inland Revenue, was in breach of certain provisions of non-discrimination articles in double taxation agreements concluded by the United Kingdom with some overseas nations. For the reasons which I will describe at length below I do not accept the claimants case. Although I think that there may have been infringements of the non-discrimination article (infringements which were certainly not perceived to have been such by anyone at the time), in my judgment this aspect of the article never became a part of domestic United Kingdom tax law upon which the taxpayer claimants could rely in proceedings in the national courts. 4. The second ground on which the claimants say that they are or may be entitled to relief involves reliance on provisions in article 56 of the EC Treaty. The claimants do not suggest that I can myself decide the relevant arguments, but they invite me to refer the relevant questions to the CJEC under article 234 of the EC Treaty. However, in my opinion article 5 7(1) is clear to the effect that the provisions of article 56 on which the claimants wish to rely do not apply to the ACT payments complained of. In the circumstances I will not make a reference to the CJEC. Instead I dismiss the claimants second ground for claiming relief, as well as their first. The non-discrimination article issue: the statutory and treaty background 5. Repeating what I have said in paragraph 2 above, under the imputation system the general rule under the Taxes Act was that, when a company resident in the United Kingdom paid a dividend to its shareholders, it was liable to pay ACT to the Inland Revenue: s 14. At the times relevant to this case the rate of ACT was 25 per cent of the dividend. The ACT was available to be set off later against the company s liability for corporation tax (MCT), that is corporation tax on its profits (its taxable income and its chargeable gains) in so far as it had such profits. The effect of the ACT was that, if the company did have taxable profits, it had to pay its corporation tax earlier than it otherwise would have done, and earlier than some of its competitors paid their corporation tax. Further, it was quite common for a company to have paid ACT but not to have a sufficient liability to MCT for it to be able to set off the ACT. In that case the ACT was not just an early payment of corporation tax: it was a true additional tax liability. The general point was that it was disadvantageous to have to pay ACT. However, s 247 enabled a United Kingdom resident company which was a subsidiary of a parent company also resident in the United Kingdom to join with its parent in making a group income election. Once the election was accepted by the Inland Revenue or upheld on appeal the United Kingdom subsidiary could pay dividends to its parent company without being liable to ACT. Thus United Kingdom tax law extended an advantage to subsidiaries of United Kingdom holding companies which it did not extend to subsidiaries of overseas holding companies. 6. All of this was the background to the Metallgesellschaft/Hoechst case, in which the CJEC held that the rule of United Kingdom law which prohibited a United Kingdom subsidiary and a parent company established in another member state from making a group income election was contrary to article 43 (formerly article 52) of the EC Treaty, the right of freedom of establishment. The CJEC directed that in such cases compensation or restitution was payable by the Inland Revenue, and left consequential questions of United Kingdom law to be determined by the English courts. As I said above, I have already decided three cases of that nature: the Pirelli case, the Hoechst case and the DMG case. Pirelli and DMG are subject to appeal, but the position rests for the time being at my decisions, the references to which are in the table in paragraph 1 of this judgment.

4 7. The present case is another one in which restitution is sought by United Kingdom subsidiaries of non-united Kingdom parent companies which paid dividends in the belief, which was certainly encouraged by the clear words of s 247, that they could not make group income elections. The United Kingdom subsidiaries therefore paid ACT, but now they claim that the ACT was unlawful (or more precisely that the rule in s 247 which prevented them and their parent companies making group income elections was unlawful). They say that in consequence they are entitled to restitution. If in the meantime the ACT has been set off against MCT the restitution which they claim is an amount calculated by applying an interest factor over the period beginning with when they paid the ACT and ending with when they set it off against MCT: that period is equivalent to the period for which the ACT rules required them to pay part of their corporation tax liability earlier than they would otherwise have done. If and to the extent that the ACT has not been set off against MCT the subsidiaries claim restitution of the ACT, plus interest. 8. However, this case, unlike Pirelli, Hoechst and DMG, is not brought by United Kingdom subsidiaries of parent companies established in other member states. Rather it is brought by subsidiaries of parent companies established outside the European Community, and, so far as concerns the part of the case with which I will deal first (the non-discrimination article issue), the subsidiaries rely not on provisions of European law but on so-called non-discrimination articles in double taxation agreements between the United Kingdom and the State where the parent company is based. 9. Double taxation agreements are treaties concluded between sovereign states. Under the law of the United Kingdom they are entered into in exercise of the prerogative power of the Crown. Under our law treaties are not self-executing : that means that, although they are binding in international law between the United Kingdom and the other State as soon as they are concluded (or ratified, if by their terms they require ratification), they do not then take automatic effect in domestic law as part of the law of the United Kingdom. The intervention of Parliament, either directly by statute or by statutory delegation authorising another person or body to bring the treaty into effect domestically, is needed. In the case of double taxation agreements Parliament has, as I will explain in more detail later, delegated to Her Majesty the power to bring the treaties into domestic effect by Order in Council. 10. The United Kingdom s double taxation agreements are all bilateral agreements with one other State, and there are a great many of them. However, nearly all of them are based on a draft produced, with a supporting commentary, by the OECD. It follows that many of the provisions of the United Kingdom s double taxation agreements are identical between themselves, and indeed identical to provisions of double taxation agreements concluded between pairs of other nations which have also adopted the OECD model. Among the States which have concluded with the United Kingdom double taxation agreements containing non-discrimination articles are Japan, Switzerland and the United States, all non-ec countries. NEC Semi-Conductors Ltd, one of the companies which is acting as a test case for the present proceedings, is a subsidiary of a Japanese parent company. Several Bush Boake Allen companies are subsidiaries of a United States corporation, and they are another test case. The United Kingdom/Japan double taxation agreement and the United Kingdom/USA double taxation agreement are not identical in all respects, but they are identical so far as the present case is concerned, since they both contain non-discrimination articles, and those articles include identical sub-paragraphs which are the particular provisions relied on. The test cases do not include a United Kingdom subsidiary of a Swiss parent company, but there are such subsidiaries which are parties to the GLO. The decision in the present case should serve as a test case for them, because the United Kingdom/Switzerland double taxation agreement also contains a non-discrimination article which has the identical sub-paragraph within it. 11. I will now set out the text of the critical sub-paragraphs of the double taxation agreements, and then I will set out the legislative provisions which bring the contents of such agreements, or some of their contents, into force as parts of United Kingdom domestic law. Article 25(3) of the United Kingdom/Japan double taxation agreement is as follows. (I have interpolated in square brackets references to the United Kingdom and to Japan as appropriate.) 25(3) Enterprises of a Contracting State [the United Kingdom], the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting

5 State [Japan] shall not be subjected in the first-mentioned Contracting State [the United Kingdom] to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State [the United Kingdom] are or may be subjected. In the United Kingdom/USA double taxation agreement the identical sub-article is article 24(5). 12. The statutory provision which governs the introduction of double taxation agreements into domestic law is now s 788 of the Taxes Act It traces its origins back to the Finance Act 1945, which was enacted in anticipation of double taxation agreements expected to be concluded between the United Kingdom and other States. I believe that an agreement between the United Kingdom and the United States was the first such agreement between this country and another sovereign State. The United Kingdom also concluded agreements with many British dependent territories. The critical subsection of the present s 788 is subsection (3), but I need also to set out subsection (1). 788(1) If Her Majesty by Order in Council declares that arrangements specified in the Order have been made with the government of any territory outside the United Kingdom with a view to affording relief from double taxation in relation to (2). (a) income tax (b) corporation tax in respect of income or chargeable gains, and (c) any taxes of a similar character to those taxes imposed by the laws of that territory, and that it is expedient that those arrangements should have effect, then those arrangements shall have effect in accordance with subsection (3) below. (3) Subject to the provisions of this Part, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax and corporation tax in so far as they provide - (a) for relief from income tax, or from corporation tax in respect of income or chargeable gains; or (b) for charging the income arising from sources, or chargeable gains accruing on the disposal of assets, in the United Kingdom to persons not resident in the United Kingdom; or (c). (d) for conferring on persons not resident in the United Kingdom the right to a tax credit under section 231 in respect of qualifying distributions made to them by companies which are so resident. There are other subsections, but they are not relevant to this case. In relation to subsection (3) I should explain now that the paragraph which is of most significance in the present case is paragraph (a). Some reliance is also placed by the claimant companies on paragraph (b). No specific reliance is placed on paragraph (d), but it could be relevant because it was specifically enacted in 1972 to give effect to anticipated provisions in double taxation agreements dealing with one aspect of the imputation tax system, but not with the aspect which is at the heart of the present case. 13. To complete the citations of the legislative background to double taxation agreements in United Kingdom tax law I should also refer to the Orders in Council which are made as contemplated by s 788(l), In the case of Japan the Order is the Double Taxation Relief (Taxes on Income) (Japan) Order It was made by Her Majesty the Queen. After recitals the operative paragraph is paragraph 2. It is worded as one would

6 expect given the terms of s 788. It provides: 2. It is hereby declared - (a) that the arrangements set out in Part I of the Schedule to this Order have been made with the Government of Japan with a view to affording relief from double taxation in relation to income tax, corporation tax, or capital gains tax and taxes of a similar character imposed by the laws of Japan; and (b) that it is expedient that those arrangements should have effect. The Schedule then sets out the full text of the double taxation agreement as concluded between the United Kingdom and Japan. In the case of other States such as the United States the Order in Council is in the same form, but the Schedule contains the text of the double taxation agreement concluded between the United Kingdom and the other Contracting State. Most of the double taxation agreements are recognisably derived from the OECD model Convention, but there are various detailed differences between them, which have resulted from particular bilateral negotiations. So far as the present case is concerned, however, (and as I have already mentioned) the double taxation agreements with Japan, the United States and Switzerland all contain paragraphs in the non-discrimination article which are identical to each other and are relied on by all of the claimants. The facts 14. The facts of the test cases are all agreed, and I can deal with them very briefly. In the case of the NEC group the United Kingdom subsidiary was a wholly owned subsidiary of the Japanese parent company. The agreed statement of facts gives particulars of four dividends paid between 1994 and 1996 and of the associated ACT payments, which were made on dates in 1995 and I do not need to set out the specific dates or amounts, since nothing turns on those details. Most of the ACT paid was set off against MCT, but a substantial part of it was not. It is agreed that, if s 247 had permitted a group income election to be made, the companies would have made one. 15. In the case of the Bush Boake Allen group the details are obviously different, but the underlying principles are the same. There were several United Kingdom subsidiaries, not just one, and the parent company was (and is) in the United States, not in Japan. The agreed statement of facts gives details of ACT payments made between 1996 and As with the NEC group most of the ACT was set off against MCT, but not all of it. There is the same agreement that, if s 247 had permitted a group income election to be made, the companies would have made one. One extra feature of the Bush Boake Allen group is that under the United Kingdom/USA double taxation agreement of 1980 (which replaced an earlier one of 1945 or 1946) the United States parent company received from the United Kingdom Revenue tax credit payments similar to those which were at the core of the arguments in the Pirelli case. There was nothing similar in the case of the NEC group. The explanation is that the tax credit payments were an aspect of the imputation system which commenced in this country in 1973, before the 1980 double taxation agreement with the United States but after the double taxation agreement with Japan. The non-discrimination article issue: the claimants argument 16. The argument for the claimant companies seems to me to have three main strands to it. The first is an argument about the interpretation of the critical sub-paragraph in the non-discrimination article; the second is an argument about the interpretation of s 788 of the United Kingdom statute; the third is an argument about the remedy to which the claimants are entitled if they are correct on their first two arguments. 17. For convenience I will repeat here the relevant parts of the critical sub-paragraph in the article, but substituting references to the United Kingdom and to Japan for the references to a Contracting State. Enterprises of the United Kingdom, the capital of which is owned or controlled... by residents of Japan, shall not be subjected in the United Kingdom to any taxation or any requirement connected

7 therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the United Kingdom are or may be subjected. The United Kingdom subsidiary of the NEC group is an enterprise of the United Kingdom, and its capital is owned or controlled by one resident of Japan, namely the Japanese parent company. The argument for the United Kingdom subsidiary is that the necessity for it to pay ACT in consequence of paying dividends, without the possibility of removing the liability by a group income election, was taxation or a requirement connected with taxation. It is also said to have been taxation or a connected requirement which was other or more burdensome than the taxation and connected requirements to which other similar enterprises of the United Kingdom were or might have been subjected. The claimants say that the other similar enterprises of the United Kingdom are United Kingdom subsidiaries of United Kingdom parent companies, and they point out that such subsidiaries could join with the parent companies in making group income elections. Therefore, it is said, the denial to United Kingdom subsidiaries of Japanese parent companies of the ability to make group income elections (or of some other means to pay dividends without ACT) was contrary to the critical sub-paragraph in the non-discrimination article. The same applies in the case of United Kingdom subsidiaries of parent companies in other States, like the United States or Switzerland, which had similar double taxation agreements with this country. 18. I move to the second strand in the claimants argument. They say that the particular effect of the non-discrimination article on which they rely is made part of United Kingdom domestic law by s 788 and the Order in Council. In this connection they base themselves principally on s.788(3)(a), by which provisions in a double taxation agreement (provided that it has been brought into effect domestically by an Order in Council) have effect in so far as they provide for relief from... corporation tax in respect of income or chargeable gains. Their case is that the provisions of the non-discrimination article, in so far as they meant that the United Kingdom subsidiaries concerned could make group income elections or otherwise pay dividends without being liable to ACT, provided for relief from corporation tax in respect of income or chargeable gains. I will examine the argument in detail later, but it may be helpful for me to mention now that this is the central point at which, in my view, the case for the claimants breaks down. 19. The third strand in the claimants argument is that, if they are right so far, they are entitled at common law to restitution from the Revenue, on the authority of either or both of the Woolwich or Kleinwort Benson cases (for references to those cases see the table in paragraph 1 above). As I have said earlier they argue that, in so far as the ACT has been set off against MCT, the restitution is an amount calculated by reference to interest over the period between the payment of the ACT and the setting-off of it against MCT; in so far as the ACT has not been set off against MCT, they claim restitution of the full amount of ACT not so set off, with interest. They also argue that it is proper for them to pursue their claim by an action in the High Court, rather than following the more usual route for resolving tax disputes of taking an appeal to the Special Commissioners: in the special circumstances of this case they say that the route of statutory tax appeals would be of no use to them even if their arguments on the points of principle are correct. 20. Under the various sub-headings which follow I will evaluate the foregoing arguments advanced by the claimants. Interpretation of the relevant paragraph of the non-discrimination article 21. Did the paragraph of the article have the effect of prohibiting the United Kingdom from denying to United Kingdom subsidiaries of parent companies in, for example, Japan and the United States the right to make group income elections? For convenience I set out again an abbreviated paraphrase of the article: Enterprises of the United Kingdom, the capital of which is owned or controlled... by residents of Japan, shall not be subjected in the United Kingdom to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the United Kingdom are or may be subjected. 22. I begin with the background observation that, if the paragraph did have the effect contended for by the claimants, it was certainly not an effect which was intended. In a sense that is an obvious and trite point,

8 because the wording of the paragraph is taken from the OECD model Convention, which. was certainly not formulated with the United Kingdom s imputation system in mind. To the same effect the United Kingdom/Japan double taxation agreement was agreed in 1969, four years before the imputation system commenced. 23. However, the United Kingdom/US double taxation agreement was negotiated and agreed after the commencement of the system, and it is, I think, generally accepted and understood that a major reason why the United Kingdom and the United States entered into negotiations for a new agreement in place of the one which had operated from 1946 onwards was because the imputation system made a renegotiation desirable. Thus the international tax aspects of this country s imputation system were in the forefront of the negotiators minds. It certainly did not occur to the United Kingdom s negotiators that the standard wording of the non-discrimination article in the OECD model would mean that United Kingdom subsidiaries could pay dividends to United States parents under group income elections and without ACT. If that thought had occurred to the United Kingdom negotiators I am sure that they would have insisted on some provision to prevent the effect arising. 24. Further, as regards the United States negotiators I can feel almost as confident that the argument which is now placed before me did not occur to them either. In 1977 the US Treasury Department published a Technical Explanation of the new double taxation agreement which had been signed in December (The agreement did not commence to operate until 1980, but, if my memory serves me correctly, that was because of difficulties concerning taxation in some States of the USA, and had nothing to do with the subject matter of this case.) I believe that the Technical Explanation is accorded significant weight in the courts of the United States, and I imagine (though I do not know) that the United States negotiators contributed to it. The explanation of article 24(5) itself casts no light on the argument now advanced by the claimants, but some of the contents of the explanation of article 23 are informative. That article was in many respects the most important new article in the agreement, because it regulated the extent to which United States recipients of dividends from United Kingdom companies could receive and benefit from tax credits available against the United Kingdom Revenue. (In paragraph 12 above I set out provisions of s 788 of the United Kingdom Act, including s 788(3)(d). That paragraph had been introduced by the Finance Act 1972 specifically to give domestic effect in United Kingdom law to anticipated articles in future double taxation agreements along the lines of article 23 of the 1975 double taxation agreement with the United States.) The detailed explanations of article 23 do not matter, but what is significant is that they contain a number of worked examples in which a United. Kingdom subsidiary is assumed to have paid a dividend to a US parent company. In all of the examples it is assumed that ACT would be paid. If the United States negotiators had thought that the non-discrimination article would permit group income elections to be made, the examples would not have been expressed as they were. 25. Thus, if the non-discrimination article does have the effect contended for by the claimants in the present case, that is a fortuitous and unintended windfall. However, I do not think that that in itself means that the interpretation of the article contended for is wrong. Indeed, I have concluded that the claimants are right on this part of the case. A non-discrimination article by its nature is unlikely to be directed at one or more specific provisions of a Contracting State s tax legislation as respects which the discrimination was already present to the minds of the negotiators. Rather it is in the nature of a general precautionary provision, meaning that if, over time in the course of operation of the double taxation agreement, it emerges that some provision of the tax law of one of the contracting states (whether tax law already existing at the time of the agreement or tax law introduced thereafter) is discriminatory within the terms of the article, the discrimination ought not to be permitted. In this case, notwithstanding that neither the United Kingdom nor the United States negotiators appear to have thought of the possibility that the inability of United Kingdom subsidiaries to pay dividends to United States parents without having to pay ACT might infringe the article, now that the possibility had been raised I think that I must make up my own mind upon it. 26. It seems to me that there are three questions raised by the wording of the relevant sub-paragraph of the article, which I set out in an order different from that in which they appear in the sub-paragraph itself. First, what is meant by other similar enterprises of [the United Kingdom]? (In that question the United Kingdom replaces the actual words that first-mentioned State.) Secondly, given that the position under United Kingdom statute law was that the United Kingdom subsidiary of a Japanese or US parent company

9 could not make a group income election and, if it paid dividends to its parent, had to pay ACT, was the position thereby created taxation or any requirement connected therewith? Thirdly, if it was, was it other or more burdensome than the taxation and connected requirements to which the other similar enterprises of the United Kingdom were or might be subject. 27. So the first question is: what is meant by other similar enterprises of the United Kingdom? Paraphrasing the question: what is the comparator with which the taxation of the actual United Kingdom subsidiary is to be compared? In my judgment, in agreement with Mr Aaronson QC for the claimants, the comparator is a United Kingdom subsidiary of a United Kingdom parent, as opposed to the actual case of the United Kingdom subsidiary of, to take the NEC case, a Japanese parent. I accept that the sub-article could have been more explicit on the point, but in my view the interpretation which I favour is clearly correct. In theory there could be four possibilities to examine: i) The other similar enterprises are United Kingdom subsidiaries of other parent companies resident in the other contracting State. In the case of the NEC group this would mean that the taxation of the NEC United Kingdom subsidiary would fall to be compared with the taxation of other United Kingdom subsidiaries of other Japanese parent companies. This is probably the most correct grammatical reading of the paragraph, but it is obviously not what is intended, and neither party contends for it in this case. ii) The other similar enterprises are United Kingdom subsidiaries of other parent companies resident in third States, not being either the United Kingdom or the other contracting State. Until the start of the hearing before me this was the interpretation for which the Inland Revenue was contending. In my view it is extremely difficult to force the interpretation out of the language of the paragraph, and it would have little or nothing to commend it from the point of view of policy. In his submissions on behalf of the Inland Revenue Mr Glick QC said that he no longer supported it. iii) The other similar enterprises are United Kingdom subsidiaries of United Kingdom resident companies. As I have said, in my opinion this is the correct interpretation. I will enlarge on my reasons later, but first I wish to deal with the fourth possibility. iv) There are no other similar enterprises. This in the end became the Inland Revenue s position. If I understood Mr Glick correctly his analysis began by accepting that, because the hypothetical parent company of the comparator United Kingdom enterprise could not be assumed to be resident either in Japan (which was possibility (i)) or in a third State (which was possibility (ii)), the only possibility left was a parent company resident in the United Kingdom. However, so the argument ran, if the hypothetical United Kingdom resident parent would receive (so far as dividends are concerned) the normal tax treatment applicable to United Kingdom resident companies, its United Kingdom subsidiary, though an enterprise of the United Kingdom, would not be an enterprise similar to the actual enterprise under consideration. For example it would not be an enterprise similar to NEC Semi-Conductors Ltd. Why not? Mr Glick s answer is: because of the United Kingdom tax treatment of dividends received and paid, not by the enterprises themselves (NEC Semi-Conductors Ltd and another hypothetical United Kingdom subsidiary), but by their parent companies (the Japanese parent company of NEC Semi-Conductors Ltd and the hypothetical United Kingdom resident parent company of the hypothetical United Kingdom subsidiary). The Japanese parent company of NEC Semi-Conductors Ltd was not liable to pay United Kingdom ACT if it paid dividends itself; the hypothetical United Kingdom parent company of a comparator United Kingdom subsidiary would have been liable to pay ACT if it paid dividends itself. The Japanese parent company of NEC Semi-Conductors Ltd was not entitled to a United Kingdom tax credit if it received dividends from United Kingdom sources; the hypothetical United Kingdom parent company would have been so entitled. Therefore, so the argument concluded, because the tax treatments of the parent companies would have been different, the two subsidiaries would not themselves have been similar enterprises. 28. I do not accept Mr Glick s argument. I agree that the differences between the actual parent company and the hypothetical parent company which Mr Glick describes would have existed, but I do not think that

10 they are relevant to the exercise with which I am concerned. I am concerned with whether the actual Japanese-owned company (eg NEC Semi-Conductors Ltd) and another hypothetical United Kingdom company are similar. I agree that it is necessary to assume that, if the actual company is a subsidiary of another company, then so is the hypothetical comparator company; but I do not agree that the exercise has to be taken to the lengths of examining whether the hypothetical parent company, though resident in the United Kingdom, would have a tax treatment as respects dividends received and paid which would be the same as if it was not resident in the United Kingdom. In my judgment the actual company (e.g. NEC Semi-conductors Ltd) and a hypothetical other United Kingdom resident company which is a subsidiary are fairly comparable with each other in this context, and I do not accept that they cease to be comparable because there would be differences between the United Kingdom tax treatments of their respective actual and hypothetical parent companies. I also believe that Mr Glick s submission would be difficult to reconcile with the OBCD commentary on the sub-article, which states that the provision relates to the taxation only of the enterprises and not of the persons owning or controlling their capital. Therefore I do not accept the submission that there did not exist any such comparator company as was visualised by article 25(3) of the United Kingdom/Japan double taxation agreement (and of the equivalent sub-article in other double taxation agreements). 29. I return to what I believe to be the correct interpretation. The context is a United Kingdom subsidiary controlled by a parent company resident in the other Contracting State (eg Japan) which pays dividends to its parent. In that context I believe that other similar enterprises of [the United Kingdom] means other United Kingdom subsidiaries controlled by parent companies resident, not in the other Contracting State, but in the same Contracting State (ie in the United Kingdom) which pay dividends to their parents. In my view it is obvious from the whole scheme and purpose of the non-discrimination article that that is what the particular sub-article is getting at. It is clearly the view taken by the United States Treasury. The technical explanation (to which I referred in paragraph 24 above) reads as follows (with my italicising of the vital words). Paragraph (5) prohibits one Contracting State from subjecting an enterprise of such Contracting State, the capital of which is... owned or controlled by one or more residents of the other Contracting State to any taxation or any requirement connected with taxation which is other or more burdensome than is applicable to enterprises of the first-mentioned Contracting State carrying on the same activities, the capital of which is wholly or partly owned or controlled by one or more residents of the first mentioned Contracting State. Mr Aaronson has helpfully shown me decisions of courts at the highest levels in the Netherlands and Sweden, dealing with the same sub-article of the OECD model treaty, and taking it virtually for granted that the comparator company is one controlled in the State which is alleged to have applied other or more burdensome taxation. The question has also arisen in administrative courts in France. The decisions there appear not all to be consistent with one another, but I was given information which shows that a case is expected to come before the Conseil d Etat, and that the Commissaire du Gouvernement (a position which I understand to be similar to that of the Advocate General in the CJEC) has delivered an opinion (admittedly only of a preliminary nature and on an interlocutory matter) which appears to be consistent with the view that in France the comparator would be a French subsidiary owned by a French parent company. 30. in all the circumstances I agree with Mr Aaronson that in the present case the comparator similar enterprise postulated by the relevant paragraph of the non-discrimination article does exist, and that it is a United Kingdom subsidiary company owned by a United Kingdom parent. 31. In my view that deals with the only difficult point on the question of construction of the paragraph, but I need to cover the other two questions which I identified in paragraph 26 above. One of those questions focused on the treatment under the United Kingdom statutory provisions of a United Kingdom subsidiary which paid dividends to its non-resident parent company. The subsidiary had to pay ACT in consequence of paying the dividends, and it could not make a group income election with its parent to remove the ACT liability. Was that a treatment covered by the description taxation or any requirement connected therewith? In my judgment it was. It could be regarded as taxation in that the result was that ACT (which is certainly taxation of some sort) had to be paid. It could be regarded as a requirement connected with taxation in the

11 sense that, in order to make a group income election, the United Kingdom subsidiary needed to have a United Kingdom parent company a requirement with which it could not comply. I only add that I do not think that Mr Glick effectively contested the proposition that the facts of the present case did exhibit taxation or a requirement connected with it. 32. The other question which I identified in paragraph 26 above was whether the taxation or connected requirement to which the actual United Kingdom subsidiaries (eg NEC Semi-conductors Ltd) were subjected was other or more burdensome than the taxation or connected requirements to which the hypothetical United Kingdom comparator company would have been subjected. Given my conclusion in earlier paragraphs that the hypothetical comparator is a United Kingdom subsidiary of a United Kingdom parent company, the answer is clear: yes, the taxation and connected requirements were other than the taxation and connected requirements which would have applied to the comparator; further, they were more burdensome. 33. For the foregoing reasons I accept the first part of Mr Aaronson s submissions on behalf of the claimants. In my judgment the relevant rules in the Taxes Act were, so far as their impact on the payment of dividends by the claimant United Kingdom subsidiaries was concerned, contrary to article 25(3) of the United Kingdom/Japan double taxation agreement, and were also contrary to the identically worded article 24(5) of the United Kingdom/United States double taxation agreement. I will only add this. The respect in which the rules were contrary to the double taxation agreements was only that they did not permit the subsidiaries to join with their non-resident parent companies in making group income elections. I do not accept one submission which Mr Aaronson made, namely that by virtue of the double taxation agreements the subsidiaries should simply have been allowed to pay dividends to their parents without ACT and without first making ACT elections and observing all the procedural requirements in connection therewith which had to be observed by United Kingdom subsidiaries which made elections with their United Kingdom parent companies. Is the non-discrimination article as it applies to the facts of the present case incorporated into United Kingdom domestic tax law? 34. This is in my view the critical question in this case. In my view the answer to it is: no. I will enlarge on my reasons in the paragraphs which follow, but it might be helpful if I state here the two key stages in my reasoning. They are as follows. i) Where a double taxation agreement has been brought into force in domestic law by an Order in Council, s 788(3) does not mean that all the effects of all of the provisions in the agreement are automatically incorporated into domestic law. Most of those effects probably will be incorporated into domestic law, but some will not be. That is the result of the words in the opening part of the subsection: in so far as they provide for...' the matters listed in paragraphs (a) to (d). In so far as provisions of a double taxation agreement provide for a matter so listed they are incorporated into domestic law. In so far as they provide for a matter which is not so listed they are not incorporated into domestic law. ii) The provisions of the relevant paragraph in the non-discrimination article of the double taxation agreements involved in this case, in so far as they provide (or mean) that the United Kingdom subsidiary of a parent company resident in the other Contracting State ought to be able to join with its parent in making a group income election and thereafter to pay dividends without being liable to pay ACT, provide for a matter which is not listed in paragraphs (a) to (d) of s 788(3). The critical point arises under paragraph (a). The provisions of the non-discrimination article may provide for relief from ACT, but that is not relief... from corporation tax in respect of income or chargeable gains. Therefore that particular effect of the non-discrimination article is not incorporated into the domestic law of the United Kingdom, and the United Kingdom subsidiaries cannot claim restitution in reliance on it in the present case. 35. In this and a number of following paragraphs I enlarge on the proposition summarised in (i) above. A taxpayer who claims that some aspect of his United Kingdom tax treatment is contrary to a provision of a

12 double taxation agreement must first succeed in showing that the treatment complained of is indeed contrary to the agreement (as I have accepted that the claimants have shown in this case): but that only gets the taxpayer part of the way home. If a resident company wishes to be able to rely on an infringement of the agreement in direct proceedings against the Inland Revenue, it also needs to establish that the particular effect of the agreement has been incorporated into United Kingdom domestic law. If it has not been so incorporated, then the actions of the Inland Revenue in operating the tax system in a way which conflicts with the agreement may be a breach of international law between the United Kingdom and the other State. But that does not give to the aggrieved taxpayer rights for which it can claim protection in the national courts of this country. 36. The vital point in this connection is that s 788(3) provides that, once the arrangements in a double taxation agreement have become the subject matter of an Order in Council declaring it expedient that they shall take effect, then they shall notwithstanding anything in any enactment, have effect in relation to income tax and corporation tax in so far as they provide for any of the various matters spelt out in paragraphs (a) to (d) of the subsection. If the infringement of the terms of the double taxation agreement is within one of the matters spelt out in those paragraphs, the taxpayer can rely on it in domestic proceedings. Usually the domestic proceedings will take the form of a conventional tax appeal which begins before the Special or General Commissioners, but exceptionally they may take the form of a civil action in the national courts. If, however, the infringement of the double taxation agreement is not within any of the matters listed in paragraphs (a) to (d) of s 788(3), then that aspect of the agreement is not part of the domestic law of this country. The taxpayer cannot rely on it in a conventional tax appeal or in a civil action against the Inland Revenue. 37. Although Mr Aaronson was cautious about accepting it, there is in my opinion no doubt that the words in so far as they provide for are limiting words. Mr Aaronson s considered position on this was that the words did have a limiting effect, but only a small one. He said that it would have been different if they had read only in so far as they provide for, etc. I do not agree. In my opinion the addition of the word only would not have made any difference. 38. Mr Aaronson urged that I should give a wide interpretation to the various matters listed in paragraphs (a) to (d), in order that as many provisions of double taxation agreements as possible should be covered by s 788(3) and thereby made parts of domestic law. I do not see why I should do that. I intend to give a natural interpretation, neither wide nor narrow, to those of the matters listed in paragraphs (a) to (d) which are argued to cover the particular application of the non-discrimination article in point in this case. The matter principally relied on by the claimants is the reference in paragraph (a) to providing for relief from... corporation tax in respect of income or chargeable gains. If, as is the case, I do not think that the natural interpretation of those words includes relief from ACT, I do not think that I should give an unnatural and extended interpretation to the words in order, through the non-discrimination article, to bring treaty relief from ACT within the scope of domestic law. I do not accept the submission that the structure of s 788(3) (or its statutory predecessors going back to the Finance Act 1945) evinces an intention on the part of the draftsman to list everything which might realistically be expected to be covered by a double taxation agreement. If the draftsman s intention had been to bring into domestic law everything contained in a double taxation agreement he could have provided that the arrangements shall, notwithstanding anything in any enactment, have effect. And he could have left it at that. To my mind the structure of the subsection shows clearly that the draftsman did not want to secure that everything in a double taxation agreement should become part of domestic law. That is why he continued with the words in relation to income tax and corporation tax in so far as they provide for the listed matters. 39. It is also worth pointing out that, whereas the generality of provisions in double taxation agreements are stated in the agreements to apply, so far as United Kingdom tax law is concerned, only to income tax, corporation tax and capital gains tax, the provisions of non-discrimination articles are different and are commonly expressed to apply to all kinds of taxes. In the United Kingdom/Japan double taxation agreement paragraph (5) of article 25 (the non-discrimination article) reads: In this article the term taxation means taxes of every kind and description. In the case of the double taxation agreement with the United States a similar result is produced by article 2(4): For the purposes of Article 24 (non-discrimination) this Convention shall also apply to taxes of every kind and description imposed by each Contracting State, or by