Tax Professional usually responds in minutes
Our tax advisers are all verified
Unlimited follow-up questions
The India–Mauritius Double Tax Avoidance Agreement (DTAA), signed in 1983, has long been a pivotal treaty for investors due to its favourable tax terms.
For years, investors, particularly in the private equity and venture capital space, have utilised this treaty to minimise tax liabilities in India.
However, the treaty has also sparked numerous litigations and controversies, primarily concerning capital gains tax exemptions for investments made through Mauritius.
In a recent ruling, the Delhi High Court (HC) addressed a dispute concerning the application of the DTAA benefits to a Mauritius-based company, Tiger Global International.
This case clarified critical issues, including the significance of the Tax Residency Certificate (TRC), the Limitation of Benefits (LoB) clause, and the applicability of the grandfathering provision in the treaty.
The court’s decision has brought much-needed relief and certainty to taxpayers navigating the complexities of international taxation.
The case centres on Tiger Global International (the Assessee), a company incorporated in Mauritius for the purpose of making investments on behalf of Tiger Global Management LLC (TGM LLC), a Delaware-based investment manager.
The Assessee held a Category 1 Global Business License and a Tax Residency Certificate (TRC) from the Mauritius tax authorities.
Between October 2011 and April 2015, Tiger Global acquired shares in Flipkart Singapore and later transferred its holdings to Fit Holdings SARL, a Luxembourg-based entity.
The company sought clarity from India’s Income Tax Department (ITD) regarding the applicability of capital gains tax on these transactions under the DTAA.
However, the Advance Authority Ruling (AAR) ruled against the Assessee, stating that Tiger Global’s Mauritius-based structure lacked commercial substance and was merely a vehicle for *tax avoidance.
The Assessee argued that its investments were eligible for the **capital gains tax exemption** under Article 13(3A) of the DTAA.
This provision exempts Mauritian residents from Indian capital gains tax for shares acquired before April 1, 2017, and transferred thereafter.
The Assessee also relied on a Tax Residency Certificate (TRC) from the Mauritius authorities as proof of its eligibility for DTAA benefits, citing CBDT Circular No. 789, which upholds the TRC as sufficient evidence of residency.
The Assessee further contended that the Limitation of Benefits (LoB) clause, which restricts treaty benefits for entities with little economic substance, did not apply to the transactions in question because the shares were acquired prior to 2017.
They also argued that the AAR erred in questioning the motives behind the company’s establishment in Mauritius, as the purpose of incorporation should not disqualify it from treaty benefits.
The ITD took a starkly different position, arguing that the Mauritius-based entities were created solely to avoid capital gains tax in India.
The ITD asserted that TGM LLC, the US-based investment manager, exercised ultimate control and decision-making over the Mauritius entities, rendering the Mauritian companies mere intermediaries in a tax avoidance scheme.
The ITD relied on the Vodafone case, which allows the piercing of the corporate veil when an entity’s structure lacks commercial substance.
The ITD supported the AAR’s conclusion that Tiger Global International did not possess independent management and was ineligible for the DTAA benefits due to its tax avoidance motives.
The Delhi HC ruled in favour of the Assessee, providing a well-reasoned judgment that clarified the application of the India-Mauritius DTAA.
The court categorically held that TGM LLC was merely an investment manager and not the parent company of the Assessee.
The court observed that Tiger Global International was a significant entity with considerable economic activity, managing investments for more than 500 investors across 30 jurisdictions.
Regarding beneficial ownership, the court found no evidence to suggest that the Assessee was obligated to transfer revenues to TGM LLC or that it was merely acting on behalf of the US-based company.
Furthermore, the court upheld the Assessee’s Tax Residency Certificate (TRC) as conclusive proof of its eligibility for DTAA benefits, in line with earlier rulings.
Crucially, the court reaffirmed that grandfathering provisions under Article 13(3) of the DTAA would protect investments made before April 1, 2017, from the LoB clause.
This provision, the court held, was clear and unambiguous, ensuring that the General Anti-Avoidance Rules (GAAR) could not override treaty benefits.
The ruling of the Delhi High Court is a major victory for international investors who rely on the India-Mauritius DTAA for tax certainty.
The judgment clarifies that corporate structures established in tax-friendly jurisdictions should not automatically be viewed as vehicles for tax avoidance, and that the Tax Residency Certificate (TRC) holds substantial weight in determining eligibility for treaty benefits.
The decision imposes a high burden of proof on tax authorities to establish tax evasion or fraud, ensuring that only in cases of sham transactions will treaty benefits be denied.
This landmark ruling provides investors with the much-needed confidence to structure their investments in line with international treaties, reinforcing India’s position as a tax- and investment-friendly jurisdiction.
If you have any queries about this article, or Indian tax matters in general, then please get in touch.
When companies earn profits in foreign countries, they often face the possibility of being taxed twice: once in the foreign country and again in their home country.
To mitigate this, tax systems around the world, including in the United States, allow for foreign tax credits (FTCs).
FTCs enable companies to offset the tax paid to foreign governments against their domestic tax liability.
However, claiming FTCs isn’t always straightforward, and a recent US Tax Court ruling has provided much-needed clarity on how companies should approach this complex area of tax law.
The US Tax Court recently ruled on a significant case (Varian Medical Systems, Inc. v. Commissioner), involving Section 245A of the Internal Revenue Code, which deals with dividends received from foreign subsidiaries.
The case hinged on how companies should calculate their foreign-source income, which is critical for determining how much of a foreign tax credit they can claim.
In this particular case, a US-based multinational argued that certain types of income should not be included in the calculation of foreign-source income, allowing them to claim a larger foreign tax credit.
However, the court ruled that all types of income, including those that may seem unrelated, must be factored into the calculation.
The case also highlighted the importance of proper documentation and compliance when claiming FTCs, as even small errors in reporting foreign-source income can lead to significant tax penalties.
For multinational companies, this ruling has far-reaching implications.
The court’s decision makes it clear that companies cannot cherry-pick which types of income to include when calculating their foreign tax credits.
Instead, they must take a holistic approach, ensuring that all forms of foreign income are properly accounted for.
Moreover, the ruling underscores the importance of compliance.
Companies that fail to accurately report their foreign income or that miscalculate their foreign tax credits risk being audited by the IRS and could face significant penalties.
In light of this ruling, multinational companies should take immediate steps to review their foreign tax credit calculations.
This may involve working closely with tax advisers to ensure that all foreign income is properly accounted for and that the company is complying with the latest IRS guidelines.
Companies may also want to invest in better tax reporting systems, especially those with operations in multiple countries.
Having the right technology in place can help streamline the tax compliance process and reduce the risk of errors.
The US Tax Court’s ruling serves as a reminder that claiming foreign tax credits is a complex process that requires careful attention to detail.
Companies must ensure that they are following all applicable tax laws and regulations to avoid costly mistakes.
By staying informed and working with experienced tax advisers, multinationals can minimise their tax liabilities while remaining compliant with the law.
If you have any queries about this article on US Tax Court Clarifies Rules on Foreign Tax Credits, or US tax matters in general, then please get in touch.
Transfer pricing refers to the pricing of goods, services, or intellectual property exchanged between different parts of a multinational company.
For example, if a subsidiary in Italy sells products to a subsidiary in Germany, transfer pricing rules determine the price at which these transactions take place.
These rules ensure that companies don’t manipulate internal prices to shift profits to low-tax countries and minimise their tax bills.
In August 2024, the Italian Supreme Court made a landmark decision regarding transfer pricing that is expected to have significant implications, not only for Italy but also for how other countries enforce their transfer pricing rules.
The case involved a multinational company with subsidiaries in Italy and other European countries.
The company was accused of setting artificially high prices for goods transferred between its Italian subsidiary and subsidiaries in lower-tax jurisdictions.
The Italian tax authorities argued that these inflated prices reduced the profits reported in Italy, allowing the company to pay less tax.
The key issue in the case was whether the company’s transfer pricing arrangements complied with the arm’s length principle, a fundamental rule in transfer pricing law.
This principle states that transactions between different parts of a company should be priced as if they were between independent companies.
The Italian Supreme Court ruled in favour of the tax authorities, finding that the company had violated the arm’s length principle.
The court emphasised that tax authorities should scrutinise transfer pricing arrangements to ensure that companies are not artificially shifting profits out of the country.
The ruling is seen as a victory for tax authorities and a warning to companies that Italy is prepared to take a tougher stance on transfer pricing enforcement.
For companies operating in Italy and beyond, this ruling has important implications:
The Organisation for Economic Co-operation and Development (OECD) has been working on transfer pricing guidelines for years, as part of its Base Erosion and Profit Shifting (BEPS) initiative.
This initiative aims to prevent companies from using tax loopholes to shift profits to low-tax jurisdictions.
Italy’s ruling is in line with the OECD’s efforts to ensure that transfer pricing is applied consistently across different jurisdictions.
As more countries adopt these guidelines, companies will need to pay closer attention to how they price transactions between subsidiaries.
This ruling is a clear signal that transfer pricing enforcement is becoming more robust.
Companies with operations in Italy—or any other country with strict transfer pricing rules—should review their pricing policies to ensure compliance.
Working closely with tax advisers is essential to avoid costly penalties and ensure that transactions are priced in accordance with the arm’s length principle.
If you have any further queries on this article on Italy’s transfer pricing decision, or tax matters in Italy more generally, then please get in touch.
In June 2024, the Swiss Federal Court issued its second ruling on the tax treatment of French non-trading property companies, also known as Sociétés Civiles Immobilières (SCIs).
This decision, building on a previous ruling from December 2022, challenges the longstanding tax advantages many Swiss residents have enjoyed when using SCIs to acquire and manage property in France.
The rulings bring significant implications for Swiss residents who hold or plan to hold French property through these entities.
For years, SCIs have been a favored method for Swiss residents, especially in French-speaking cantons, to invest in French real estate.
These entities offered flexibility in property management and, until recently, a relatively favorable tax treatment in Switzerland, despite variations between cantons.
However, the Federal Court’s recent rulings have raised concerns over their continued tax efficiency.
The first of the two pivotal rulings, issued in December 2022 (2C_365/2021), addressed the treatment of SCIs concerning wealth tax.
The Swiss Federal Court determined that SCIs should be treated as fiscally opaque from a Swiss tax perspective, regardless of their tax status in France.
Moreover, the court ruled that the double taxation agreement (CDI CH-FR) between Switzerland and France does not prevent Switzerland from taxing SCI shares if France does not impose taxes on them.
This decision created uncertainty and raised concerns about whether these principles would apply to other tax areas, such as income tax.
On 5 June 2024, the Federal Court issued a second decision (9C_409/2024) that extended these principles to income tax.
The court emphasized that Swiss authorities must first evaluate the SCI under Swiss tax law and then consider whether the CDI CH-FR allows Switzerland to impose taxes.
The court reaffirmed that SCIs are fiscally opaque from a Swiss standpoint and, in the absence of taxation in France, Switzerland could exercise its taxation rights both on wealth and income tax.
While the second ruling resolved some uncertainties, it introduced new challenges for Swiss residents.
One significant issue stems from the differing treatment of SCIs in Switzerland and France.
In Switzerland, SCIs are seen as opaque, meaning their income is subject to taxation.
In France, however, SCIs are treated as translucent, meaning certain incomes, such as those from personal use of real estate, are not taxed.
This disparity could lead to situations where Swiss residents face taxation in Switzerland for benefits not taxed in France.
For instance, personal use of real estate held by an SCI in France, which is not subject to income tax there, could be taxed in Switzerland as an unrecognized rental benefit.
Since France does not impose income tax on such personal use, Switzerland is not obliged to prevent double taxation under the CDI CH-FR, leaving Swiss residents potentially liable for these taxes.
Given the Federal Court’s rulings, holding French real estate through an SCI could become increasingly inefficient for Swiss residents, especially in cases where properties are used for personal purposes.
The possibility of Swiss taxation on benefits not recognized by French tax authorities complicates the tax planning strategy for individuals using SCIs.
Swiss residents who own French property through SCIs should reconsider their approach to property management and ownership.
These rulings suggest that the traditional advantages of SCIs could be significantly diminished, prompting a re-evaluation of whether SCIs remain the best structure for cross-border real estate holdings.
In the short term, property owners will need to assess how these rulings affect their tax filings and ensure compliance with both Swiss and French tax authorities.
In conclusion, the Swiss Federal Court’s decisions from December 2022 and June 2024 mark a turning point for the use of SCIs by Swiss residents.
The evolving tax landscape will require careful navigation, and individuals should seek professional advice to avoid unexpected tax liabilities.
If you have any queries on this article on SCIs for French Property, or other Swiss tax matters, then please get in touch.
A recent ruling by the Travis County District Court determined that the Texas franchise tax, as applied to American Airlines, Inc. (“American”), is preempted by the federal Anti-Head Tax Act (AHTA).
The court dismissed the Texas Comptroller‘s arguments that the franchise tax was not a gross receipts tax and that it did not apply to revenues from air commerce or transportation.
This ruling opens the door for further federal preemption challenges against the Texas franchise tax.
American Airlines, a major airline based in Fort Worth, Texas, operates a vast fleet of around 1,000 aircraft, serving destinations across North America, the Caribbean, Latin America, Europe, and the Asia-Pacific region.
The case revolved around American’s franchise tax obligations for the 2015 reporting year, covering fiscal year 2014.
The Texas franchise tax is calculated based on the taxable margin of entities conducting business within the state.
A company’s taxable margin is either 70% of its total revenue or its total revenue minus specific deductions (e.g., $1 million, cost of goods sold, or compensation). This margin is then apportioned to Texas using a gross receipts factor, and the tax is calculated based on the applicable rate.
For the 2015 report, American chose to calculate its taxable margin by applying the 70% of total revenue option, excluding revenues from passenger ticket sales, baggage fees, and freight transportation.
American argued that these transportation-related revenues were not subject to the Texas franchise tax due to federal preemption under the AHTA, which prohibits states from taxing gross receipts derived from air commerce or transportation.
From 2009 to 2014, the Texas Comptroller agreed with American’s interpretation and excluded such transportation revenues from the franchise tax base.
However, the Comptroller later sought clarification from the U.S. Department of Transportation (DOT), which affirmed that the AHTA preempts state taxes on revenues from air transportation.
Despite this, the Comptroller encouraged American to pay its 2015 franchise tax under protest and pursue legal action to resolve the dispute. American complied, paid the tax under protest, and subsequently filed a lawsuit to challenge the Comptroller’s authority.
The court ruled in favour of American, concluding that the Texas franchise tax, as applied to the airline’s transportation receipts, is indeed a gross receipts tax preempted by the AHTA.
The court referenced similar rulings from other jurisdictions, including a U.S. Supreme Court decision, Aloha Airlines, Inc. v. Director of Taxation of Hawaii.
Consequently, American was entitled to exclude its transportation receipts from its franchise tax calculations for 2015, and the court ordered the Comptroller to issue a refund.
This ruling marks a significant victory for American Airlines and other air carriers operating in Texas, affirming that the AHTA overrides the application of the Texas franchise tax to revenues from air transportation.
The decision underscores the necessity for the Texas Comptroller to have a valid legal basis before altering its tax positions on similar matters.
Other businesses in Texas should consider whether federal laws, like the AHTA, could preempt the imposition of the franchise tax on their gross receipts.
The court’s ruling in favour of American Airlines marks a significant precedent, affirming that the Texas franchise tax cannot be applied to revenues derived from air commerce or transportation due to federal preemption under the Anti-Head Tax Act (AHTA).
This decision not only secures a victory for American Airlines but also serves as a crucial reference point for other businesses in Texas that may be subject to similar federal protections against state-imposed taxes.
If you have any queries about this article on Texas Franchise Tax Preempted by Federal Law, or US tax matters in general, then please get in touch.
In a significant ruling that could have widespread implications for taxpayers across the UAE, the Abu Dhabi Cassation Court has delivered a judgment that clarifies the rights of taxpayers in recovering Value Added Tax (VAT) from non-compliant suppliers.
The ruling, issued on 8 August 2024, in Case No. 648/2024, addresses a common issue where the UAE Federal Tax Authority (FTA) has historically rejected VAT refund requests due to suppliers failing to provide compliant tax invoices.
This decision now opens the door for taxpayers to seek financial recourse from suppliers, potentially reclaiming substantial amounts of VAT.
The case involved a construction company that issued a cheque to a supplier as a guarantee for VAT related to a construction project.
The dispute arose when the FTA rejected the company’s VAT refund request, citing a lack of proper documentation—specifically, the necessary VAT invoices from the supplier.
Under UAE VAT Law (Federal Decree-Law No. 8 of 2017), businesses are entitled to recover input tax (VAT paid on goods and services) provided they possess a valid tax invoice.
However, strict compliance with the invoicing requirements, as detailed in Article 59 of the Executive Regulations, is crucial.
Non-compliance has frequently led to the FTA rejecting VAT refund requests, leaving businesses with significant unrecovered VAT liabilities.
In this particular case, the construction company was unable to submit compliant invoices within the required timeframe, leading to the FTA’s rejection of their refund claim. Consequently, the company initiated legal action to recover the VAT from the supplier who had failed to provide the necessary documentation.
The Abu Dhabi Cassation Court’s decision is a pivotal moment in UAE tax law, establishing that taxpayers have a clear legal path to recover VAT amounts from suppliers when refund claims are denied due to non-compliance.
The court upheld the principle that if a supplier issues a non-compliant tax invoice and this results in the FTA rejecting the taxpayer’s VAT refund claim, the taxpayer is entitled to reclaim the corresponding amount from the supplier.
The court’s reasoning was based on the supplier’s obligations under UAE VAT Law.
It emphasized that issuing a compliant tax invoice is a statutory requirement, and failing to do so can have serious financial consequences for the purchaser.
In this case, the court found that the supplier’s failure to provide the necessary VAT invoices within the stipulated period directly led to the FTA’s decision to deny the refund.
As a result, the court ruled that the taxpayer could recover the lost VAT from the supplier.
Moreover, the court underscored the principle of equity, asserting that the financial burden resulting from non-compliance should not fall on the taxpayer.
Instead, the supplier, who failed to meet their legal obligations, should bear the responsibility.
This ruling has significant implications for both taxpayers and suppliers in the UAE:
This decision offers a vital remedy in situations where VAT refunds are denied due to the supplier’s non-compliance with invoicing requirements.
Taxpayers now have a clear legal avenue to seek compensation directly from suppliers, ensuring they are not financially penalised for issues beyond their control.
The ruling serves as a strong warning to suppliers about the importance of adhering to VAT invoicing standards.
Suppliers must ensure that their tax invoices meet the FTA’s requirements, as failure to do so could lead to substantial financial liabilities, including the need to reimburse clients for denied VAT refunds.
The Abu Dhabi Cassation Court’s ruling in Case No. 648/2024 marks a landmark moment in the UAE’s tax landscape.
It reinforces the critical importance of compliance with VAT regulations and provides a robust legal mechanism for taxpayers to recover amounts denied by the FTA due to non-compliant supplier invoices.
Both taxpayers and suppliers should pay close attention to this ruling and its potential impact on their financial and operational practices.
If you have any queries about this article, UAE Court Allows VAT Recovery, then please do get in touch.
In a notable ruling, the Irish Tax Appeals Commission (TAC) has decided in favor of a taxpayer in Ireland’s first-ever transfer pricing case.
The case revolved around transfer pricing adjustments proposed by the Revenue Commissioners (Revenue) concerning the supply of services by an Irish subsidiary (Taxpayer) to its US parent company (Parent), particularly focusing on share-based awards (SBAs) granted to the Taxpayer’s employees by the Parent.
The Taxpayer, under intercompany services agreements, performed sales, marketing, and research and development activities for the Parent on a “cost-plus” basis.
This arrangement meant the Taxpayer charged the Parent a fee based on its costs plus a mark-up. Although the Taxpayer’s financial statements included expenses for SBAs as required by Financial Reporting Standard 102 (FRS 102), the intercompany agreement explicitly excluded these expenses from the cost base used to calculate the charges to the Parent.
The Revenue contended that the Taxpayer failed to demonstrate that the intercompany service fees were at arm’s length, arguing that SBA costs should have been included in the cost base for the markup calculation.
Both parties agreed that the Transactional Net Margin Method (TNMM) was the appropriate transfer pricing method to apply in this case.
The Taxpayer disputed the Revenue’s view, asserting that SBA costs were notional and should not factor into the cost base for determining intercompany charges.
The Taxpayer’s expert witness argued that the economic risk associated with SBAs was borne by the Parent’s shareholders, who effectively diluted their ownership to incentivise the Taxpayer’s employees.
The TAC, relying on OECD guidelines, sided with the Taxpayer.
It considered whether the SBAs created an economic cost for the Taxpayer, ultimately concluding that the Parent bore the risk and administrative burden of the SBAs.
The TAC emphasised that while the accounting treatment of SBAs was correct, it did not reflect the economic reality.
Therefore, the SBAs should be excluded from the Taxpayer’s cost base in accordance with the arm’s length principle.
The Revenue objected to the admissibility of the Taxpayer’s expert reports, claiming they were opinions on Irish domestic law rather than expert economic evidence.
However, the TAC found the expert witnesses credible, independent, and helpful in addressing the appeal’s issues.
The TAC accepted the Taxpayer’s evidence on accounting treatment as uncontroversial.
A contentious point was the 2015 tax return and the four-year statutory time limit for Revenue to raise an assessment.
The Revenue argued the time limit did not apply because the return was insufficient, citing flaws in the transfer pricing documentation.
The TAC, however, stated that a “sufficient” return does not need to align with Revenue’s assessment, as long as the taxpayer provided full and true disclosure.
Consequently, the TAC ruled in favour of the Taxpayer.
This decision holds international significance, diverging from rulings in other jurisdictions such as Israel.
For instance, in the Israeli cases of Kontera and Finisar, tax authorities required that SBA costs be included in the cost base for calculating cost-plus remuneration, despite the subsidiaries not incurring these costs.
This TAC ruling, informed by comprehensive expert testimony and aligned with OECD Transfer Pricing Guidelines, will impact multinational corporations with SBA schemes.
Businesses should consider reviewing their transfer pricing policies in light of this landmark decision.
If you have any queries around this article, the Taxpayer Wins First Transfer Pricing Case, or other tax matters in Ireland, then please get in touch
The introduction of General Anti-Avoidance Rules (GAAR) into the Income Tax Act, 1961, marked a significant shift in India’s tax enforcement landscape.
Effective from the financial year 2017-18, these provisions grant the Indian Revenue Authorities (IRA) extensive powers to recharacterize transactions, disregard certain transactions, and disallow expenses if they are primarily designed to obtain tax benefits.
Despite initial concerns about their broad application, the IRA has invoked GAAR provisions sparingly.
However, the recently delivered a landmark judgment on one such GAAR-related case.
The case involved a taxpayer accused of engaging in a “bonus stripping” scheme through transactions with Crown C Supply, a building supply company owned by brothers Michael and Thomas Connelly.
This scheme typically involves issuing bonus shares and subsequently selling them to claim tax losses.
The taxpayer and a sister concern, XYZ, acquired shares of ABC at INR 115 per share.
Shortly after, the taxpayer purchased additional shares from XYZ. ABC then issued bonus shares, reducing the share value to INR 19.20 from INR 115.
The taxpayer sold these shares to another entity, PQR, claiming a short-term capital loss of INR 4,620 million.
The IRA argued that the bonus stripping arrangement was a tax avoidance scheme.
The taxpayer contended that GAAR should not apply as Section 94(8) of the Income Tax Act specifically addresses bonus stripping for mutual funds but not shares, thus falling under Specific Anti-Avoidance Rules (SAAR).
However, the Court dismissed this argument, noting that GAAR provisions, introduced through a non-obstante clause, take precedence over other sections.
The Court emphasized that the scheme was designed primarily to evade taxes and lacked commercial substance.
It cited the Supreme Court’s ruling in the Vodafone International Holdings B.V. case, reinforcing the “substance over form” doctrine, which aims to identify and disregard transactions lacking genuine business intent.
The Telengana High Court ruled that the taxpayer’s transactions constituted impermissible tax avoidance under GAAR.
It highlighted that while Section 94(8) applies to mutual funds, it does not preclude GAAR’s application to share transactions.
The Court referenced the Finance Minister’s speech during GAAR’s introduction, clarifying that GAAR or SAAR applicability would be determined case-by-case.
The judgment affirmed that the IRA can invoke GAAR in cases where the primary objective is tax avoidance, regardless of other provisions.
The taxpayer’s attempt to sidestep tax liabilities through contrived transactions was deemed invalid.
This ruling underscores the importance of ensuring transactions have genuine commercial substance.
Taxpayers must meticulously document the business rationale behind transactions, especially those yielding tax benefits, to avoid falling afoul of GAAR provisions.
The judgment serves as a reminder that while specific anti-avoidance rules exist, GAAR can be applied to a broader range of tax avoidance schemes.
Businesses should anticipate more stringent scrutiny from tax authorities and prepare accordingly.
If you have any queries about this article on the First Indian GAAR Judgment ruling, or any other Indian tax matters, then please get in touch.
The U.S. Supreme Court has affirmed the Ninth Circuit’s decision in Moore v United States, upholding the constitutionality of the mandatory repatriation tax enacted in 2017.
On 20 June 20, 2024, the U.S. Supreme Court ruled that the mandatory repatriation tax (MRT) under section 965 of the Internal Revenue Code is constitutional.
The decision might well be a narrow one. Nonetheless, it potentially also has significant implications.
The MRT was introduced as part of the 2017 Tax Cuts and Jobs Act.
It imposes a one-time tax on specific US shareholders of foreign corporations based on their pro rata share of the foreign corporation’s realized but undistributed earnings accumulated since 1986.
The Moore’s challenged the MRT under the Sixteenth Amendment, arguing that it constituted an unapportioned direct tax on property.
The Court, however, upheld the MRT based on established precedents that allow Congress to attribute undistributed (and untaxed) income realized by an entity to its equity holders and tax those equity holders on their pro rata share of the income.
The Supreme Court affirmed the Ninth Circuit’s decision, concluding that the MRT is constitutional.
This conclusion was based on long-standing precedents which assert that Congress may attribute realized income of one entity (a foreign corporation) to another person (certain US shareholders) and tax them on that income.
This ruling is notable as Moore is one of the first significant constitutional tax cases addressed by the Court in many years.
Had the Court found an affirmative realization requirement, many tax regimes under the Code, such as subpart F, GILTI, PFIC, and partnership taxation, could have been upended.
However, the Court’s “precise and narrow” decision did not extend that far.
While the decision affirms the MRT’s constitutionality, the Court did not address two critical issues:
These unanswered questions suggest potential areas for future legal challenges. Notably, the concurring and dissenting opinions revealed that at least four Justices might require a realization event for an income tax to be constitutional under the Sixteenth Amendment.
Although the decision did not declare large portions of the Code unconstitutional, it leaves the door open for future challenges to certain tax laws and policies.
The opinions expressed by the Justices indicate that areas such as wealth tax or certain income tax provisions might still be subject to scrutiny.
Taxpayers and legal experts should closely monitor developments, as Moore v United States is unlikely to be the final word on the constitutionality of various tax provisions. This decision, while maintaining the status quo, sets the stage for further debates and potential litigation in the tax law arena.
If you have any comments on this article on Supreme Court Upholds Repatriation Tax, or US tax matters in general, then please get in touch.
In an important decision, the Supreme Court recently addressed the extent to which professional advisory fees associated with the disposal of a loss-making investment can be deducted as management expenses under section 1219 of the Corporation Tax Act 2009 (CTA 2009).
The case in question was Centrica Overseas Holdings Ltd v HMRC.
The crux of the matter was whether the fees incurred were of a revenue or capital nature, as only the former are deductible under section 1219 CTA 2009.
While it was accepted that the fees were expenses of management, their classification as either revenue or capital expenditure remained contested.
The Supreme Court unanimously agreed with the Court of Appeal that the test for determining the nature of the expenditure is the same for both investment companies and trading companies, leading to the conclusion that the fees were non-deductible capital expenditure.
Centrica Overseas Holdings Ltd (COHL), an intermediate holding company within the Centrica group, owned a failing Dutch investment known as Oxxio.
Following a decision in mid-2009 to dispose of the Oxxio business, it was accounted for as a “discontinued operation” and “held for sale” starting June 30, 2009, with an anticipated sale by June 30, 2010.
However, complications delayed the sale process.
From July 2009 to early 2011, COHL incurred approximately £2.5 million in fees for banking, accountancy, and legal services related to the strategic considerations and sale documentation.
The sale was finally completed in March 2011 after Centrica plc’s board approved a third-party offer.
The Supreme Court affirmed the Court of Appeal’s stance that determining whether expenditure is capital or revenue in nature is a question of law, and the same test applies to both investment management businesses and ordinary trading businesses.
The primary indicator is the objective purpose of the expenditure.
Where a capital asset is involved, money spent on its disposal is generally considered capital expenditure unless specific transaction features indicate otherwise.
In this case, once the decision was made in 2009 to sell the Oxxio business, the fees for professional advice to facilitate the sale were deemed capital in nature and, therefore, non-deductible.
A crucial aspect of this case was the 2009 strategic decision to sell the Oxxio business and its subsequent accounting as a discontinued operation held for sale.
The Supreme Court found that the professional services were engaged to achieve the disposal, as reflected in the engagement letters.
Consequently, the taxpayer’s argument that the advice was to inform management decisions rather than directly facilitate the sale was rejected.
The Court emphasized that considering different options does not change the commercial reality that a decision to dispose of Oxxio had been made.
COHL did not differentiate between the various professional services fees, resulting in a broad-brush approach by both the Court of Appeal and the Supreme Court.
A more detailed breakdown might have highlighted services not directly aimed at achieving the disposal, potentially altering the outcome.
Uncertainty about whether an asset will be sold does not classify the expenditure as revenue.
The Supreme Court noted that uncertainty is common in transactions and does not change the fact that expenses aimed at enabling a decision on acquisition or disposal are capital in nature, even if the transaction does not occur.
The possibility of an aborted transaction does not alter the commercial reality of a decision to dispose of an asset.
The Supreme Court’s decision underscores the importance of the objective purpose behind expenditure when determining its capital or revenue nature.
In the context of COHL, the professional fees incurred to facilitate the disposal of the Oxxio business were capital in nature and thus non-deductible under section 1219 CTA 2009.
This ruling highlights the nuanced considerations involved in classifying expenditure and the rigorous application of legal principles to determine tax deductibility.
If you have any queries about this article on Centrica Overseas Holdings Ltd v HMRC, or other UK tax matters, then please get in touch.