28 August 2020

Irish Bank & Or v HMRC; (Court of Appeal)

Irish Bank Resolution Corporation & Irish Nationwide Building Society (Appellants) v HMRC

Philip Baker QC for the Appellants; David Milne QC [and Jonathan Bremner QC] for HMRC

After a virtual hearing in July, the Court of Appeal (Patten, Singh and Rose LJJ) have unanimously affirmed the decisions of the FTT and Upper Tribunal that the UK was entitled, in the FA 2003,  to insert the new s 11AA into the ICTA 1988—now section 21(2) Corporation Tax Act 2009—providing that in calculating the taxable profits of a non-UK resident company (typically a bank) attributable to its branch or permanent establishment (“PE”) in the UK, it must be assumed not only that the PE is a distinct and separate enterprise dealing at arm’s length with the non-UK resident company of which it is part, but also that it has the same credit rating as that non-UK resident company, and has such equity and loan capital as it could reasonably be expected to have if it were a distinct and separate enterprise ( the Capital Attribution Tax Adjustment or “CATA”).

The Court of Appeal rejected the Appellants’ argument that the CATA was precluded by Article 8 of the 1976 UK-Ireland Double Tax Treaty and (it would have followed) by the provisions of all the other Double Tax Treaties which had the same wording as that in Article 7 of the 1963 OECD Draft Convention—effectively all Double Tax Treaties entered into by the UK before 2010 (when a new version of the OECD Draft Convention was agreed).

In doing so, the Court of Appeal rejected as irrelevant arguments based on the alleged unilateral practice of HMRC in periods subsequent to the 1976 Treaty, and distinguished three foreign cases, in the Courts of USA, France and Spain, which the Appellants argued had arrived at different conclusions.

The Appellants have applied for permission to appeal to the Supreme Court.

To see the approved decision, click here.