UK PE is not entitled to credit for foreign tax

One more interesting decision by the United Kingdom Special Commissioners of Income Tax (Avery Jones for example is one of the Special Commissioners). This decision in the USB case deals with the eventual application of the non-discrimination relief under Switzerland-UK tax treaty to a UK branch(PE) of a Swiss resident company claiming a tax credit on UK dividends received. Accordingly, UK law allows a UK resident company to surrender trading losses against payment of the tax credit on UK dividends. The PE argued that it was entitled to claim the relief by virtue of the non-discrimination provision in Art. 23 of the UK-Switzerland tax treaty. The Special Commissioners considered that the payment of the tax credit is part of the levying of taxation for the purposes of Art. 23 with the result that the appellant was less favourably taxed than a comparable UK resident company and was therefore entitled to the benefit of Art. 23. However, the Special Commissioners held that the PE's right under the treaty to receive the payment of the tax credit had not been incorporated into UK law.

It should be noted that the OECD Commentary (Art.24 Comm. para.51.) clearly states that a permanent establishment is entitled to credit for foreign tax in the same way as domestic enterprises are entitled to it under internal law. It appears in this case that the credit could not be extended to a permanent establishment in accordance with the non-discrimination provision because there was no internal law giving effect to the treaty by delegated legislation. The Special Commissioners reached this decision with considerable reluctance because the result is considered unsatisfactory. It basically means "that the UK has made a treaty but has not given effect to it in domestic law and is therefore in breach of the Treaty in the sphere of international law". In fact, the Special Commissioners urge the Parliament to reconsider s 788.