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Saturday, June 15, 2024 | Back issues
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Justices to Guide Foreign Tax Credit Eligibility

(CN) - The high court agreed Monday to clarify whether courts should look to form or substance when deciding if companies are eligible for foreign tax credits.

The U.S. Supreme Court granted certiorari in the case of PPL Corporation v. Commissioner of Internal Revenue.

The dispute involves a Pennsylvania company that claims it's entitled to a foreign tax credit on a so-called "windfall tax" levied on a United Kingdom-based utility in which it held a 25 percent stake.

After the Labour Party won the 1997 elections, the British government capitalized on public discontent by taxing the excess profits of 32 utilities that had been privatized between 1984 and 1996 by the then-governing Conservative Party.

The utilities' profits and share prices soared following privatization, as any savings they generated through efficiency were kept as profits rather than passed on to customers.

The windfall tax was a one-time 23 percent tax on the difference between each company's profit-making value and the price at which the government sold it -- a price the public considered too low. A company's profit-making value was defined as its average annual profit multiplied by its price-to-earnings ratio.

PPL Corporation cited a section of the Internal Revenue Code that grants U.S. corporations a tax credit for "income, war profits, or excess profits taxes" paid to another country.

The Internal Revenue Service denied PPL's claim for a refund, but the Tax Court reversed.

The 3rd Circuit, at the Commissioner of Internal Revenue's urging, ruled that PPL was not entitled to the foreign tax credit because the windfall tax was not technically a tax on the company's profits, but a tax on the difference between two numbers, one of which was factored in the company's average annual profit over a four-year period.

In a similar case involving the same U.K. tax, the 5th Circuit came to the opposite conclusion, saying courts needed to look beyond form and consider how the tax actually operates.

In its petition to the Supreme Court, PPL argued that the tax is, in substance, a tax on the "excess profits" of the privatized utilities.

"While the tax is nominally a tax on the excess 'value' of those companies above their privatization price, the tax 'value' was measured entirely by the companies' profits during the four years immediately after privatization," PPL claimed.

The high court agreed to clarify whether courts, when deciding if a foreign tax credit applies, should look solely at how the foreign tax is structured or take a more substance-based approach that factors in the tax's practical operation and intended effect.

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