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- Title
Unasked and Unanswered in PPL Corp. v. Commissioner. Why Limit the Foreign Tax Credit to Income Taxes?
- Authors
WALKER, ANDREW
- Abstract
U.S. taxpayers are generally allowed to credit against their U.S. income tax liability foreign taxes that are imposed on the same income, but only if the foreign tax is an "income" tax. On May 20, 2013, the Supreme Court decided PPL Corp. v. Commissioner (PPL Corp.), a case addressing whether the United Kingdom's windfall profits tax (the Windfall Tax) is a creditable income tax. The Windfall Tax was a one-time, retrospective tax imposed to recoup what the U.K. Parliament viewed as excessive returns enjoyed by private shareholders when various public utilities were privatized. These profits were generated by under-pricing of the utilities' shares in their initial public offerings and under-regulation of the utilities following privatization. The Windfall Tax was not imposed explicitly upon net income, but on a tax base equal to the excess of (1) the utility's "value in profit making terms," a notional value that was a multiple of the average annual financial accounting profits of the utility based on the four year period immediately following its privatization over (2) the company's "flotation value" (i.e., the share price at which the utility was first offered to the public). The Supreme Court held that the Windfall Tax was a creditable income tax, resolving a split between the Third Circuit which, reversing the Tax Court in PPL Corp., held that the Windfall Tax is not a creditable income tax and the Fifth Circuit, which in a companion case, Entergy Corp. v. Commissioner CEntergy Corp.), had upheld a Tax Court decision that the Windfall Tax is a creditable income tax. The Windfall Tax affected a very small number of U.S. taxpayers. Consequently, whether a foreign tax credit was appropriate in the specific instance of the Windfall Tax is not of great moment, except insofar as it has broader implications for the kinds of foreign taxes that will be considered creditable in the future. This Article therefore focuses primarily on a more general question ignored in the Supreme Court decision. Why, as a tax policy matter, should the foreign tax credit be limited to income taxes in the first instance? The academic literature has touched on the question but has yet to develop a coherent and convincing rationale. Indeed, one prominent commentator has suggested there was no underlying tax policy logic to the income tax limitation, stating that, "if one complained about double taxation and the United States tax was an income tax, then the other tax in the couplet must necessarily be an income tax. It probably was as simple as that." Taking as given that the tax system allows a credit for foreign taxes, this Article for the first time comprehensively analyzes the tax policy advantages and disadvantages of the income tax limitation, considering the equitable and efficiency rationales for the foreign tax credit, the history of the limitation, international comity considerations and the practical concerns faced by the Service in administering the foreign tax credit regime. While the Article does not offer a single unified policy rationale for the income tax limitation, it demonstrates that there are a number of important policy considerations at stake and that the reasons for the income tax limitation are anything but "simple."
- Subjects
UNITED States; PPL Corp.; FOREIGN tax credit laws; UNITED States tax laws; TAX base; INCOME tax laws; ENTERGY Corp.; TAX courts; UNITED States. Supreme Court; ACTIONS &; defenses (Law)
- Publication
Tax Lawyer, 2014, Vol 67, Issue 3, p559
- ISSN
0040-005X
- Publication type
Article