By Mayur Nayak, Tarunkumar G. Singhal, Anil D. Doshi, Chartered Accountants
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On 29th October 2012, the US Supreme Court granted a petition for a writ of certiorari filed by PPL Corporation and Subsidiaries (petitioner). PPL Corporation and Subsidiaries v. Commissioner of Internal Revenue, No. 12-43 (29th October 2012).
The petitioner filed the petition for a writ of certiorari on 9th July 2012 to request the US Supreme Court to resolve the conflicts between the US Third Circuit and Fifth Circuit regarding whether the US foreign tax credit (FTC) should be granted u/s. 901 of the US Internal Revenue Code (IRC) for the windfall tax imposed in the United Kingdom.
The question presented in the petition is whether, in determining the creditability of a foreign tax, courts should employ a formalistic approach that looks solely at the form of the foreign tax statute and ignores how the tax actually operates, or should employ a substance-based approach that considers factors such as the practical operation and intended effect of the foreign tax.
The windfall tax is a UK tax that was imposed on the privatised UK utilities as a one-time 23% assessment on the difference between the company’s “profit-making value” and its “floating value”, i.e. the price for which the UK government sold the company to investors. In the PPL Corporation case, the Court of Appeals for the Third Circuit concluded that the UK windfall tax fails to satisfy the gross receipts requirement and thus is not an income tax that is creditable against the US income tax.
PPL Corporation and Subsidiaries v. Commissioner of Internal Revenue, Docket No. 11-1069 (22nd December 2011). The Third Circuit made this conclusion on the ground that the UK windfall tax can be formulated as a 23% tax on a 2.25 multiple (i.e. 225%) of profits, which leads to the calculation of a tax base that begins with an amount greater than 100% of gross receipts.
In a similar case involving the UK windfall tax, the Fifth Circuit found the Third Circuit’s analysis to be too formalistic and determined that the UK tax is an income tax for which a US FTC is allowable. Entergy Corporation and Affiliated Subsidiaries v. Commissioner of Internal Revenue, Docket No. 10- 60988 (5th June 2012) Certiorari is a procedure by which the US Supreme Court exercises its discretion in selecting the cases it will review.
