UK windfall profit tax cannot be claimed as foreign tax credits in the US | Norton Rose Fulbright
UK WINDFALL PROFIT TAXES cannot be claimed as foreign tax credits in the United States, the Internal Revenue Service said.
A number of US utilities bought interests in electric distribution companies in the United Kingdom in the early 1990’s when the British government privatized its utilities. The public was soon alarmed at the large profits being earned by the new owners of these companies. Consequently, Britain enacted a one-time windfall profit tax in July 1997. The tax was 23% of the difference between the “value of the company in profit making terms” and the price the company originally fetched in the privatization. The “value of the company in profit making terms” was set at nine times average annual earnings in the four years following privatization.
US companies can claim credit against their US income taxes for any “foreign income taxes” they paid on earnings that are brought back from overseas. However, the foreign tax must be an income tax in a US sense to be creditable.
The IRS national office warned its agents in a “field service advice” at the end of December that this one is not. The agency said the UK windfall profit tax falls short in two respects. First, it was not a tax on the UK company’s earnings or income, but rather a tax on an artificial value. Second, the UK government did not wait to collect it until the taxpayer received, or “realized,” the share value.
The IRS made the advice public in late March. The utility in question did not claim the credit on its original tax return filed in 1997, but tried to do so later on an amended return. This led to the query to the national office.