The Supreme Court, in a unanimous decision, has held that a one-time U.K. windfall tax paid by the subsidiary of a U.S. corporation is creditable against U.S. income tax. The case, PPL Corporation et al. v. Commissioner, U.S. No. 12-43, was decided by the court on May 20, 2013.
Because the U.S. taxes its citizens, including corporations, on a worldwide basis, the Tax Code generally allows a deduction from gross income or a credit in the amount of foreign tax paid.
During the period between 1984 and 1996, the Conservative government in the U.K. privatized certain U.K. companies. In 1997, the Labour Party imposed a one-time “windfall tax” on 32 of these companies. PPL Resources Inc., a U.S.-based global energy company, was a partial owner of a U.K. company that was subject to the windfall tax. It claimed a credit for its share of the bill on its 1997 federal income tax return, relying on Code Section 901(b)(1), which states that any “income, war profits, and excess profits taxes” paid overseas are creditable against U.S. income taxes. The regs (Section 1.901-2) interpret this to mean that a creditable foreign tax must have the predominant characteristic of an income tax in the U.S. sense.
The IRS objected to this characterization and denied the credit, but the Tax Court found for PPL. The Third Circuit reversed the Tax Court, and because there was a split in the circuits (the Fifth Circuit had rejected the Third Circuit’s reasoning in a similar case) the Supreme Court agreed to decide the case.
The Supreme Court held unanimously that the U.K. tax is creditable under Section 901 of the Tax Code. In the decision written by Justice Clarence Thomas, the court concluded that the predominant character of the windfall tax is that of an excess profits tax, which is a category of income tax in the U.S. sense.