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Eschewing Obfuscation: The Creditability of Foreign Taxes and the Supreme Court

Author(s): Rufus Rhoades and Alexey Manasuev
Date: December 2012

On October 29, 2012, the U.S. Supreme Court granted certiorari to PPL Corp. v. Commissioner (the decision will impact its companion case, Entergy v. Commissioner, and one more case waiting the resolution of the same issue). The issue brought before the Supreme Court is whether the U.K. windfall tax should be creditable for U.S. federal income tax purposes. The U.K. windfall tax issue is seemingly limited in its impact as it only affects three U.S. taxpayers. That limited impact raises the question as to why the Supreme Court granted certiorari; one hopes cert was granted in order to allow the Court to examine the knotty question of when a foreign tax is creditable.

Background — U.K. Windfall Tax

The windfall tax was imposed in 1997 on 32 U.K. previously state-owned companies that were privatized between 1984 and 1996. At some point, many outspoken members of the public claimed that the Government had sold the companies too cheaply. That claim was based on the companies’ profits compared to the companies’ original purchase prices paid to the Government. The Labour Party, which by then had come into power, concluded that a one-time “windfall tax” would both generate funds for the Government and mollify the Government’s critics. In theory, the tax would be a levy on the spread between each company’s “profit making value” and the original purchase price of the stock when the companies were privatized.

What led to the current controversy was an extraordinarily complicated formula that the Government created in order to determine each company’s “profit making value.” Although the Third Circuit laid out the algebraic formula, we will not burden you with that mathematical mind-bender. What is important, for purposes of this EIA, is that, in practice, the formula used by the U.K. statute effectively resulted in a windfall tax that was mainly driven by …

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