Xerox, a New York corporation, owned directly and indirectly the majority of the voting shares of RXL, a corporation of the United Kingdom. In 1974, the tax year here at issue, RXL paid a dividend distribution to Xerox and paid the requisite ACT in the United Kingdom on the distribution. A portion of that ACT was set off in 1974 against RXL’s mainstream corporation tax in the United Kingdom. The foreign tax credit for that portion of the 1974 ACT is not in dispute. The portion of the ACT was not used to offset RXL’s mainstream tax was surrendered by RXL to its United Kingdom subsidiaries. The U.S IRS then withdrew the foreign tax credit for this portion of the ACT and required payment of the corresponding income tax on the dividends denied. Xerox states that it has been allowed no foreign tax credit for this ACT, and that the same profits have thereby been taxed twice. Specific Issues
Whether Xerox Corporation is entitled, under the tax treaty, to an indirect foreign tax credit for tax year 1974 for certain Advance Corporation Tax that was paid in the United Kingdom by its affiliated company Rank Xerox Ltd., on dividends that RXL paid to Xerox Corporation in 1974? Conclusions
The tax treaty and revenue code allow the tax credit to Xerox for the tax year in which the ACT was paid or accrued in the United Kingdom, whether or not the ACT was offset against mainstream corporation tax in the United Kingdom. or was otherwise used or surrendered by RXL in accordance with United Kingdom law. Support
Basic Facts of Tax Treaty between United Kingdom and United States In accordance with the Finance Act of 1972 a United Kingdom corporation must pay 1) mainstream corporation tax, which is a tax on corporate income, and 2) advance corporation tax (ACT), a tax on any qualifying distribution to shareholders. Section 86 of the Finance Act of 1972 provides that a United Kingdom resident shareholder is entitled to a tax credit for the ACT paid by the...