US Outbound: US Supreme Court holds UK windfall tax creditable

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Outbound: US Supreme Court holds UK windfall tax creditable

foley.jpg

mcgrew.jpg

Sean Foley


Landon McGrew

The US Supreme Court recently held that a one-time UK windfall tax that was imposed on 32 privatised UK companies was a creditable income tax for purposes of the US foreign tax credit rules (PPL Corporation v. Commissioner, 133 S. Ct. 1897). The Court's unanimous decision resolved a split between the Third Circuit Court of Appeals (which had held the windfall tax not creditable) and the Fifth Circuit Court of Appeals (which had held that the tax was a creditable tax). Though the Court's ruling applies to only a very limited number of taxpayers, its analysis could prove helpful in determining whether other types of foreign taxes are creditable.

The UK windfall tax was enacted by the newly elected Labour government in 1997. It was imposed on 32 UK companies that had been privatised by the Conservative government between 1984 and 1996. As part of the privatisation, some of the companies were required to continue providing services to customers at a fixed rate for an initial period of four to five years. During this period, many of the companies became more efficient and earned substantial profits (as rates charged to customers were prohibited from being reduced). The windfall tax was designed as a 23% tax on the difference between what the Labour Government believed the privatisation value should have been (given what it viewed as excess profits) and the lower value at which the shares were actually issued.

PPL Corporation, a US corporation, indirectly owned 25% of the stock of Southwestern Electricity plc, a UK company that was privatised in 1990. Southwestern Electricity paid the UK windfall tax in 1997, and PPL claimed a foreign tax credit for its share of the tax on its 1997 US tax return. PPL's foreign tax credit claim was rejected by the Internal Revenue Service of the US federal government on the basis that the windfall tax was a tax on the excess value of the privatised stock, and not a tax on excess profits.

Under the US foreign tax credit rules, a foreign tax is only creditable against US income tax if its predominant character is that of an income tax in the US sense. The foreign tax credit regulations clarify that a foreign tax's predominant character is considered to be that of a US income tax if the foreign tax is likely to reach net gain in the normal circumstances in which it applies. The regulations further provide that the net gain standard is satisfied only if it satisfies each of a realisation, gross receipts, and net income requirement.

In its opinion, the US Supreme Court noted that the way a foreign government characterises its tax is not dispositive. Rather, the Court must look to whether the economic effect of the tax is that of an income tax. Accordingly, the fact the UK government characterised the windfall tax as a tax on value did not prevent the Court from determining that it was actually a tax on profits.

The Court went on to algebraically rearrange the windfall tax calculation to show that it actually imposed a 51.71% tax rate on excess profits. Based on this algebraic rearrangement, the Court concluded that the predominant character of windfall tax was that of an income tax within the meaning of the foreign tax credit rules and therefore creditable.

While the Court's opinion is limited to the handful of US taxpayers holding stock of UK subsidiaries subject to the windfall tax, other US taxpayers would be well-advised to consider the Court's ruling when determining whether other types of foreign taxes (especially those that may not on their face appear to be an income tax) are eligible for a foreign tax credit.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Sean Foley (sffoley@kpmg.com) and Landon McGrew (lmcgrew@kpmg.com)

KPMG, Washington, DC

Tel: +1 202 533 5588

Fax: +1 202 315 3087

Website: www.us.kpmg.com

more across site & shared bottom lb ros

More from across our site

Complex and constantly shifting rules on global mobility mean ‘the risk is too great’ for staff to work abroad on personal time, EY’s Maureen Flood tells ITR
While it’s great that the OECD is alive to multinationals’ fears of being caught in a compliance trap, the ‘common understanding’ illustrates a worrying lack of readiness
Rising demand for specialist expertise has fuelled the growth in tax partner headcounts, Cain Dwyer found; in other news, Switzerland has been urged to reconsider pillar two
An OECD report on the taxation of the digital economy is expected by the end of 2026, according to the group of nations
Trophy assets are evolving from personal indulgences to structured investments, prompting family offices to prioritise tax efficiency, governance discipline, and cross-border compliance
As demand for complex, cross-border private client counsel spikes, Patrick McCormick sees opportunity in starting from scratch
As part of an exclusive global alliance, KPMG will become one of Anthropic’s ‘preferred consultants’ for private equity
In the second part of this series, the focus shifts to how taxpayers can manage ongoing risks across the lifecycle of cross-border structures
Jurisdictions have moved to ensure that multinationals are not punished for late GIR filings due to a lack of available filing portals or exchange relationships
HMRC’s push for unified tax adviser registration won’t prevent every instance of improper conduct, but it is good for taxpayers and the UK’s reputation
Gift this article