US Tax Court rules that UK windfall tax is 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 2025

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

US Tax Court rules that UK windfall tax is creditable

Two taxpayers have each won separate, but related, cases in the US Tax Court on whether the UK windfall tax is creditable for US federal tax purposes.

Two taxpayers have each won separate, but related, cases in the US Tax Court on whether the UK windfall tax is creditable for US federal tax purposes.

In 1979, the UK government began to privatise many state-owned companies. In private hands, the companies grew strongly and earned large profits. The Labour Party came to power in 1997, and Parliament approved its plan for a windfall tax in July of that year, imposing the charge on 32 privatised companies in the UK. The IRS position was that the windfall tax on US subsidiaries in the UK was not an income tax and not a creditable foreign tax for US tax purposes. They denied PPL's claim for a refund of $786,804 from its 1997 federal tax bill. The refund also related to a dividend distribution from the company's UK subsidiary, which the parent company repaid after it was rescinded.

In his decision in PPL Corp vs Commissioner on September 9, Judge Halpern determined that the foreign tax does qualify as a creditable tax in accordance with section 901(a) of the Internal Revenue Code. The judge cited section 1.901-2 (a), which he said rejects the IRS's view that the court could not consider anything other than the text of the windfall tax statute when determining whether the foreign tax qualifies as an income tax. The decision in Entergy Corp vs Commissioner followed as a memorandum and directly referred to the legal reasoning in PPL Corp. Entergy's UK subsidiary was called London Electricity, PPL's was South Western Electricity.

Partners Stephen Gardner and William O'Brien of Cooley Godward Kronish represented Entergy. Partners Richard May, Mark Bierbower and associate Timothy Jacobs of Hunton & Williams represented PPL. Hunton & Williams declined to comment on the case.

"It is the nature of the UK tax which is unique," said Gardner. "The nature of the UK statute and the statute's language created some issue of whether or not it was an income tax."

The court's decision to consider factors other than just the text of the statute has significant implications for the international tax community.

"The court's endorsement of a broad scope of interpretation in both cases is important for any taxpayer involved in foreign activities," said Gardner.

more across site & shared bottom lb ros

More from across our site

Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Rafael Tena tells ITR about the ‘crazy’ Mexican market, ditching the hourly rate, and refusing to grow his fledgling firm in an ‘unstructured way’
It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
Gift this article