The United States Supreme Court held Monday in PPL Corporation v. Commissioner (No. 12-43) that a U.S. taxpayer was entitled to claim a foreign tax credit on its share of a “windfall tax” imposed on the taxpayer’s United Kingdom (U.K.) subsidiary. Applying a “commonsense approach that considers the substantive form of the tax,” the Court found the windfall tax creditable because its “predominant character” “is that of an excess profits tax, a category of income tax in the U.S. sense.” In so doing, the Court reaffirmed the principle that substance, not form, should determine the characterization of a given tax transaction, and provided some welcome clarity for taxpayers and practitioners. Sutherland lawyers along with other amici filed briefs urging the Court to review the case and address the applicability of the substance over form doctrine.
The PPL opinion conclusively resolves the creditability of the windfall tax at issue and reaffirms the substance over form doctrine, but the impact it will have on the broader creditability question is not clear. While the majority opinion reaffirms the role of substance, not form, in determining the predominant character of a tax, Justice Sotomayor’s concurring opinion raises the question of whether the “predominant character” test requires that it have the same character for all taxpayers in order to satisfy the test. Whether this prompts the Treasury Department to consider clarifying amendments to its regulations on this point remains to be seen. The decision also raises the possibility that Treasury will promulgate new regulations specifically addressing excess profits taxes as a subset of income taxes.
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