US utility companies win 'windfall' tax foreign credit

A new ruling from the US Supreme Court means that utility companies who paid a post-privatisation 'windfall tax' in the UK in the 1990s can claim a foreign tax credit on their US tax returns.

The unanimous decision overturned an earlier federal court ruling in a case involving PPL, one of the largest companies in the US utility sector, which took part ownership of electricity supplier Western Power Distribution (WPD) in 1996 and is now the sole owner. WPD currently serves 7.8m customers in central and southwest England and south Wales.

In 1997, the then Labour government imposed a one-off windfall tax on 32 companies that had been privatised between 1984 and 1996. As a result PPL was assessed as owing about $140m (£91m) in tax, for which the company sought a US credit.

The US Internal Revenue Service (IRS) challenged PPL's claim, saying that in its view the windfall tax did not meet its criteria which state that any 'income, war profits, and excess profits taxes' paid overseas are creditable against US income taxes. It argued that the tax was in essence a 'profit making valuation'.

After legal battles in the lower courts, the Supreme Court has now ruled that the 'predominant character' of the windfall tax is that of an excess profits tax, and therefore it was a category of income tax in the US sense.

In its ruling the Supreme Court said the formula used was eco

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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