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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Aozora GMAC Investment Ltd, R (On the Application Of) v Revenue And Customs [2017] EWHC 2881 (Admin) (14 November 2017) URL: http://www.bailii.org/ew/cases/EWHC/Admin/2017/2881.html Cite as: [2017] EWHC 2881 (Admin), [2018] STC 11, 20 ITL Rep 402, [2017] BTC 36, [2017] STI 2686

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		14 November 2017

SIR KENNETH PARKER :

Introduction

1. The Claimant in this claim for judicial review is Aozora GMAC Investment Limited ("Aozora UK"), a company that was incorporated and resident in the UK at all material times. The Defendants are the Commissioners for Her Majesty's Revenue and Customs ("HMRC"). Aozora UK in effect challenges closure notices issued by HMRC dated 20 May 2016, following enquiries into tax returns for the accounting periods ending 31 March 2007, 31 March 2008 and 31 March 2009. By a review decision of 21 October 2016 HMRC definitively confirmed the closure notices.
2. During the material periods Aozora UK was the wholly owned subsidiary of a Japanese parent company, "Aozora Japan". Aozora UK in turn established a wholly owned subsidiary in the United States of America, Aozora GMAC Investments LLC ("Aozora US"), which was for fiscal purposes resident in the US. During accounting periods ended 31 March 2007 – 31 March 2009 Aozora UK made loans to Aozora US, and received interest payments in respect of the funds advanced. The US imposed withholding tax (at 30 percent) on the interest received. Aozora UK was liable to corporation tax in the UK on the amount of interest received from Aozora US.
3. The effect of each closure notice was to deny Aozora UK relief under s.790 Income and Corporation Taxes Act 1988 ('ICTA 1988') in respect of the withholding tax imposed by the US. The closure notices were issued on the basis that the provisions of s.793A ICTA 1988 operated to prevent the availability for relief under s.790 ICTA 1988. The corporation tax due from Aozora UK pursuant to each closure notice is £900,497 (for the accounting period ending 31 March 2007), £2,640,337 (for the period ending 31 March 2009) and £922,622 (for the accounting period ending 31 March 2010).
4. By this claim Aozora UK contends that the terms of HMRC's international manual INTM151060 ("The Manual") as in force at relevant times contained a representation by HMRC that gave rise to a legitimate expectation that it would be taxed in accordance with the Manual, whether or not the terms of the Manual were accurate; and that it would be conspicuously unjust and an abuse of power for HMRC to resile from the alleged representation.
5. The review decision of 21 October 2016 did not directly address the issue of legitimate expectation, but it did state the following in respect of the Manual:

"HMRC do not consider that anything turns on the original wording of INTM151060. This passage was removed as part of the updating of the International Manual when references were changed from ICTA to TIOPA. However it was also removed as it was incorrect. The 'new UK/US DTC' [Double Taxation Convention] was the first UK DTC to include a Limitation on Benefits article and all its ramifications had not been fully understood when the original guidance was written. As mentioned above, whether the incorrect guidance led to a legitimate expectation is outside the terms of this submission." (emphasis added)

6. That statement would tend to suggest that HMRC gave guidance which it now believes was not correct, and that it gave such erroneous advice because it had failed to understand the full meaning and scope of ICTA s.793A.

Double taxation relief

7. Double taxation relief ("DTR") is central to this claim. A UK resident subject to UK tax on income or gains that have suffered foreign tax may claim relief in different ways. First, a double tax agreement with another State may exempt from UK tax the relevant foreign income. Secondly, a taxpayer may choose to treat foreign tax levied as if it were an expense ("deduction") (ICTA 1988 s.811). Thirdly, the foreign tax may be off-set as a credit against the UK tax liability, either under the terms of a double tax agreement (ICTA 1988 ss. 788, 792-906, 812-815); or unilaterally (ICTA 1988 s. 790) ("unilateral tax credit").
8. Unilateral tax credit was first introduced in the UK in 1950. Initially the credit was for one half of the foreign (that is, non-Commonwealth) tax, but this limit was removed in 1953. Unilateral tax credit remains important, for the UK, although it now has over 100 tax treaties with other States, does not have a tax treaty with every State; and there may also be situations where a relevant tax treaty does not cover the particular circumstances.
9. S. 790 (Unilateral relief) provides as follows:

"(1) To the extent appearing from the following provisions of this section, relief from income tax and corporation tax in respect of income and chargeable gains shall be given in respect of tax payable under the law of any territory outside the United Kingdom by allowing that tax as a credit against income tax or corporation tax, notwithstanding that there are not for the time being in force any arrangements under section 788 providing for such relief.

(2) Relief under subsection (1) above is referred to in this Part as 'unilateral relief'.

(3) Unilateral relief shall be such relief as would fall to be given under Chapter II of this Part if arrangements in relation to the territory in question containing the provisions specified in subsections (4) to (10C) below were in force by virtue of section 788, but subject to any particular provision made with respect to unilateral relief in that Chapter; and any expression in that Chapter which imports a reference to relief under arrangements for the time being having effect by virtue of that section shall be deemed to import also a reference to unilateral relief.

(4) Credit for tax paid under the law of the territory outside the United Kingdom and computed by reference to income arising or any chargeable gain accruing in that territory shall be allowed against any United Kingdom income tax or corporation tax computed by reference to that income or gain (profits from, or remuneration for, personal or professional services performed in that territory being deemed for this purpose to be income arising in that territory)……

(12) In this section and in Chapter II of this Part in its application to unilateral relief, references to tax payable or paid under the law of a territory outside the United Kingdom include only references-

(a) to taxes which are charged on income and which correspond to the United Kingdom income tax, and

(b) to taxes which are charged on income or chargeable gains and which correspond to United Kingdom corporation tax;

but for this purpose tax under the law of any such territory shall not be treated as not corresponding to income tax or corporation tax by reason only that it is payable under the law of a province, State or other part of a country, or is levied by or on behalf of a municipality or other local body."

10. From 1950 until relatively recently there was no generally applicable restriction on the availability of unilateral tax credit by explicit reference to treaty provisions. That changed with the enactment on 28 July 2000 of the Finance Act 2000, Sch. 30 para 5(1), which added s. 793A ("No double tax relief, etc"):

"793A No double relief etc.

(1) Where relief in respect of an amount of tax that would otherwise be payable under the law of a territory outside the United Kingdom may be allowed-

(a) Under arrangements made in relation to that territory, or

(b) Under the law of that territory in consequence of any such arrangements,

Credit may not be allowed in respect of that tax, whether the relief has been used or not.

(2) Where under arrangements having effect by virtue of section 788, credit may be allowed in respect of an amount of tax, credit by way of unilateral relief may not be allowed in respect of that tax.

(3) Where arrangements made in relation to a territory outside the United Kingdom contain express provision to the effect that relief by way of credit shall not be given under the arrangements in cases or circumstances specified or described in the arrangements, then neither shall credit by way of unilateral relief be allowed in those cases or circumstances." (emphasis added to the words that are central to this claim).

11. Subsections (1) and (2) of s.793A have effect in relation to claims for unilateral tax credit made on or after 21 March 2000. Subsection (3) of s.793A has effect in respect only of arrangements (that is, tax treaties) made on or after March 21 2000. As a practical matter it appears that, so far as s.793A(3) is concerned, the UK taxpayer can safely ignore all the many treaties made before that date. However, it appears that if, and only if, the taxpayer is claiming unilateral tax credit in respect of US tax, the taxpayer needs carefully to consider the UK – US tax treaty to determine the extent to which s. 793A(3) might apply, because that particular treaty was entered into after the crucial date.
12. S.793A(1) and s.793A(2) do not appear to present any obvious difficulty of interpretation. S.793A(1) is plainly addressing the situation where an applicable treaty has, for example, exempted the relevant income from tax. The treaty might, for example, provide that certain income arising in the relevant State should be exempt from tax if the taxpayer receiving the income is resident in the other State. The UK taxpayer may not then claim unilateral tax credit for the tax paid if, under the treaty, he was entitled to require that the foreign State should not impose tax on the relevant income. S.793A(2) is saying no more than that, if credit is available under an applicable treaty, the taxpayer must make his claim for relief by way of credit under s.788, and may not make a claim for unilateral tax credit under s. 790.
13. It is common ground in this claim that neither s.793A(1) nor s.793A(2) is directly relevant. The contest focuses on s. 793A(3), the meaning and scope of which are perhaps not quite as pellucid as those of the other two sub-sections of s.793A.
14. It is of interest to note that the enactment of s.793A, along with other legislative provisions, followed a fairly intensive Inland Revenue review of double taxation relief. In March 1999 the Inland Revenue issued a "discussion paper" (running to 72 Pages) that explored, with some sophistication, a wide range of economic, fiscal and practical issues arising from international taxation, and invited views from interested parties on the Revenue's provisional thoughts. It appears that in July 1999 the Inland Revenue ran a workshop for business on double taxation relief that allowed those interested in the topic to express views and elucidate concerns.
15. On Budget Day 2000 the Revenue published the government's conclusions on the review of double taxation relief for companies, including proposed draft legislative clauses in respect of double taxation relief. That document referred to a topic that I do not believe had been explicitly canvassed in the discussion paper, under the heading "A simple route to claiming credit relief", as follows:

"1.45 The Government has decided to introduce a specific provision to put it beyond doubt that if, because of a double taxation agreement, a taxpayer can claim relief from another country's tax, or can claim credit relief in the United Kingdom for foreign tax under the agreement, he cannot in either case claim credit relief for the foreign tax under Section 790 ICTA 1988.

1.46 Nor will it be possible to claim credit relief under Section 790 in a particular situation if the relevant double taxation agreement itself expressly precludes such relief in that situation.

1.47 Those points will apply to all taxpayers, not just to companies; and they will apply in relation to claims for credit relief against income tax, corporation tax and capital gains tax. See paragraph 5 in Schedule 1 in Appendix 1.

148. Those changes will introduce greater certainty into the legislation. It is also consistent with the importance that the Government attaches to the negotiation of double taxation agreements. The United Kingdom has the largest network of such agreements (over 100) of any country in the world. Where an agreement is in place it is intended that it should provide a comprehensive solution to all matters that are within its scope. It is therefore right that relief for foreign tax should be claimed under it, and only to the extent contemplated by it."

16. Paragraph 5(1) in Schedule 1 of Appendix 1 to the above document, setting out draft clauses as referred to above, was in precisely the same terms as the eventual s.793A. Paragraph 5(2) recited that the putative new regime would have effect in relation to claims for credit made on or after 21 March 2000, corresponding with the eventual enactment, but it did not limit the application of what became s.793A(3) to tax treaties made on or after that date.
17. It appears that the Government then changed its position on this last matter, for on 3 May 2000 The Rt. Hon. Dawn Primarolo, the Paymaster General, in a debate on the Finance Bill 2000, told the House of Commons that under the relevant provision:

"….if a double taxation agreement expressly rules out credit relief for foreign tax, relief cannot be claimed under UK domestic law either. The amendment that we are making will ensure that provisions apply only in the case of future arrangements." (House of Commons Hansard Debates for 3 May 2000, column 235, emphasis added).

The UK/USA Double Taxation Convention

18. On 24 July 2001 the UK and US signed the UK/USA Double Taxation Convention ("The Treaty"). The Treaty entered into force on 31 March 2003, and became effective, for corporation tax, from 1 April 2003 and, for taxes withheld at source, from 1 May 2003. It is plain that the provisions of the Treaty fell within the potential scope of s.793A(3).
19. Article 23 of the Treaty imposed a specific "Limitation on benefits" in relation to benefits that would otherwise arise from the Treaty, as follows:

"Article 23: Limitation on benefits

(1) Except as otherwise provided in this Article, a resident of a Contracting State that derives income, profits or gains from the other Contracting State shall be entitled to all the benefits of this Convention otherwise accorded to residents of a Contracting State only if such resident is a 'qualified person' as defined in paragraph 2 of this Article and satisfies any other specified conditions for the obtaining of such benefits."

20. Article 23 is a fairly dense provision. It appears that the United States strongly believed that tax treaties should include provisions that specifically prevented what it believed to be misuse of treaties by residents of third countries, and that all recent US income tax treaties contained similar comprehensive "limitation on benefits" provisions. A treaty that provided treaty benefits to any resident of a contracting State had, in the view of the United States Government, the potential for "treaty shopping", namely, the use by residents of third States of legal entities established in a contracting State with a principal purpose of obtaining the benefits of a tax treaty between the contracting States. However, on that approach, if the third country resident had "substantial reasons" for establishing the entity in the contracting State that were unrelated to obtaining treaty benefits, it would not be "treaty shopping" in the above sense. It appears that Article 23 sought to set out a series of objective criteria, on the footing that if the taxpayer satisfied one of the relevant requirements it could be presumed that the taxpayer had a genuine business purpose for the structure it had adopted, or had a sufficiently strong nexus to the other contracting State; and that the business purpose or connection was sufficient to justify the conclusion that obtaining the benefits of the treaty was not a principal purpose of establishing or maintaining residence in that other State.
21. It is not apparent, from my somewhat cursory consideration of the documents referred to at paragraphs 14 - 17 above, that this possible aspect of public policy, namely, "treaty shopping", was specifically discussed during the consultation exercise. I do not know whether the UK, like the US, had previously included comparable "limitation of benefit" provisions in any tax treaties made with other States. I have, however, not been able to find in the general provisions governing unilateral tax credit any specific provision designed to restrict a taxpayer, resident in the UK and thus liable to pay tax in the UK, from obtaining unilateral tax credit on the ground that the taxpayer had an insufficiently strong "nexus" with the UK. In other words, absent any relevant tax treaty, a resident UK taxpayer would enjoy the right to claim unilateral tax credit, even if it did not satisfy additional criteria, the same as, or materially similar to, those in Article 23 of the UK-US Tax Treaty.
22. In any event, Article 23 was not couched in absolute terms, for Article 23(3) and (4) in certain circumstances enabled a person who was not a "qualified person" to obtain certain benefits conferred by the Treaty; and Article 23(6) in effect enabled a person who was not a "qualified person" to defeat the unfavourable presumption created by its inability to satisfy any of the objective criteria for sufficient "nexus", as follows:

"(6) A resident of a Contracting State that is neither a qualified person nor entitled to benefits with respect to an item of income, profit or gain under paragraph 3 or 4 of this Article shall, nevertheless, be granted benefits of this Convention with respect to such item if the competent authority of the other Contracting State determines that the establishment, acquisition or maintenance of such resident and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under this Convention.

The competent authority of the other Contracting State shall consult with the competent authority of the first-mentioned State before refusing to grant benefits of this Convention under this paragraph."

23. If a person were a "qualified person", exemption from paying foreign tax was conferred by Article 11 of the Treaty (interest):

"Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State".

24. Thus if a company resident in the UK, and a "qualified person", received interest in the US, the interest was under the Treaty exempt from US tax. The income, exempt from any US tax, would of course be taxed in full in the UK at the appropriate rate of corporation tax.
25. Article 24 of the Treaty also provided more generally for, inter alia, relief in the UK from double taxation, as follows:

"4. Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):

(a) United States tax payable under the laws of the United States and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within the United States (excluding, in the case of a dividend, United States tax in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the United States tax is computed;

(b) in the case of a dividend paid by a company which is a resident of the United States to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 percent of the voting power in the company paying the dividend, the credit shall take into account (in addition to any United States tax for which credit may be allowed under the provisions of sub-paragraph (a) of this paragraph) the United States tax payable by the company in respect of the profits out of which such dividend is paid;

(c) United States tax shall not be taken into account under sub-paragraph (b) of this paragraph for the purpose of allowing credit against United Kingdom tax in the case of a dividend paid by a company which is a resident of the Untied States if and to the extent that

(i) the United Kingdom treats the dividend as beneficially owned by a resident of the United Kingdom; and

(ii) the Untied States treats the dividend as beneficially owned by a resident of the United States; and

(iii) the United States has allowed a deduction to a resident of the United States in respect of an amount determined by reference to that dividend.

(d) the provision of paragraph 2 of Article 1 (General Scope) of this Convention shall not apply to sub-paragraph (c) of this paragraph."

26. Thus, broadly speaking, if a company resident in the UK, and a "qualified person", received, for example, dividend income from a US corporation, it could claim relief by way of credit against UK corporation tax payable in respect of the dividend income; and, if further conditions were met, it could also claim relief by way of credit against UK corporation tax for any US tax charged on the relevant underlying profits of the US company paying the dividend. Article 24(4)(c), however, imposed a qualification on the latter entitlement.
27. I did read Article 24(4)(c) several times, in a futile endeavour to understand its purpose. Some enlightenment did, however, emerge from the helpful "Department of the [United States] Treasury Technical Explanation of the Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains" ("the Note").
28. It appears from the Note that Article 24(4)(c) was inserted in the Treaty at the behest of the UK Government, as an anti-avoidance provision to deal with what was perceived to be a very specific arbitrage device intended to generate a tax credit against UK corporation tax that was considered to be unjustified. In the relevant scenario a US corporation would sell stock in a US subsidiary to a UK resident company, with an obligation at some point to repurchase the stock ("a repo"). US revenue law looked at the commercial reality, treated the repo as a secured loan to the US corporation, any "dividend" paid to the UK company as a payment of interest by the US corporation, and, semble, the stock and "dividend" as beneficially owned by the debtor US corporation. For UK corporation tax, however, the "dividend" had to be treated as genuine, and the UK company would be positioned to obtain credit against UK tax in respect of an appropriate part of the profits of the US corporation, notwithstanding the fact that the US corporation had fully deducted the "dividend"/interest payment for the purposes of stating its US taxable income – a form of double tax relief successfully arbitraged through the different treatment of the transaction in the two jurisdictions.
29. In that specific context the US Treasury noted that "recent changes to UK foreign tax credits allow the United Kingdom to deny credits if a tax treaty specifically so provides". This appears to be a fairly explicit reference to s.793A(3), which had been enacted, as explained earlier, in 2000. The US Treasury also noted that standard "repos" were based on current cost of funds, and that accordingly Article 24(4)(c) "should not (and is not intended to) affect most repos and similar transactions that take place in the public markets". The US Treasury also noted that Article 24(4)(c) limited benefits that would otherwise be available under "domestic law", that is, presumably, the internal tax regimes of each State; that Article 1(2) of the Treaty provided that the Treaty could not limit benefits that were so available, and that Article 24(4)(d) was therefore required, so as to create an exception to the general rule and to render Article 24(4) (c) effective in the "domestic" tax regimes (see generally pages 101 and 102 of the Note).
30. This is probably the most appropriate point in the judgment to record the important central fact that Aozora UK was not a "qualified person" within the meaning of Article 23 of the Treaty. Aozora UK could, therefore, not invoke Article 11 (interest) or Article 24(4) (tax credits generally) to obtain under the Treaty relief from double taxation, unless in the circumstances it could persuade the Internal Revenue Service ("IRS") in the US to grant an exception to the Limitation of benefits under Article 23(6). Absent any grant of exception, the US would impose under US tax law withholding tax (at 30 percent) on the interest payable to Aozora UK, and the latter could not rely upon Article 11 of the Treaty to obtain credit against UK corporation tax due on the interest paid. If unilateral tax credit were available, however, no further UK corporation tax would be due, and Aozora UK's effective tax would be 30 percent. If no such credit were available, Aozora UK could deduct the tax paid in the US, but would then pay UK corporation tax on the net amount of income thereby reduced, resulting in a cumulative effective tax rate of 51 percent (in 2007, when the applicable corporation tax was 30 percent), or 49.6 percent (in 2009 and 2010, when the applicable corporation tax was reduced to 28 percent).

The Manual

31. HMRC publishes manuals to assist its staff to understand and apply the law; these manuals are made available to the general public for the information of taxpayers and their advisers in accordance with the Code of Practice on Access to Government Information.
32. From at least 20 December 2003 HMRC, and its predecessor Inland Revenue, had a general notice regarding the publication of its manuals:

'Inland Revenue Guidance Manuals

These manuals contain guidance which has been prepared for the staff of the Inland Revenue. It is being published for the information of taxpayers and their advisors in accordance with the Code of practice on Access to Government Information.

It should not be assumed that the guidance is comprehensive nor that it will provide a definitive answer in every case. The staff of the Inland Revenue are expected to use their own judgment, based on their training and experience, in applying the guidance to the facts of particular cases. In particular difficult or complex cases they are able to obtain further guidance from specialists in Head Office.

The guidance in these manuals is based on the law as it stood at date of publication. The Inland Revenue will publish amended or supplementary guidance if there is a change in the law or in the Department's interpretation of it. The Inland Revenue may give earlier notice of such changes through Tax Bulletin or a press release.

Subject to these qualifications readers may assume that the guidance given will be applied in the normal case; but where the Inland Revenue considers that there is, or may have been, avoidance of tax the guidance will not necessarily apply.' (emphasis added).

33. The current general notice, which is in similar terms to that at 20 December 2003, states:

"These manuals contain guidance prepared for HMRC staff and are published in accordance with the Freedom of Information Act 2000 and HMRC Publication Scheme.

You shouldn't assume that the guidance is comprehensive or that it will provide a definitive answer in every case. HMRC will use their own reasoning, based on their training and experience, when applying the guidance to the facts of particular cases.

The guidance in these manuals is based on the law as it stood when they were published. HMRC will publish amended or supplementary guidance if there's a change in the law or in the department's interpretation of it. HMRC may give earlier notice of such changes through a Revenue and Customs brief or press release.

Subject to these qualifications you can assume the guidance normally applies, but where HMRC considers that there is, or may have been, avoidance of tax the guidance will not necessarily apply."

34. The current general notice contains a hyperlink to guidance published on 4 May 2009 which identifies circumstances in which in HMRC's view it is open to a taxpayer to rely on information or advice provided by HMRC. The latter notice states that "where it [the information or advice] takes the form of guidance or Public Notices, the information applies as stated within those documents (emphasis added).
35. Before 2011 the Manual stated:

"UK legislation – unilateral relief

ICTA99/S790 together with TCGA92/s277 for Capital Gains Tax, allows unilateral tax credit relief to be given against United Kingdom taxes for foreign taxes imposed in a country with which the United Kingdom has no double taxation agreement. The legislation provides that Section 792-806M (rules for giving foreign tax credit relief) are to apply as if they was an agreement in force with the country concerned which contained the provisions in Sections 790(3) and (4).

Unilateral relief under s790 can only be given by way of credit for foreign tax. Part of the income cannot be taken out for assessment. In broad terms credit is limited to the amount that would be due if a treaty were in existence.

ICTA 1988/s793A provides a restriction to credit relief under s.790. It provides that where a double taxation treaty contains an express provision to the effect that relief by way of credit shall not be given in particular cases or circumstances specified or described in the agreement, then neither shall credit by way of unilateral relief be allowed in those cases or circumstances. The provision has effect for arrangements made after 20 March 2000. At 1 April 2003 the only provisions to which s.793A applies is Article 24(4)(c) of the new UK/US DTA".(emphasis added).

36. By 3 February 2011 the Manual had been amended specifically to exclude the sentence emphasised above.

The Conduct of Aozora UK

37. In the later part of 2006 Aozora Japan was considering how to structure an investment into the US. It was advised on the tax implications of this project by Tohmatsu Tax Co in Japan ("Deloitte Japan"). One possibility was a direct investment by Aozora Japan. Interest payments from a US company (such as Aozora US) directly to Aozora Japan would have qualified for exemption from US withholding tax under article 11(3)(c)(i) of the US/Japan Double Tax Treaty. However, Aozora Japan would have paid tax at 41 percent on those interest payments under Japanese revenue law.

Aozora Japan also considered making the investment through a UK resident subsidiary. Deloitte Japan prepared calculations modelling the tax position on different assumptions, namely an assumption where there was no relief from US withholding tax under the UK/US Treaty; and on an alternative assumption where the relief was available. On the first assumption Deloitte Japan included in its calculations unilateral relief under ICTA s. 790 as being available.

38. There was put in evidence a number of emails between Deloitte Japan and Deloitte in London during September-October 2006. For example, on 9 October 2006 Ms Yuki Konii in London emailed Mr Scott Monson, executive officer for financial transactions and international tax services at Deloitte Japan. In that email Ms Konii said the following regarding Article 23(6) of the Treaty.

"The guidance on paragraph 6 [viz. of Article 23] is not really relevant, and my previous queries on experience around this suggests that the process could be time consuming and generally difficult to get. However, I think there is more of a chance of getting competent authority approval [viz. a favourable ruling under Article 23(6)] in the current situation because these benefits would be available under the new US-Japan treaty. In particular, there is nothing that explains why equivalent beneficiaries [an apparent reference to Article 23(3) and the limited definition of "equivalent beneficiary" in Article 23 (7) (d)] need to be EU/EEC or NAFTA members – so why this restriction was inserted is still unclear to us.

It is worth noting that when the US/UK treaty was signed in 2002, it was the first time that the US agreed to a 0% WHT rate on dividends. We are happy to contact HMRC policy division: International on a no-names to see whether there is more to this or whether this might be something they might eventually change by way of a protocol…."

39. Following further communication Mr Scott Monson emailed Ms Yuki Konii in London on 10 October 2006, saying among other things:

"….our best shot is via CA [viz. a favourable ruling under Article 23(6)] and I have a US TP [tax partner] making an anonymous inquiry as to the prospects for gaining CA relief based on our facts.

"I have also lined up a call tomorrow with a UK partner, named Cole,[in fact, Neil Coles] to go over the UK FTC [viz. foreign tax credit] computations for our transaction….."

"Even if we don't get CA and the interest payment from US blocker to the UK Co is subject to 30 percent US w/holding [viz. withholding tax], assuming a direct FTC, there will just be timing between the US w/holding payment and FTC claimed on the UK return. Again, we will need to confirm the UK FTC computations with Cole….."

40. Ms Yuki Konii replied to Mr Scott Monson by email on 10 October 2006, saying:

"….I agree that going for CA seems to be the best way forward. In fact, my concern would be that by NOT going for it, the FTC [viz. foreign tax credit] availability might be compromised as there is a requirement for foreign taxes to be minimised [an apparent reference to ICTA 1988 s.795A] while if you go for it but it is denied then it should be available subject to a possible restriction for financial traders…"

41. On 11 October 2006 Ms Konii followed up with a further email to Mr Monson, recording that Mr Neil Coles had spoken that morning on the telephone with Mr Monson and saying:

"Neil [Coles] agreed that there might be a concern about FTC [viz. foreign tax credit] availability if competent authority is not at least applied for…."

42. On 14 October 2006 Mr Neil Coles emailed Mr Scott Monson directly, referring to the telephone conversation on 11 October 2006, and explaining at some length that foreign tax credit might give rise to timing issues, and advising on how best that issue should be addressed. The last email was of 23 October 2006 in which Mr Monson told Mr Coles that he would like "to discuss UK FTC [viz. foreign tax credit] in the context of UK Co's direct investment in a US LLC".
43. These somewhat fragmentary emails were supplemented by a witness statement from Mr Neil Coles. He qualified as a chartered accountant in 1990, joined Deloitte LLP in 1992 and became a tax partner at Deloitte in June 2000. In 2006 one of his areas of expertise was how the UK's double tax relief rules applied in relation to the repatriation of foreign profits to the UK for UK companies investing overseas. Mr Coles had been involved in the 1999 consultation exercise, knew and understood the relevant UK legislation and the provisions of the Treaty. He was fully aware of ICTA 1988 s.793(A), and appreciated the purpose and effect of Article 24(4)(c) of the Treaty. He believed that Article 24(4)(c) was "an express provision" within the meaning of s.793A(3), and that in the circumstances described by that Article no unilateral credit would be available.
44. Mr Coles stated:

"Given the timing of domestic law change [2000] and that it coincided with the negotiation and conclusion of the Treaty (noting specifically that the draft Treaty provisions were known and in the public domain prior to the publication of the draft law of Finance Bill 2000), I was of the view at the time that section 793A(3) was included in the domestic law specifically to cater for the anti-avoidance clause of Article 24 (4)(c) of the Treaty. That is, it was logical that a domestic "parallel' rule was required for this express treaty anti-avoidance provision in order for it to be effective, and not simply side-stepped by a unilateral credit relief claim". (paragraph 16 of witness statement).

45. In respect of the Manual, Mr Coles stated:

"I drew comfort from the content of [the Manual] in reinforcing my understanding that section 793A(3) was legislated as "bespoke" to Article 24(4)(c) (and that, as described above), this point was indeed relevant to a number of clients. Correspondingly, I also drew comfort from this guidance that section 793A(3) could be disregarded as a realistic risk area in any unilateral credit relief analysis where Article 24(4)(c) of the Treaty was not in point, including the analysis I undertook as part of the Aozora matter…." (paragraph 17 of witness statement).

46. Mr Coles stated that Deloitte UK was consulted by Deloitte Japan "in relation to the UK tax aspects of the investment, including the expected UK tax position with respect to interest and dividend income if Aozora Bank, Ltd were to establish a wholly-owned UK holding company to hold shares in and make loans to a wholly-owned US subsidiary that would own their share of the investment – i.e principally, the position in accordance with the UK double tax relief rules".
47. Mr Coles continued:

"19. Whilst Aozora Bank, Ltd was not a client for which I was usually responsible, the Deloitte UK tax engagement team specifically asked me to be involved in reviewing the structure and advise, by reason of my reputation within Deloitte UK as a UK double tax relief advisor…..

21. My principal involvement was the review of modelling calculations prepared by Deloitte Japan in connection with the US investment, which considered various scenarios for the UK tax position. These modelling calculations…considered two broad scenarios – a scenario in which no relief from US withholding tax would be available under the Treaty…., and a scenario in which such relief would be available…... Both scenarios were contemplated because it was considered by Deloitte Japan that access to the Treaty was only possible via a discretionary ruling from the US Competent Authority under Article 23(6), and prior to making an application for such discretionary access, it was considered by Deloitte that the outcome of the exercise was uncertain (and in fact, ultimately no discretionary ruling was granted by the US Competent Authority, which is why the UK unilateral credit relief analysis became relevant). In the scenario assuming no relief from US withholding tax under the Treaty, the benefit of unilateral credit relief under section 790 was considered by Deloitte Japan as available and included in the calculations.

22. My review of these modelling calculations included consideration of whether it was correct to include the benefit of unilateral credit relief under section 790 in the absence of relief under the Treaty (the assumptions list at the top of each spreadsheet explicitly notes I was to be consulted….I participated on a call with Deloitte Japan on 11 October 2006 as planned, and on that call I explained that I considered that such unilateral relief would be available (and therefore raised no concerns with that assumption in the model). As an integral part of reaching that conclusion, I considered that the possible application of domestic anti-avoidance provisions. Whilst I believed that section 795A ("Limits on credit minimisation of the foreign tax") was an important provision to take into account in the case of a unilateral credit relief analysis……I did not consider that section 793A(3) – or any other domestic anti-avoidance provisision – would be relevant in these modelled circumstances.

23. My own analysis of the application of the unilateral credit relief rules to these circumstances, together with my awareness of INTM151060 was the reason why I did not, at the time, believe section 793A(3) would present a problem to the above analysis. Furthermore, because of the existence of INTM151060 I believed any risk of challenge by HMRC to the availability of unilateral credit relief stemming from section 793A(3) was remote, because in INTM151060 HMRC had made a statement regarding their view of the narrow application of section 793A(3). Whilst the statement referenced 1 April 2003, I was aware that nothing else changed in the Treaty between 2003 and when the advice was being delivered in 2006 – which could have been relevant to that risk assessment."

48. On 27 March 2008 Aozora UK requested the IRS in the US for a favourable determination under Article 23(6) of the Treaty, on the basis that Aozora UK "was not established, acquired, maintained or operated with a principal purpose of obtaining benefits under the Treaty".
49. The written request explained the full corporate structure and stated:

"[Aozora UK] was incorporated on 6 November 2006 in the UK to raise funds in the UK financial markets, to be proximate to Aozora Bank's European customers, which would afford such customers the opportunity to effect business with a European entity, and to leverage Aozora Bank's experience/presence in the UK…."

"Aozora Bank decided to establish the Applicant in the UK based upon criteria that satisfied its business goals, including proximity to the UK financial markets and European customers, being able to leverage Aozora Bank's existing presence in the UK, and capitalising on Aozora Bank's UK business experience".

"The UK is considered one of the foremost financial centres in the world with a history of large institutional investment and a reliable regulatory environment. For these business and financial advantages, [Aozora UK's] sister company, Aozora Investment Management Limited ("AIML), was established in early 2006 to provide investment management services in the UK financial markets. The experience gained by AIML, the potential benefit of working with AIML, and being located in a leading financial centre made the UK particularly well suited for [Aozora UK] long-term goals". (page 5).

50. The written request explained why Aozora UK was not a "qualifying person" under Article 23, and then set out the "business reasons for UK residence", including:

"…The UK was considered the most suitable location for the Aozora Bank offshore investment vehicle based on its proximity to Aozora's already existing client base and the potential for raising additional financing in the London financial market".

"Moreover, Aozora Bank already had an existing UK presence in the form of AIML, a UK company that undertakes investment management services, and sought to leverage its experience in the UK….."

51. Under the heading "Equivalent treaty benefits available" the request stated:

"Aozora Bank is a publicly traded bank with legal residence in Japan. If Aozora Bank chose not to invest in the UK through the Applicant, it could have provided funding directly to the US Co to invest in Aozora GMAC Investments LLC. In turn, any dividend payments from US Co to Aozora Bank would have been exempt from withholding under Article 10(3) of the US – Japan Treaty. In addition, interest payments would also have been exempt from withholding under the US – Japan Treaty Article (11)(3)(c)(i) because they would have been made to a Japanese bank.

As such, equivalent treaty benefits would have been available to Aozora Bank had Aozora Bank chosen instead to make its investment directly into US Co. Aozora Bank, however, decided to pursue its overall global financing structure, which seeks to position the Applicant in the UK, a major financial center that would enable Aozora Bank to potentially raise additional financing in that financial market, capitalize on Aozora Bank's other resources in the UK, be proximate to Aozora Bank's customers, and afford such customers the opportunity to effect business with a European entity, and establish the Applicant as its primary investment vehicle for investments outside of Japan. Locating the global financing structure primarily in the UK is consistent with Aozora Bank's history, ongoing business operations, and general familiarity with the UK business environment.

The fact that Aozora Bank had equivalent treaty benefits available under the US – Japan Treaty when it chose to establish the Applicant and make the current investment via the Applicant demonstrates that Applicant was not established in the UK with the principal purpose of taking advantage of the Treaty."

52. Under the heading "other factors to be considered" the request stated:

"The exemption of withholding tax in the US under the Treaty does not affect the final tax liability of dividend and interest income received by [Aozora UK], as [Aozora UK's] UK corporate tax liability of 30 percent may be fully creditable against any US tax withheld on dividends and interest. This likewise supports the conclusion that [Aozora UK] was not established with the principal purpose of taking advantage of the Treaty".

53. In the event, the IRS refused the request. I was not shown the actual refusal decision. Mr Ewart QC, appearing at the hearing on behalf of Aozora UK, told me that Aozora UK was advised that a legal challenge to the IRS ruling had no realistic prospect of success, advice that was later vindicated at least at first instance by Starr International Company, Inc. v United States (DC District Court, 23 August 2017). In that case the federal district judge observed that the standard of review in the relevant context was "highly deferential"; and that the challenged IRS finding that at least one of the principal purposes of the taxpayer for locating in a contracting State was to obtain benefits under the applicable tax treaty was neither "arbitrary" or "capricious", and was hence lawful. Starr International does contain a learned and interesting discussion of "treaty shopping", the vice at which Article 23 of the Treaty is aimed.

Legal Principles: Legitimate expectation

54. At the end of the day I do not believe that the parties differed significantly as to the applicable legal principles.
55. Those principles were in any event very recently restated by the Court of Appeal in R (on the application of Hely – Hutchinson) v Revenue and Customs Commissioners [2017] STC 2048; [2017] EWCA Civ 1075, by Arden LJ, with whom McCombe and Sales LJJ agreed. The whole passage in the judgment of Arden LJ from [36] to [44] is relevant to this claim and should be treated as cited in this judgment.
56. At [45] in Hely–Hutchinson Arden LJ also stated:

"[45] I now turn to the situation where HMRC issues a policy or guidance but later comes to the view that its policy or guidance was wrong in law. Legitimate expectations are not unqualified: see, for example, United Policyholders, above. If HMRC finds that they need to resile from guidance, a taxpayer can only rely on the legitimate expectation that the guidance created, where, having regard to the legitimate expectation, it would be so unfair as to amount to an abuse of power" (my emphasis).

57. At [72] Arden LJ enlarged on that important aspect, as follows:

"[72] As explained under Issue (1), it is well established that it is open to a public body to change a policy if it has acted under a mistake. The decision whether or not to do so is not reviewed for its compatibility in the public interest: the question is whether or not there has been sufficient unfairness to prevent correction of the mistake. It is clear from the authorities that the unfairness has to reach a very high level: see, in particular, the holding of Simon Brown LJ in Unilever where he held that it was not enough that the change of course by the public body was 'mere unfairness' or conduct which was 'a bit rich'. It had to be outrageously or conspicuously unfair. The respondent relies on authorities showing that it is not necessary for HMRC to charge the correct amount of tax and makes the obvious point that HMRC has no authority to do so where it is constrained by public law. I accept those points but they do not address the crucial question of when HMRC can depart from published guidance."

Application of the legal principles to this case

(a) Relevant representation

58. For his reply at the oral hearing of this claim, Mr James Rivett, on behalf of HMRC, very helpfully and elegantly summarised his submissions as to the correct test for a relevant representation and as to why there was no relevant representation in the present case:

"To give rise to any legitimate expectation on the part of a taxpayer the HMRC must make a representation that the taxpayer can demonstrate to be 'clear, unambiguous and devoid of relevant qualification' (see MFK at page 1569 G and Davies [2011] UKSC 47 at [29]).

In testing whether such a representation has been made you must look at the context in which the representation is made and the scope of the representation itself (see MFK at page 1569 B and page 1569 F-G) and ask what the 'ordinarily sophisticated taxpayer' with or without the benefit of advice would have understood the statement by HMRC to mean (see Davies [2011] UKSC 47 at [29]).

Viewed in its context and on its terms the statement in INTM 151060 was not such as to constitute a 'representation' to taxpayers that was 'clear unambiguous and devoid of relevant qualification' as that has been understood by the Courts.

In this regard: (i) in reading INTM 151060 the 'ordinarily sophisticated taxpayer' would have known that HMRC do not make the law (see MFK at page 1569) and that a reading of HMRC's internal manual was not a substitute for an analysis of the legislation itself; (ii) the statement in INTM 151060 was made in an internal HMRC manual for the purpose of providing guidance to HMRC staff (albeit published more widely) (contrast, therefore, Davies [2011] UKSC 47 where the IR20 booklet was published in order to provide guidance to taxpayers as to the main factors that HMRC would regard as relevant to ascertainment of whether the taxpayer was being non-resident or ordinarily non-resident for the purposes of UK income tax and capital gains tax, see [1], [27], [32] and [45]; (iii) the INTM 151060 identified expressly that it should not been taken to constitute comprehensive guidance; (iv) the statement in INTM 151060 was a bald provision of law and did not provide guidance as to how HMRC proposed to apply the law to the facts of a particular case; (v) the statement in INTM 151060 was short and read literally was on its terms clearly incomplete; (vi) the statement in INTM was not given in response to a request by the Claimant or its advisors for a ruling on particular facts; (vii) there is nothing within INTM 151060 to indicate that in considering a claim for unilateral relief HMRC could or would exercise their powers under s.5 CRCA 2005 to do anything other than apply the strict letter of the law; and (viii) there is nothing in INTM 151060 which would could be taken as a mandate for taxpayer to rely exclusively on its terms and take no view of its own on the law.

Further and/or alternatively the statement in INTM 151060 was a mere assertion of law and did not involve any indication of how HMRC would exercise its powers in s.5 CRCA 2005 to apply the law to the facts of a given set of circumstances in order to collect tax (in this compare the detailed terms of the manual considered by the Court of Appeal in Samarkand at Appendix 3 to the report at [2017] STC 926)."

59. Powerful though these points are, I am ultimately satisfied that there was in this case a relevant representation.
60. First, as to the status of the Manual, it is correct that the Manual contained guidance which had been prepared for the staff of the Inland Revenue. However, the general notice also stated that "it [the guidance] is being published for the information of taxpayers and their advisers". Most importantly, in my view, the general notice also stated:

"Subject to these qualifications [a matter to which I shall return] readers may assume that the guidance will be applied in the normal case; but where the Inland Revenue considers that there is, or may have been, avoidance of tax the guidance will not necessarily apply".

61. The taxpayer is certainly thereby warned that he must examine very carefully each individual piece of guidance upon which he might rely. The taxpayer must critically ask whether there is, or may well be, some other aspect or feature, either of the tax code or of a particular transaction, actual or contemplated, not specifically mentioned in the guidance, that is, or may well be, relevant to a correct fiscal analysis of the relevant scenario. The taxpayer must also critically examine whether there is, or may well be, some aspect or feature of the transaction itself, actual or contemplated, that might suggest that the guidance cannot reasonably or properly yield a "definitive" answer in all the circumstances. Finally, the taxpayer must be alert to the risk that the guidance might be abused, as a vehicle for seeking to avoid the imposition of tax where a purpose oriented or policy driven application of the relevant law would, or might, produce a different result.
62. In my view, it cannot be said that a statement of the law, or an interpretation of the law, contained in a particular guidance, cannot in principle constitute a relevant representation. No authority supports such a broad proposition. Of course, any statement of the law, or interpretation of the law, would have to be critically examined in each case, to determine whether it was sufficiently clear and comprehensive, and, perhaps, not obviously incorrect or, in the light of other relevant material, questionable or controversial, so that it was safe to conclude, all things considered, that it could fairly and reasonably be relied on.
63. Mr Rivett noted that in some instances the Manual provided definite examples of how particular situations would fall to be taxed, and that a taxpayer whose transaction, actual or contemplated, was a mirror image in all respects of the example, could fairly, subject to the normal provisos, ordinarily rely upon the guidance. However, in my view, that feature is not a necessary one in all cases. In a particular case an example might be regarded as simply superfluous or, for other reasons, inappropriate. Mr Rivett did not suggest that, so far as s. 793A(3) was concerned, an example would have been necessary or helpful to the taxpayer.
64. I now turn to the actual guidance in this case. I first ask what that judicial construct, "the ordinarily sophisticated taxpayer," should be taken to have within his knowledge and understanding in the present context. I assume that he or she has a basic familiarity, if not an expert understanding, of the relevant law concerning unilateral tax credit, which for present purposes includes ICTA 1988 ss.790 and 792-806M. I also assume that the taxpayer has some broad familiarity with the events preceding the relevant amendments made by the FA 2000, with the terms of the UK-US Tax Treaty and also with the contents of any official, publicly available explanation of, or commentary on, the Tax Treaty.
65. The first paragraph of the guidance describes in outline the nature and scope of unilateral tax credit. It gives a précis of the effect of ICTA 1988 s.790, referring to the case where the UK "has no double tax agreement". That précis is not strictly accurate; s.790 might apply where there is a double tax agreement, but, in the exact language of s.790(1), no relief from double taxation is available (see paragraph 9 above). Article 23 of the Treaty, as explained, precluded Aozora UK from obtaining treaty relief, but whether it also precluded unilateral tax credit remains a contentious issue. Nothing, however, in the present case turns on the inaccuracy, but it might alert the ordinarily sophisticated taxpayer, who has the legislation to hand, to verify for himself whether the guidance is stating the terms of the legislation accurately.
66. It is plain that the guidance was not purporting to give a comprehensive explanation of unilateral tax credit. The taxpayer, with or without the aid of a tax adviser, would have to consider the sections of the legislation referred to in the guidance, to determine how, if at all, they would apply to an actual or contemplated transaction. However, the question here is not whether the guidance was comprehensive in a general sense. The question is whether the guidance was comprehensive in so far as it purported to explain the legal and practical effect of s. 793A(3).
67. However, the second paragraph of the guidance referred to a specific, and important, section of ICTA 1988, namely, s.793A. The putative ordinarily sophisticated taxpayer in 2006 could be taken to know that s.793A had been relatively recently introduced into the tax code by the FA 2000. He or she would not therefore be surprised that HMRC was providing guidance on the meaning and scope of this specific provision. For the reasons stated earlier (see paragraph 12 above), the first two sub-sections of s.793A would in any event pose little difficulty of interpretation or application. It would not be surprising that the guidance said nothing about them. However, s.793A(3) was not only new, its meaning and scope were not immediately obvious, and some guidance could reasonably be expected. The first sentence of the second paragraph is again not strictly accurate: s.793A provides three restrictions, not one restriction, to credit relief under s.790. However, the next sentence recites s.793A(3) verbatim. In my view, particularly in the light of the relevant background explained above, it is clear beyond doubt that the second sentence is referring to, and exclusively referring to, s.793A(3).
68. The third sentence states that "the provision" has effect for "arrangements made after 20 March 2000". That reference in the singular person must be an unambiguous reference to s.793A(3), and to no other sub-section of s.793A. Neither s.793A(1) nor s.793A(2) is limited to "arrangements" made after March 2000; both of those sub-sections are "limited" in an entirely different way, namely, by reference to whether the claim for credit was made after 20 March 2000.
69. That distinction also reinforces the conclusion that the ordinarily sophisticated taxpayer would appreciate that the whole of the second paragraph of the guidance is dealing with, and exclusively dealing with, s.793A(3), because that sub-section alone is limited by reference to the date of the "arrangements".
70. In 2006 the ordinarily sophisticated taxpayer would know, or could readily ascertain, that the only relevant "arrangements" were those made by the 2001 UK/US Tax Treaty. The UK had since 20 March 2000 simply made no other tax treaties. The crucial, and only, question was therefore: "Is there anything in the Tax Treaty with the US that contains, or could, on any reasonable interpretation and/or application, constitute a "restriction" for the purposes of s.793A(3)?" That question was crucial because, if Treaty relief were not available, the taxpayer needed to know whether any provisions of the Tax Treaty precluded unilateral tax credit. The guidance gave the unequivocal answer to that question:

"At 1 April 2003 the only provision to which s.793A applies is Article 24(4)(c) of the new UK/US DTA" (my emphasis)

71. That statement is clear, unambiguous and devoid of any relevant qualification. In 2006 the reference to 1 April 2003 was of no practical significance. There were no relevant "arrangements" made after 1 April 2003 and before 2006, because the UK had made no new tax treaty in that period.
72. Pursuant to this clear and unequivocal guidance, therefore, the ordinarily sophisticated taxpayer was not required to look beyond Article 24(4)(c) of the Tax Treaty. I suppose that some ordinarily sophisticated taxpayers might have been suffering acute anxiety and in that condition asked themselves whether, as an objective matter, and exercising exorbitant prudence, they should look beyond the Article of the Treaty that had been uniquely identified for them by HMRC, towards other parts of the Tax Treaty, including, most pertinently, Article 23 (Limitation of benefits). However, even a taxpayer applying anxious scrutiny would have been rather relaxed at the end of his journey. As far as I can discern, before the enactment of the Finance Act 2000 there had been no generally applicable UK public policy along the lines reflected in s.790A(3), for unilateral tax credit was available even if an applicable tax treaty would have denied exemption or credit: indeed that had been the essential function of unilateral tax credit.
73. Most importantly, there were apparently no general provisions in domestic law intended to counter the putative mischief of "treaty shopping". A taxpayer was entitled under UK law to claim unilateral tax credit if it was resident in the UK and otherwise subject to UK tax, even if the taxpayer had, on the kind of "objective" tests articulated in Article 23 of the Tax Treaty, no "substantial connection" with the UK, or could even be shown, subjectively, to have taken and/or maintained, residence in the UK with a primary purpose of enjoying such unilateral tax credit. Broadly speaking, there was nothing to suggest to the anxious taxpayer that "treaty shopping" had been a concern of UK public policy.
74. Again, as far as I can discern, in the extensive consultation exercise leading to the relevant amendment contained in the Finance Act 2000, and in the legislative process, the general issue of "treaty shopping" as such did not feature as a specific concern of UK public policy, and of course any possible UK concern regarding "treaty shopping" did not in the event result, as might otherwise have been expected, in the enactment of generally applicable measures intended to deny unilateral credit relief to UK residents who could not show substantial connection to the UK according to objective tests of the kind articulated in the Tax treaty.
75. Even on HMRC's later, and corrected, interpretation of s.793A(3), putative "treaty shopping" of the nature articulated in Article 23 defeated the claim to unilateral credit, if, and only if, the particular tax situation fell within the scope of Article 23 of the Tax Treaty: as at 2006 tax treaties with other States were irrelevant, and s.793A(3) plainly had no application if there was no tax treaty at all.
76. I was not shown any contemporary specialist articles or text book commentaries that, inconsistently with the guidance, would have alerted even the most anxious taxpayer to the possibility that s.793A(3) could reasonably refer to the provisions of Article 23 of the Tax Treaty, and that a UK resident who was not a "qualified person" would be denied a claim to unilateral tax credit. I was referred to passages from Simon's Taxes but they do not deal with the present question, and my own researches have shed no further light on this topic.
77. Even if, therefore, the hypothetical taxpayer considered the matter objectively, and with a super abundance of caution, there was nothing at all prominent to alert the anxious taxpayer to look beyond the terms of the HMRC guidance that uniquely identified a single Article of the Tax Treaty, namely, Article 24(4)(c).
78. I do, therefore, reach the conclusion that the guidance constituted a relevant representation, namely, that s.793A(3) had application only to the circumstances set out in Article 24(4) (c) of the Tax Treaty. It is common ground that Article 24(4)(c) had no relevance to Aozora UK. It was also common ground that Aozora UK was not seeking to rely upon the guidance in order to engage in tax avoidance in the sense intended by the guidance. Aozora Japan was therefore entitled in principle to rely on the guidance.
79. I might simply add that the US Treasury Note was not referred to at the hearing, and no submissions were made on it. It did, however, strike me at first sight that the Note appeared to chime with what Mr Ewart QC (correctly) submitted was the clear and unambiguous meaning of the guidance. It looks from the Note that "treaty shopping" was at the time a peculiar concern of US public policy, and that the US was the driving force behind Article 23. By contrast, it looks from the Note that Article 24(4)(c) was driven primarily by UK concern, which saw a particular, but somewhat limited, potential abuse of the Tax Treaty, and was taking appropriate steps to ensure that Article 24(4)(c) would be effective, both under the Tax Treaty (notwithstanding Article 1(2)), and also under domestic law which had recently been amended with that end in mind.
80. For completeness I also mention a submission that Mr Rivett made in his original written skeleton argument, but which was understandably not pursued with marked vigour at the hearing, namely, that HMRC could not properly have made the alleged representation because to have done so would have been an ultra vires or unlawful act. It seemed to me that this submission came uncomfortably close to asserting that HMRC could not in law be prevented in any case from resiling from a representation that could later be shown to be an incorrect interpretation of the applicable law.
81. Mr Rivett did not quite go that far, being seemingly willing to wound, but afraid to strike. That was unsurprising because the cases in this area show that HMRC may well be prevented from applying what later emerges as the correct interpretation of the relevant law, by reason only of a legitimate expectation that it had previously created. That is not to say that there are not possible conceptual difficulties in this area. The general position in public law appears to be that public authorities must apply the law correctly, even if inconsistent representations have previously been made (see, for example, Professor Craig, Administrative Law, 7^th edition, pages 701-716). That also appears to be the position in EU law: see R (on the application of Software Solutions Partners Limited) v HMRC [2007] EWHC 971 (Admin), at paragraphs 45-46. My recollection also is that the United Stated Supreme Court has held, more than once, that in strict US constitutional law the IRS may not be prevented from applying the tax code correctly, whatever representations may have previously been made, although there is a detailed regime in the US for tax interpretations and rulings, which appear to be honoured in practice notwithstanding the strict constitutional position.

(b) Reliance

82. The next question is whether the taxpayer, Aozora UK, relied upon what I have held to be a relevant representation. Of course, strictly speaking Aozora UK did not yet exist at the relevant time, but I am prepared to treat Aozora Japan as a proxy for the actual taxpayer in this context.
83. On the evidence before me it does not appear that Aozora Japan was even aware of the Manual or the guidance. It does not appear that either Deloitte London, through Mr Coles, or Deloitte Japan provided any written tax advice to Aozora Japan. That is for several reasons hardly satisfactory in a case of this nature, but it does mean that it is simply not possible to ascertain with confidence what specifically, if anything, was said to Aozora Japan about the Manual or guidance. It is not even clear whether Deloitte Japan knew about the Manual or guidance. There is just no mention of the Manual or guidance in any of the contemporary emails.
84. In particular, Mr Coles does not say in his evidence that he mentioned, explicitly or implicitly, the Manual or the guidance in the crucial telephone conference of 11 October 2006 (see paragraph 35 above). Indeed it is not apparent that Mr Coles even mentioned s.793A(3) in that conference. He did discuss s.795A, for that section was on any view plainly relevant to the availability of unilateral credit.
85. On the evidence before me, therefore, the only conclusion that I can properly draw is that Aozora Japan was relying on, and was exclusively relying on, expert advice of Deloitte that unilateral credit would be available under UK law to a wholly owned subsidiary company resident in the UK in respect of taxed income received from the US by the UK subsidiary. Aozora Japan was unaware of the Manual and guidance and did not directly rely upon any representation made by HMRC about the meaning and scope of s.793A(3).
86. In my view, this conclusion presents a very formidable difficulty for the taxpayer, Aozora UK, in this claim. Assuming for a moment that Deloitte, as tax adviser of Aozora, did rely upon the relevant representation, would that be sufficient? I do not believe that it would be sufficient in a case, such as the present, where there is no evidence that:

(i) the adviser drew the taxpayer's attention to the representation made by HMRC; and

(ii) explicitly explained to the taxpayer that the adviser was relying upon the representation in giving the relevant advice to the taxpayer.

87. In the absence of such a condition it seems to me that it would be all too easy for an adviser later to assert that he had relied on HMRC guidance in advising a client, and it would be very difficult for HMRC to rebut such an assertion, whatever the true position might have been. The temptation for the tax adviser would be all the greater if, as might well be expected, the client was later aggrieved by what has turned out to be possibly flawed advice, and the adviser were exposed to legal liability and reputational damage. On the other hand it does not seem unduly burdensome, particularly in the context of a doctrinal exception to the principle of legality in favour of legitimate expectation, to require the adviser in advance to make plain to the client that he has relied, in giving the advice, on HMRC guidance. The adviser, of course, always has the alternative – which may in some cases be preferable – of contacting HMRC, explaining the nature and scale of a contemplated transaction or transactions, and indicating an intention to rely upon a relevant HMRC guidance. That course was not adopted in the present case.
88. Even if, however, contrary to the above, it were sufficient to show that Deloitte, as tax adviser to Aozora Japan, relied upon the relevant representation in giving the advice that it gave, I am not satisfied on the evidence before me that the Claimant has shown that that was indeed the case. For that purpose Aozora UK had to show that the representation played a real and substantial part in the giving of the advice. It is insufficient to show that the adviser was supported or encouraged in giving the advice by reason of the representation.
89. Mr Coles was an expert on the availability of double taxation relief in the UK, whether under applicable treaties or by unilateral credit. He knew the relevant UK law. He had participated in the 1999 consultation exercise, and he was familiar with the amendments made in the Finance Act 2000. Mr Coles had specifically considered S793A(3) and had concluded:

"… Section 793A(3) was included in the domestic law specifically to cater for the anti-avoidance…. clause of Article 24(4)(c) of the Treaty. That is, it was logical that a domestic "parallel" rule was required for this express treaty anti-avoidance provision in order for it to be effective, and not simply side-stepped by a unilateral credit relief claim. I thus consider that this was the specific reason for the introduction of section 793A(3)" (paragraph 16 of witness statement)

90. On his own reasoned analysis, therefore, he had firmly concluded that the only relevant "restriction" for the purpose of Section 793A(3) was Article 24(4)(c) of the Tax Treaty. That Article had no relevant application to the scenario upon which he was advising.
91. Mr Coles in his statement put the position quite frankly:

"I drew comfort from the content of [The Manual] in reinforcing my understanding that section 793A (3) was legislated as "bespoke" to Article 24(4)(c)…… correspondingly, I also drew comfort from this guidance that Section 793A (3) could be disregarded as a realistic risk area in any unilateral credit relief analysis where Article 24 (4)(c) of the Treaty was not in point…" (paragraph 17 of witness statement, my emphasis).

92. Again I draw attention to the surprising, and unsatisfactory, fact that no advice in writing was given. Such a written advice would have spelled out in terms what part, if any, the Manual and guidance played in the final advice to Aozora Japan. As it is, I must draw inferences from patchy contemporary documents and a witness statement made long after the events in question. In my view, the evidence falls well short of showing that the guidance played a real and substantial part in the giving of the advice, rather than supporting or encouraging Mr Coles in giving the advice.
93. Another way of testing my conclusion is to ask what advice Mr Coles would have given if the relevant representation had not been made. On the evidence before me it is clear that the advice would have been precisely the same, namely, that unilateral credit would be available on the scenario under consideration. Absent the relevant representation, and even if quod non Aozora Japan and Deloitte Japan had in conference raised a specific query about the potential application of s. 793A(3), Mr Coles, consistently with his reasoned analysis of that section, as explained to this Court, would have advised that only Article 24(4)(c) of the Tax Treaty was caught by that section. Furthermore, in the light of that analysis he would have advised that there was no appreciable risk of HMRC seeking to apply s.793A(3) to any provision of the Tax Treaty other than Article 24(4)(c).
94. When the judgment was handed down in draft, Mr Ewart QC wrote to me saying that he wished me to record a submission to the effect that Mr Coles did not independently believe that Article 24(4)(c) was the only provision of the Tax Treaty to which s. 793A(3) applied. I duly record the submission, but also record my judgment that it is wholly unsustainable. At paragraph 16 of his witness statement Mr Coles states that he independently considered that "section 793A(3) was included in the domestic law specifically to cater for the anti-avoidance provision of Article 24(4)(c) of the Treaty" (my emphasis). At paragraph 17 he re-iterates his independent understanding that "section 793A(3) was legislated as "bespoke" to Article 24 (4)(c)". A suit of clothes is "bespoke" if it is intended, and intended solely, for the customer whose measurements the tailor has taken.
95. The truth of the matter is that at the time neither Mr Coles, nor anyone else in Deloitte, believed that Article 23, or any Article of the Tax Treaty other than Article 24(4)(c), fell, or could plausibly be regarded as falling, within the scope of s. 793A(3). If no representation had been made, the advice would have been the same, namely, that s. 793A(3) was aimed exclusively at, or was "bespoke" to, Article 24(4)(c), an Article which was irrelevant to Aozora UK's circumstances, and that unilateral tax credit was available.
96. In short, drawing comfort or encouragement in the circumstances described above is not sufficient: Deloitte did not rely upon the relevant representation in accordance with the standard that is legally required in the present context. Deloitte relied in truth upon its own analysis provided by its own relevant tax expert for the reasons that he has clearly articulated.

(c) Conspicuous unfairness

97. Even if, contrary to the above, Aozora UK could show that the advice would not have been given but for the relevant representation, its difficulties in this claim would not end there. It would have to show that it would be conspicuously unfair for HMRC to resile from the relevant representation, even if HMRC now believed that the representation did not represent a correct interpretation of the applicable law. It is clear from the authorities that that is a very high hurdle indeed.
98. In my view, Aozora UK could not clear that hurdle in this case, unless it produced clear and compelling evidence that, by reason of its putative reliance on the relevant representation, it had suffered substantial detriment. It must show that, but for the advice that unilateral tax credit was available, it would not have made the business decision that it did, but would have made a business decision that was more favourable from a tax point of view. However, there is simply no evidence before the Court from Aozora Japan or Aozora UK as to what Aozora Japan would have done if they had been expressly (and, for this purpose, correctly) told that, by virtue of Article 23 of the Tax Treaty and s.793A(3), no unilateral credit would be available on the scenario under consideration.
99. It is simply not sufficient, in my judgment, for Mr Ewart QC to point to the fact that the unavailability of unilateral credit would lead, at then prevailing rates of tax in the US and UK, to a cumulative tax burden of 51 percent, compared to 41 percent if Aozora Japan had, on the alternative scenario open in 2006, directly established a US subsidiary. There is in evidence, for example, no internal corporate document from 2006 that set out why Aozora Japan chose to set up a wholly owned subsidiary in the UK, and that explained the role, if any, of contemplated taxation in reaching that decision. It is now asserted through counsel that taxation was critical, but I note again that no written tax advice was obtained at the time from Deloitte, somewhat surprising if the tax position had indeed been critical.
100. It is in any event clear from the subsequent request to the IRS in 2008 that Aozora Japan had what it regarded in 2006 as good independent business reasons to establish a subsidiary in the UK, apart altogether from the tax position. In short, the UK was a leading financial centre; it was geographically close to Aozora's customers, and it had a developed and impressive system of financial regulation, which would no doubt inspire confidence in customers as to the integrity and accountability of Aozora's operations. I cannot say a priori whether the stated advantages would have justified a corporate decision to invest in the UK, despite an increased tax burden of 10 per cent, but they do suggest that that might well have been the case.
101. Furthermore, the contemporary documents do not show that in 2006 Aozora UK thought that it would have no realistic prospect of persuading the IRS to grant "competent authority" clearance, as it was labelled in the contemporary emails, under Article 23(6) of the Tax Treaty. Any such clearance would of course have made unilateral credit irrelevant. Although the contemporary documents make reference to possible US legal advice, I was shown no relevant US written legal advice from that time that would suggest that Aozora Japan then viewed the prospects of a favourable ruling as slim or unrealistic, and that, all things considered, the investment in the UK would proceed only if unilateral tax credit were guaranteed.
102. On this sparse and unconvincing evidence it is, in my view, simply speculation as to what Aozora Japan would have done if it had believed in 2006 that unilateral tax credit would not be available and that it could be exposed at worst to a 51 per cent tax burden. On the material submitted to the IRS in 2008 it appears that the decision may very well have been the same, namely to establish for sound business reasons a wholly owned subsidiary in the UK. Even if the tax position was really essential to the investment decision, as now asserted, Aozora Japan may well have considered at the time that it had good prospects of ultimately obtaining a favourable IRS ruling under Article 23 of the Tax Treaty. On the evidence before me I cannot be satisfied that Aozora Japan would not have established an entity in the UK if it had believed that by reason of s. 793A(3) and the provisions of the Tax Treaty no unilateral tax credit would be available.
103. No substantial detriment, therefore, has been demonstrated; and, apart from the other points that I have decided adversely to Aozora UK, there would be no conspicuous unfairness or abuse of power if HMRC now insisted that s. 793A(3) must be applied in accordance with the meaning enacted by Parliament - a matter of contested statutory interpretation that of course will be determined in Aozora's extant appeal against the closure notices before the First-Tier (Tax) Tribunal.

Conclusion

104. For these reasons, I dismiss this claim for judicial review.