DIRECTION sought that unsubstantiated allegations of fact contained in the UK’s Written Observations to the European Court of Justice will have to be made good and that the matter cannot proceed on the basis of any of those allegations until made good – whether jurisdiction to make – yes, but no Direction made – the Tribunal’s understanding of the main differences between the parties over the facts summarised in case the ECJ finds it useful

THE SPECIAL COMMISSIONERS

	CADBURY SCHWEPPES PLC AND 
	CADBURY SCHWEPPES OVERSEAS LIMITED 	Applicant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Special Commissioners:	DR JOHN F AVERY JONES CBE
							MALCOLM GAMMIE CBE QC

Sitting in private in London on 6 December 2005

Julian Ghosh and James Henderson, counsel, instructed by Robert Moore, Group Tax Manager of the Applicant

David Ewart, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION ON APPLICATION FOR DIRECTION

1.	This is an application by Cadbury Schweppes plc and Cadbury Schweppes Overseas Limited for a direction that:
“That the unsubstantiated allegations of fact contained in the United Kingdom’s Written Observations will have to be made good once the matter is remitted back to the Special Commissioners from the Court of Justice and that the matter cannot proceed on the basis of any of those allegations until made good.”
2.	Mr Julian Ghosh and Mr James Henderson appeared for the Applicant, and Mr David Ewart for the Crown.
3.	The reason for the application is that Mr Ghosh is concerned that the European Court of Justice may be misled by the section of the United Kingdom’s Written Observations headed “The Facts” into thinking that there is more common ground between the parties over the facts than there actually is.  Paragraph 42 of the Written Observations makes clear that what follows is the Revenue’s view of the facts: 
“In order to put those facts in context, however, and in case the resolution of this appeal should depend upon other facts that this Court may hold to be relevant in its preliminary ruling, the UK sets out the position of the Inland Revenue on further areas of factual enquiry, as follows:…” 
However, later, in paragraph 48 it is stated:
“48.  It appears to be common ground that:
(a)	the functions of CSTS and CSTI were wholly internal to the group (Schedule, 2(3));
(b)	they were established purely for fiscal purposes, and not for any broader commercial or economic purpose (Schedule, 2(4)); and that
(c)	CSTS and CSTI were established solely in order to avoid UK tax (Schedule to the Order for Reference, 2(6)).” [These references correspond to the sub-paragraphs of paragraph 7 below]
In paragraph 50 and 51 it is stated: 
“50.  The statement at paragraph 2(3) of the Schedule to the Order for Reference that the ‘business of CSTS and CSTI is to raise finance and to provide that finance to subsidiaries in the PLC worldwide group’ should not be taken to imply that either company had any real economic substance.  It appears not to be in dispute that the activities of CSTS and CSTI, such as they were, were entirely superfluous to CS’s commercial operations (including the financing of them) and added nothing to those performed in the UK.  Moreover… [there then follows eight points].
51.  Accordingly, there was no commercial justification for CSTS and CSTI to have made the profits that they did from intra-group lending (CSTS made GBP 21,562,000 profit in the year 1997).  
Mr Ghosh makes it clear that paragraph 48 is not common ground, and paragraphs 50 (including the eight points not reproduced above) and 51 are in dispute.  He has a number of other points on this section of the Written Observations which we think it unnecessary to record for the purposes of our decision on the application.
4.	Mr Ewart, although instructed before us by the Commissioners for Her Majesty’s Revenue and Customs, successors to the Commissioners of Inland Revenue, rather than by the UK, says that he stands by the statements in that section of the Written Observations, and he does not consider them misleading, having made it clear in paragraph 42 that they represent only the position of the Inland Revenue.
5.	The Tribunal’s jurisdiction to make Directions is contained in regulation 4(1) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994:
“A Special Commissioners prior to the hearing of any proceedings, for the purpose of enabling the parties to prepare for the hearing or of assisting a Tribunal to determine any of the issues in those proceedings, may on the application of a party or of his own motion, give such directions as he thinks fit.”
6.	Mr Ghosh contends that we have jurisdiction to make the Direction sought as assisting a Tribunal to determine any of the issues in those proceedings.  Mr Ewart contends that there is no issue currently before the Tribunal until the answer of the European Court of Justice is known.  Accordingly he contends that we have no jurisdiction to make the Direction, as well as contending that we should not do so as it is unnecessary.
7.	We repeat our summary of the facts, which was based on a statement of agreed facts and an uncontested witness statement, as we set them out in the reference:
(1)	“Cadbury Schweppes plc (PLC) is incorporated and resident in the United Kingdom.  It is the parent company of a group of companies comprising subsidiaries established in the UK, in other member States of the European Union and in many other countries of the world.  As concerns the controlled foreign companies’ legislation, the group includes two indirect 100 per cent subsidiaries incorporated with unlimited liability in Ireland and agreed (for the purposes of this appeal only) to be resident in Ireland, Cadbury Schweppes Treasury Services (CSTS) and Cadbury Schweppes Treasury International (CSTI).  A group structure is attached as an Appendix.
(2)	CSTS and CSTI are subject to a tax rate of 10 per cent within the International Financial Services Centre in Dublin in accordance with certificates issued by the Ministry of Finance for Ireland under section 39B(2) of the Irish Finance Act 1980.
(3)	The business of CSTS and CSTI is to raise finance and to provide that finance to subsidiaries in the PLC worldwide group.
(4)	CSTS was established by PLC for three purposes to replace a previous structure that involved a Jersey company: 
(i)	to remedy a Canadian tax problem for Canadian resident preference shareholders of PLC, 
(ii)	to avoid the need to obtain consents of the UK Treasury for overseas lending, and 
(iii)	 to reduce the withholding tax on dividends paid within the group structure by benefiting from the Parent-Subsidiary Directive (Council Directive of 23 July 1990 90/435/EEC).  
These three purposes would equally well have been achieved if CSTS had been incorporated and tax resident in the UK rather than tax resident in Ireland.
(5)	CSTI was incorporated as a subsidiary of CSTS with shares denominated in US dollars. It accounted in US dollars and acquired the benefit of loans in US dollars made by CSTS to a US and an Argentinean subsidiary of PLC. The reason for incorporating CSTI was to avoid the application to CSTS of certain foreign exchange provisions under United Kingdom tax law in the event that the controlled foreign companies’ legislation in issue in this appeal was applied to CSTS. 
(6)	PLC established CSTS and CSTI as tax resident indirect subsidiaries in Ireland solely in order that the profits arising from their intra-group lending treasury activities could benefit from the International Financial Services Centre regime for group treasury companies in Ireland and would not be taxed in the United Kingdom.”
8.	The hearing of this application has drawn attention to the existence of a fundamental disagreement between the parties about what facts are common ground and what inferences flow from them.  We would summarise the difference as being essentially that Mr Ghosh is saying that CSTS and CSTI are carrying on a commercial operation of lending money, which, solely for tax reasons, the group chose to do by establishing them as Irish companies and conducting their business in the International Financial Services Centre in Ireland.  Mr Ewart, on the other hand, is saying that CSTS and CSTI are not established for any commercial purpose but solely to avoid UK tax, and their activities are entirely superfluous to the group’s commercial operations.  In other words, because CSTS and CSTI were admittedly established in Ireland for tax purposes, it follows that they have no commercial purpose.  
9.	We take a neutral stance on this difference.  Our understanding at the time in finding the facts set out above was closer to Mr Ghosh’s understanding than to Mr Ewart’s.  In particular in describing the business of CSTS and CSTI in paragraph 7(3) above, we then understood it to be accepted (contrary to paragraph 50 of the UK’s Written Observations) that a commercial operation was carried on by them.  But should further facts need to be found we would not wish to say anything that would prejudge our findings of them.  Mr Ghosh may, or may not, persuade us that the facts are contrary to those set out in the UK’s Written Observations, or Mr Ewart may persuade us that they are the facts, depending on whose burden of proof is applicable.  All we wish to do is to emphasise that we have not at this stage found as facts the statements contained in the UK’s Written Observations.  We accept that the UK has made this clear in paragraph 42 of the Written Observations but the subsequent references to matters appearing to be common ground, or not in dispute, might suggest to the European Court of Justice that there is more agreement on such matters than there is.
10.	We consider that we have jurisdiction to make the Direction on the ground that it is likely to assist our future determination of the issues in the appeal if the European Court of Justice fully understands the differences between the parties over the facts.  What we want to avoid is, for example, that the Court makes a decision based on an understanding that it is common ground that CSTS and CSTI were established for tax reasons without any commercial purpose, which when further facts are found might turn out not to be the case, in which case a further reference might be necessary.  However, we consider that the Direction sought does not achieve that aim.  We, and we are sure both parties, fully appreciate that if further facts are required to be found in the light of the European Court of Justice’s decision those facts must be proved in subsequent proceedings before us in the normal way.  The Direction is therefore unnecessary.  
11.	We consider that Mr Ghosh’s real concern is not what will happen when the case comes back to us from the European Court of Justice, but the danger, to which we have referred, that the Court decides the case based on an understanding that there is more in common between the parties over the facts than there is.  We understand Mr Ghosh’s concern and consider that such a danger exists.  We consider that the Court and the parties may be assisted by our clarifying in this Decision how we, as the fact-finding and referring tribunal, now understand the difference between the parties over the facts.  We do not consider that we should send this decision to the Court ourselves but the parties are at liberty to put it before the Court and, if the Court is willing to accept it, we hope that it may be of assistance to the Court.
12.	Accordingly we dismiss the application for the Direction.
13.	As this application raises issues which are relevant to references to the European Court of Justice generally we direct (with the consent of the Presiding Special Commissioner) that it be released to the public.

JOHN F. AVERY JONES

MALCOLM GAMMIE QC
SPECIAL COMMISSIONERS
RELEASE DATE: 9 December 2005

SC 3051/03

££Cadbiury Schweppes PLC and Cadbury Schweppes Overseas Ltd v Revenue and Customs [2005] UKSPC SPC00512 (09 December 2005)