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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
"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."
"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.
"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."
(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."
JOHN F. AVERY JONES
MALCOLM GAMMIE QC
SPECIAL COMMISSIONERS
RELEASE DATE: 9 December 2005
SC 3051/03