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Issues Involved:
1. Whether the respondent, an Australian life assurance company, can be lawfully assessed to income tax in the UK under rule 3 of case III of Schedule D to the Income Tax Act, 1918 (or section 430 of the Income Tax Act, 1952), considering the Double Taxation Relief Agreement between the UK and Australia. Detailed Analysis: 1. Nature of Rule 3 Taxation: The core issue revolves around the interpretation of Rule 3, which was designed to tax foreign life assurance companies operating in the UK. Rule 3 attributes a portion of the company's global investment income to the UK, based on the proportion of premiums received from UK policyholders. This sum is then taxed as if it were profits derived from business carried on in the UK. Relevant Text: - "Rule 3 first became law in 1915, being introduced by section 15 of the Finance Act of that year. The situation that it was framed to deal with needs to be shortly stated: it arose from a combination of the special difficulties of establishing the true annual profit of life assurance business with the special difficulties of determining the true United Kingdom income of a non-resident life assurance company doing branch business here." 2. Conflict with Double Taxation Relief Agreement: The Double Taxation Relief Agreement between the UK and Australia aims to prevent double taxation on the same income. According to the agreement, an Australian enterprise's commercial profits can only be taxed in the UK if they are attributable to a permanent establishment in the UK. The crux of the matter is whether the income taxed under Rule 3 qualifies as "commercial profits" under the agreement. Relevant Text: - "The form employed, which, for obvious reasons employs similar forms and similar language in all agreements, is derived, I believed, from a set of model clauses proposed by the financial commission of the League of Nations. The aim is to provide by treaty for the tax claims of two governments both legitimately interested in taxing a particular source of income either by resigning to one of the two the whole claim or else by prescribing the basis on which the tax claim is to be shared between them." 3. Interpretation of "Commercial or Industrial Profits": The definition of "commercial or industrial profits" in the agreement excludes income in the form of dividends, interest, rents, and royalties. The argument hinges on whether the sum taxed under Rule 3 can be considered commercial profits or if it is merely investment income. Relevant Text: - "The definition of 'industrial or commercial profits' declares that it 'includes profits from such activities or business but does not include income in the form of dividends, interest, rents, royalties,...' Accordingly, except so far as article VI makes certain special stipulations about double taxation of dividends, the respective claims of the taxing authorities upon items of income such as dividends or interest are not regulated on the 'permanent establishment principle' of article III and are left to be taxed according to the local legislation." 4. Application of Previous Case Law: The decisions of the High Court and the Court of Appeal were influenced by a previous House of Lords decision in Inland Revenue Commissioners v. Australian Mutual Provident Society (1947). This case was interpreted to mean that Rule 3 assessments were on the profits of the life assurance business, thus falling under the definition of commercial profits in the Double Taxation Relief Agreement. Relevant Text: - "The decisions in the High Court and the Court of Appeal were dominated by the view taken in those courts as to the effect of the opinions delivered in this House in an earlier case involving the present respondent, which is reported as Inland Revenue Commissioners v. Australian Mutual Provident Society [1947] A.C. 605; [1947] 1 All E.R. 600; 28 T.C. 388; 15 I.T.R. (Suppl. ) 71." 5. Judgment and Conclusion: The House of Lords concluded that Rule 3 taxation cannot be reconciled with the Double Taxation Relief Agreement. The method of attributing a portion of the global investment income to the UK violates the agreement's principle of taxing only the profits attributable to the UK establishment. Relevant Text: - "I would dismiss the appeal." Separate Judgment by LORD DENNING: LORD DENNING provided a dissenting opinion, arguing that the Rule 3 tax should be considered a tax on investment income rather than business profits. He emphasized that the Double Taxation Agreement intended to prevent double taxation on investment income and that the Rule 3 tax was designed to ensure fair taxation of foreign life assurance companies operating in the UK. Relevant Text: - "The tax under rule 3 is not a tax on the profits of the business within the meaning of that agreement but is rather a tax on income in the form of dividends and interest." Conclusion: The appeal was dismissed, affirming that the Rule 3 assessment conflicted with the Double Taxation Relief Agreement, thus preventing the UK from taxing the respondent's global investment income under this rule. LORD DENNING's dissent highlights the complexity of interpreting tax laws in the context of international agreements.
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