The US Supreme Court [official website] ruled [opinion, PDF] Monday in PPL Corp. v. Commissioner [SCOTUSblog backgrounder] that a UK "windfall tax" is creditable under US tax law. Internal Revenue Code §901(b)(1) [text] states that any "income, war profits, and excess profits taxes" paid overseas are creditable against US income taxes. In 1997, the UK imposed a one-time "windfall tax" on 32 UK companies privatized between 1984 and 1996. In an opinion by Justice Clarence Thomas, the court held that the UK tax is creditable under §901:
The economic substance of the UK windfall tax is that of a US income tax. The tax is based on net income, and the fact that the Labour government chose to characterize it as a tax on the difference between two values is not dispositive under Treasury Regulation §1.901-2. Therefore, the tax is creditable under §901.The court reversed the decision [opinion] of the US Court of Appeals for the Third Circuit. Justice Sonia Sotomayor filed a concurring opinion.
In this case, PPL Corporation was attempting to qualify for a foreign tax credit for paying a "windfall tax" in the UK, where they own a 25 percent stake in a utilities company. PPL's attorney, Paul Clement, argued [JURIST report] for a traditional, formalistic approach to evaluate the windfall tax, which he argued imposed double taxation on PPL as the windfall tax was evaluated as a tax on "value" rather than a tax on profits, although it determined value solely by surveying profits. The US Solicitor General argued against this understanding.