The U.S. tax code allows citizens and domestic corporations to credit foreign taxes paid against U.S. taxes owed. A foreign tax paid by a U.S. citizen or a domestic corporation may be creditable against domestic taxes when such tax is considered a levy on income. Although the tax’s “predominant character” controls in determining whether it is an income tax, the effect of a foreign country’s characterization of the tax on such analysis has remained unsettled. In PPL Corp. v. Commissioner, the Supreme Court considered whether a windfall tax paid in the United Kingdom (U.K.), and characterized by the U.K. as a tax on value and not a tax on income, is creditable in the United States. The Court held that the tax formula adopted by the U.K. Labour Party was an income tax in the United States for credit purposes because the economic reality of the levy was a tax on the company’s income.
A Conservative Party-controlled British Parliament privatized certain government-owned companies in the 1980s and 1990s through an initial sale to the public known as a “flotation.” Petitioner PPL Corporation (PPL) was a U.S. company that owned twenty-five percent of one of the privatized companies, South Western Electricity plc (SWE). For the four years after privatization, the British government required certain companies, including SWE, to charge customers the same rates they had charged under the government’s control. The companies became much more efficient during this period and earned large profits.