When the non-dom charge was introduced in 2008, the Budget papers contained a lengthy opinion obtained by HMRC from Skadden, Arps, Slate, Meagher and Flom LLP, the distinguished US firm, to the effect that credit would be available for the £30,000 charge against the individual’s liability to US tax.
(It seemed to me that for HMRC to structure the non-dom charge in this way was quite brilliant – certainly as far as US citizens were concerned. They would be generally chargeable to US tax on the whole of their worldwide income and if they paid an extra £30,000 in the UK but received credit for it against their US tax, it would not touch them at all.
What was even more brilliant was that we would be imposing a tax here which would be effectively paid by the US Treasury. It is perhaps for this reason that the US Internal Revenue Service have taken rather a long time to consider whether the £30,000 charge is eligible for credit in the US.)
However, the IRS has now issued a Revenue Ruling 2011-19 confirming that the non-dom charge is creditable for US income tax purposes. The Revenue Ruling is lengthy, but concludes that the non-dom charge will be eligible for a credit.
However, their conclusion does contain a caveat as follows:
“A credit for the [non-dom charge] will be available only if the other legal requirements for obtaining a foreign tax credit are satisfied. For example, an amount paid is treated as a compulsory payment of income tax only to the extent that the taxpayer applies the substantive and procedural provisions of foreign law, including elective provisions such as those available under UK law relating to the [non-dom charge] in such a way as to reduce, over time, the taxpayers reasonably expected liability under foreign law for income tax.”
Not being a US tax advisor, or well versed in the obscure phrases used by the IRS (which are significantly different from the obscure phrases used by HMRC), I hesitate to comment, but there does seem to be an issue here. I guess what they are trying to avoid is the position where the US citizen simply pays the nondom charge without giving consideration to any of the figures because he will get credit for it in the US anyway. Such a person may not obtain any benefit from the non-dom charge because for example, the tax saving from claiming the remittance basis may only have been £25,000 - or they may have been able to reduce their UK liability by reliefs or allowances which they have not bothered to claim. In these circumstances I can see that the IRS might refuse credit for the £30,000 charge because if it had not been paid, the UK tax liability would have been smaller. It will be interesting to see how this issue plays out in the coming months.