Following the Fifth Circuit Court of Appeals decision that the U.K. windfall tax is a creditable foreign income tax under Section 901, Kevin Kenworthy praised the Court for using "the appropriate framework in determining if a foreign levy satisfies the net gain test."  Interpreting Section 901 requires more than just looking at the statutory words, particularly in this case because the text of the windfall tax "doesn't appear to fit neatly within the net gain test," he said, adding that one must "look at the history of the tax, its operation, and effect to evaluate whether it is creditable." 

"The essence of the dispute all along has been how to evaluate whether an unconventional levy like the windfall tax satisfies" the predominant character requirement of the regulation, Kenworthy said.  "When you drill down into the operation of the tax, you can see that it acts as an excess profits tax rather than a more traditional income tax."  But the windfall tax meets the core elements of a creditable income tax under the regulations because it implicitly involves taking into account realized net income, he said.

The decision creates a circuit split after the Third Circuit earlier this year held that the tax was not creditable on the same issue.