The U.S. government may face huge claims by foreign banks after a court ordered the Internal Revenue Service to repay National Westminster Bank PLC at least $180 million in overpaid taxes, the Financial Times reported Thursday.
The British newspaper said the Court of Federal Claims in Washington upheld a claim by Natwest and the government of the United Kingdom that the IRS was in breach of the 1975 U.S.-U.K. income tax treaty.
Since 1981 the IRS had refused to allow a portion of interest paid by the bank's branches in the U.S. to other Natwest companies outside the U.S. to be treated as a deductible business expense.
Natwest had claimed its branches should be treated as separate entities, which under the 1975 treaty would allow them to deduct such expenses.
Sutherland Asbill & Brennan, the law firm acting on behalf of the U.K. government in its motion of support for Natwest, said other British banks could now be expected to reclaim taxes paid to the IRS, the newspaper said. The IRS has the option of appealing the decision.
The full implications of the ruling, the newspaper added, will not be known for some time, though banks from other countries that have comparable tax treaties and branches operating in the U.S. can be expected to make similar claims.