Lee Ellis, Victor Cramer, David Pickstone and Cristiana Bulbuc have drafted the United Kingdom chapter of the Ninth Edition of the Tax Disputes and Litigation Review, recently published by The Law Reviews. The book gives information on tax disputes across 22 jurisdictions.
Below is the section of the chapter on tax claims. The introduction can be found here.
Double taxation treaties
Double taxation treaties (DTTs) are primarily aimed at reducing juridical double taxation. A DTT is an agreement made between (usually) two jurisdictions, which allocates taxing rights on various items of income or gains between them. DTTs typically alleviate double taxation by eliminating or limiting taxation in the country in which the income or gain arises (source state taxation), or by requiring the country in which the person subject to taxation is resident to grant relief for source state taxation through a credit or exemption mechanism. A DTT commonly applies to residents of one or both of the contracting states and deals with specified taxes. These are, typically, the local equivalents of income tax, corporation tax and capital gains tax, but may also cover other taxes, such as petroleum revenue tax.
Another aim of DTTs is to prevent tax avoidance and evasion. The 2017 update to the OECD model tax convention introduced an explicit statement in the preamble of the convention to the effect that, in entering into the DTT, the contracting states do not intend to create opportunities for avoidance. In the UK, there are also certain anti-avoidance provisions that prevent a DTT from applying in specified circumstances. For example, Section 858 of the Income Tax (Trading and Other Income) Act 2005 provides that, in certain circumstances, a UK-resident partner of a firm that resides outside the UK or that carries on a trade that is controlled and managed outside the UK is liable to income tax on their share of the income notwithstanding arrangements under a DTT. The anti-avoidance position so far as DTTs is concerned has changed significantly following publication of the OECD’s BEPS action plans.
How are DTTs enforceable?
In theory, DTTs, like any international treaty, are not directly enforceable by taxpayers; they are no more than contracts enforceable by the contracting states themselves. Rights granted to individuals under international treaties are only enforceable to the extent they are incorporated in national legislation. It is also permissible under UK law for legislation to be introduced that contradicts the terms of treaties, because the sovereignty of the Crown extends to breaching treaties. However, where a treaty has been introduced into UK law and its terms might conflict with domestic legislation that is capable of more than one meaning, then the meaning that is consistent with the treaty is to be preferred.
The Vienna Convention on the Law of Treaties was incorporated into UK law on 27 January 1980. Its rules of interpretation are binding and it is frequently relied upon by the Tribunals and Courts in interpreting the terms of DTTs. The commentary to the OECD conventions can be relied upon to interpret the terms of treaties that follow the OECD Model.
DTTs are incorporated into UK law by statutory instrument, which is secondary legislation that does not require passage through Parliament. The legislative power to do so is provided by Section 2 of the Taxation (International and Other Provisions) Act (TIOPA) 2010. Section 6 of the TIOPA provides that where the terms of a DTT have been incorporated into law via a statutory instrument, they take effect ‘despite anything in any enactment’ but subject to two important restrictions.
There has been considerable litigation in a multinational group context on the meaning and application of the non-discrimination articles (NDA) in DTTs that follow the standard OECD model wording and from which the following principles derive.
To establish whether the UK subsidiary of a company resident in the other contracting state is subjected to other or more burdensome taxation or requirements than another similar enterprise in breach of the NDA, the relevant comparison to make is with the treatment afforded to the UK subsidiary of a UK-resident parent.
A breach of the NDA will arise only where that difference in treatment is by reason of the foreign ownership of the UK subsidiary. In circumstances where the domestic legislation passes a tax liability from subsidiary to parent, it is permissible to refuse the same treatment to the cross-border group if the parent is not subject to UK tax. In those circumstances, the difference in treatment is not by reason of the foreign ownership, but by reason of the fact that the tax liability cannot be passed on to the parent, as it would not be liable to UK tax. Conversely, the refusal of group relief between two UK-resident subsidiaries of a common foreign parent or link company (where group relief would be available had the parent been UK-resident) would offend the NDA, as the liability of the parent company to UK tax is irrelevant to the entitlement to group relief between its resident subsidiaries.
The UK provisions must be considered as a whole when establishing whether other or more burdensome taxation or requirements arise contrary to the NDA. In Felixstowe Dock, a UK-resident joint venture company owned by a Luxembourg company was refused the ability to surrender losses to offset the profits of other UK companies within the consortium in circumstances where, had that link company been UK resident, consortium relief would have been available. This was held by the Tax Tribunal to breach the NDA in the UK–Luxembourg treaty, even though the tax was paid by the other UK companies under ownership unconnected with the Luxembourg treaty.
Where a UK subsidiary of a UK parent could, by invoking EU rights, override a restriction that otherwise applies under UK legislation, it may breach the NDA not to extend the same treatment to a UK subsidiary of a foreign parent, whether or not that parent is resident in another Member State.
A recent example
In a recent case, Fowler v. HMRC  UKSC 22, the DTT between South Africa and the UK was considered in relation to UK deeming provisions as to whether income was from employment or not. The case concerned the taxation of income from diving engagements in the UK Continental Shelf waters by a South African resident diver. The Supreme Court ruled that the deeming provision in Section 15 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), which treats the income as being from self-employment rather than employment for UK income tax purposes, does not extend to the question of which Article of the South Africa–UK DTT applies to those activities. The result was that the income was taxable in the UK in accordance with Article 14 (income from employment) and not South Africa in accordance with Article 7 (business profits).
The decision in Fowler effectively highlighted the difficulty in interpreting tax treaties correctly when jurisdictions differ in how they treat taxpayers. Thus, the implications of this case are very far-reaching, as similar deeming provisions such as Section 15 ITTOIA 2005 are scattered throughout the UK’s tax code, and the Supreme Court has set a high bar for how deeming provisions should be approached or interpreted for the purposes of interpreting the terms in DTTs.
The UK courts’ approach to the interpretation of European law
The UK courts have long been comfortable applying EU law in the context of domestic tax disputes, and have generally been willing to seek references to the CJEU in appropriate cases.
The future position is less certain now that the UK has left the EU. A snapshot of EU law as it stands at 31 December 2020 is incorporated into domestic law by the European Union (Withdrawal Agreement) Act. It remains to be seen how the courts will apply potentially competing provisions of domestic law.
The full UK chapter of the Tax Disputes and Litigation Review Ninth Edition, can be accessed here.
The Tax Disputes and Litigation Review Ninth Edition, can be accessed in full here.
Reproduced with permission from Law Business Research Ltd
This article was first published in March 2021
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