Brexit and European Tax Law

Here are some interesting questions. Well, I think them interesting anyway!

1. If we ‘do Brexit’, will we persist with VAT?

2. If so, how will it be administered, bearing in mind the current cross-border arrangements?

3. Will the European Court remain supreme, in terms of judicial opinion and interpretation?

4. On direct taxes, will we revert to double tax treaties, rather than the various European Directives?

5. If so, from what date?

6. If we do leave the EU, will the Courts go back to the ‘literal’ approach to interpreting tax legislation, a la Justice Rowlatt, or will it continue to dabble in the ‘purposive’ approach?

7. In the context of the above how would anyone define ‘The Purpose of Parliament’, in terms of (say) the formulae in the Emloyee Security/Benefit rules?

Je ne sais pas?

Opinions, s’il vous plait.

Offshore Update – HMRC Clamp Down and Starbucks EU Tax Case

HMRC have recently purchased advertising pointing out that offshore income and gains may be taxable in the UK. This is true. In general, for UK domiciled residents, all worldwide income and gains are taxable (even where you reinvested the proceeds and did not remit them to the UK). For non-residents, UK source income may be taxable.

This is where it gets complicated (as if it was not before!). Like many other matters in the international tax world, circumstances can alter cases . Domicile, double tax treaties and all the new statutory residence test may all have an impact.

If you have offshore assets, review them now, before HMRC really clamp down next tax year. If in doubt, seek tax expert advice.

In an interesting twist to the European Question, the EU authorities have just issued a decision on the advance tax ruling given to Starbucks by the Dutch Revenue, helping Starbucks avoid tax in other jurisdictions. This was done by Starbucks having higher tax deductible costs with a lower tax rate in the Netherlands, thus meaning there was only immaterial profit in countries such as the UK, so minimal UK corporation tax. The EU Authorities feel this amounted to illegal State Aid, such that Starbucks should be enforced to repay it in full.

The political question is whether this is:

a) A good example to tax abuse by multinational corporations?

b) An unacceptable interference in Dutch sovereignty because tax is not supposed to be controlled at EU level?

Is that the smell of coffee or the protagonists’ lawyer preparing their morning shot of napalm?

Mr Anson (Taxpayer) Wins : Other Taxpayers look to lose

The complexities of Double Taxation loom gain in our multinational global economy.

Has every investor in a foreign entity thought through the implications of the case of Anson v Revenue and Customs Commissioners?

Historically, HMRC have treated entities such as Delaware LLC’s as legal entities separate and distinct for tax from the identity of investors in it.  Bearing in mind ‘LLC’ stands for ‘Limited Liability Company’, this was perhaps unsurprising!  However, the Supreme Court has now decided, in the Anson case, that in fact such entities are more akin to Partnerships.  This means Mr Anson was entitled to double tax relief on the tax paid by the LLC.  Significantly though, it also means, logically, that he should suffer UK income tax on the proportion of profits which would be ‘attributed’ to him.  Bearing in mind such investors may have historically followed what they thought to be UK HM Revenue and Customs guidelines, and only declared income for tax when ‘distributed’, where does that leave them now?

A review of individual circumstances would seem sensible ~ so as to come up with a strategy on how best to move forward.

When HMRC win they (obviously) say – well that was the ‘correct’ view of the law all along.  If (as here) they lose though, presumably no-one should be punished for following their original views?

Both US and UK advisors need to think about how best to report matters from now on.

THOUGHTS/OPINIONS WELCOME

Interpretation of Double Tax Treaty – Meaning of “Subject to Tax” TC02178

In the recent case of Paul Weiser v HMRC (TC02178) the first tier tribunal considered the interpretation of the double tax treaty between the UK and Israel and in particular the meaning of the phrase “subject to tax”.

Article XI of the UK-Israel double tax treaty provides that UK source pensions will not be subject to UK tax where they are received by a resident of Israel and subject to Israel tax in respect thereof. However under Israeli tax rules, UK pension income is excluded from tax in Israel during the first 10 years of residence.

HM Revenue and Customs therefore argued that because the pension income was exempt from tax in Israel it could not be said to be subject to tax.

On the other hand, the taxpayer claimed that he is within the charge to tax in Israel by virtue of living there even though Israel does not levy tax on his UK pension income because of the exemption.

Following the decision in Bayfine UK v HMRC (STS 717) the tribunal found that the double tax treaty should be interpreted using a purposive rather than a literal approach. The primary purpose of the double tax treaty is to eliminate double tax and prevent the avoidance of tax, the purpose is not therefore to enable the double non taxation of income.

The case therefore centred around the meaning of the phrase “subject to tax” and the difference in international tax treaties between this phrase and the phrase “liable to tax”.

HM Revenue and Customs presented various examples of case law from other countries and academic articles that examine the distinctions between the two phrases. The tribunal noted that whilst such authorities are not determinative they are relevant.

In HM Revenue and Custom’s view, the distinction between the two phrases is that the expression “liable to tax” requires only an abstract liability to tax (i.e. a person is within the scope of tax generally irrespective of whether the country actually exercises the right to tax) and therefore has a much broader meaning than the phrase “subject to tax” which requires that tax is actually levied on the income.

The first tier tribunal decided the case in favour of HM Revenue and Customs such that relief was not available under the UK-Israel tax treaty to exempt the pension from UK tax because the pension was not subjected to tax in Israel.

The tribunal’s interpretation of the UK-Israel double tax treaty and meaning of “subject to tax” will be of interest to taxpayers relying on double tax treaties and those practitioners who advise on double tax treaties.

Take Advice and then Action

The Tax Tribunal heard that Mr Shanthiratnam cashed in 1/3 of a bond as collateral for his business.

When he submitted his tax return HMRC enquired and corrected his tax return so that his tax bill was increased by about £20,000.  Had he gone about sourcing collateral from his bonds in a different way he could have avoided further tax.

The Judge said he sympathised with the taxpayers view that double tax had been suffered; but that he should have understood what the tax result of his actions would be, before proceeding.  The taxpayer’s appeal against the additional bill was dismissed.

Double Tax?

Eaves & Co Leeds, have advised recently on two areas where tax might have been paid twice on the same income:-

  1. A FURBS which paid tax on its income and the trustees suffered PAYE on the same income. Tax credit relief and ESC A68 may be available.
  2. Two cases where profits have been taxed in the US and our UK client wishes to avoid double tax by also paying UK tax.

If you have a case where tax may be payable twice we would be pleased to discuss how relief may be available.