Brexit and the Route Map: Do all roads lead to Rome?

Brexit and the Route Map?

Do all roads lead to Rome?

Rome

Whatever people think of the merits or demerits of Brexit, if, as seems increasingly likely, we fail to agree on all aspects of a Brexit formula before March 2019 (now just a few months away) how are we supposed to advise clients?

It is the nature of our business that we often get asked about the more esoteric bits of tax practice, such as cross border matters and the impact of double tax.

Here is an example, which we have just looked at as part of researching advice for a client in respect of the Swiss/UK double tax treaty.  Of course, Switzerland is not a member of the EU.  However, Clause 18 (4) of the UK/Swiss Treaty only applies if the individual making the claim is “subject to the legislation of the Home State in accordance with the Agreement on the Free Movement of Persons”.

I appreciate this may only apply to a few people, although it should be noted the Governmental Authorities each thought the issue significant to incorporate specifically into the Treaty.  Anyway, are not individual citizens important?

Additionally, if EU concepts are so ingrained into UK tax procedure as to affect non-EU Treaty countries, surely there must be more issues lurking.

Professional bodies what are your views?

In this context, I commend the Article by Alistair Spencer Clarke in the August 2018 edition of ICAEW Tax Line.  Ownership of Spanish property is not an outlandish thought for many UK citizens, quite apart from many other cross border situations which are now common place in our shrinking world.

Please can we start a debate about how to approach this matter?  Here I am talking about practical reality and proper approaches for Tax Practitioners to ensure they are giving best advice to clients.  Constitutional jurisprudence is for another day!

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.