PLC - Principles of Double Taxation

Question 0

When does “economic” double taxation occur?

Answer 0

When more than one person is taxed in respect of the same income - for example where an overseas subsidiary pays tax on its profits which are then taxed again in the hands of its parent.

Question 1

What is tax levied in more than one jurisdiction on the same person known as?

Answer 1

“juridical” double taxation

Question 2

Can a DTA impose a tax liability where such a liability does not exist in domestic law?

Answer 2

No.

Question 3

What four taxes can typically be dealt with by DTAs to which the UK is a party?

Answer 3

Income tax, corporation tax, capital gains tax and petroleum revenue tax.

Question 4

In what circumstances does HMRC accept that the commentary on the Model OECD DTA can be used as an aid to the interpretation of a DTA to which the UK is a party?

Answer 4

Where the text of a provision in the actual agreement follows the OECD Model wording, or has substantially similar wording.

Question 5

By whom can the benefits of a DTA usually be claimed?

Answer 5

Persons who are residents of one or both of the contracting states for the purposes of the agreement.

Question 6

What are the more usual criteria for residence under a DTA?

Answer 6

Domicile, residence, or place of management.

Question 7

If a company is potentially resident under a DTA in two jurisdictions, where does article 4 of the Model Convention provide for the company to be resident for treaty purposes?

Answer 7

The place where its ‘effective management’ is situated.

Question 8

What does section 18 CTA 2009 provide?

Answer 8

If under the terms of a DTA a company is awarded residence in another country, such a company is treated as non-UK resident for the purposes of the Corporation Tax Acts.

Question 9

Which article in the Model Convention defines a ‘permanent establishment’?

Answer 9

Article 5.

Question 10

What is the general definition of a permanent establishment under article 5 of the Model Convention?

Answer 10

“A fixed place of business through which the business of an enterprise is wholly or partly carried on.”

Question 11

What is specifically included in the OECD definition of a permanent establishment?

Answer 11

A place of management, a branch or office, a factory and a workshop (some agreements also include building sites and construction/ installation projects of a particular duration).

Question 12

What are the usual exclusions from the definition of a PE in the Model Convention?

Answer 12

The maintenance of a fixed place of business solely for carrying on activities of a preparatory or auxiliary nature.

Question 13

Can an agent who acts on behalf of an enterprise and who habitually exercises authority to conclude contracts in the name of the enterprise be a permanent establishment for the purposes of the Model Convention?

Answer 13

Yes.

Question 14

What type of agents are excluded from constituting a permanent establishment for the purposes of the Model Convention?

Answer 14

Agents of an independent status who are acting in the ordinary course of their business.

Question 15

Can a subsidiary of another company constitute a PE of its parent by reason of the fact of that relationship alone?

Answer 15

No.It will however constitute a PE if it acts as a dependant agent of the parent in addition to its own business.

Question 16

Under article 6 of the Model Convention, to what state do DTAs usually allocate income from immoveable property?

Answer 16

The state in which the property is located.

Question 17

Which law determines the scope of ‘immoveable property’ for the purposes of article 6 of the Model Convention?

Answer 17

The state in which the property is located.

Question 18

What does HMRC usually include in the definition of ‘immoveable property’ for the purposes of its DTAs?

Answer 18

Land, the buildings erected on land, minerals in the soil and rights over land.

Question 19

What 3 items are typically excluded from the definition of ‘immoveable property’ for the purposes of the Model Convention?

Answer 19

Ships, boats and aircraft.

Question 20

Under article 7 of the Model Convention, in what circumstances can the business profits of an enterprise which is resident in one state be taxed in another state?

Answer 20

If the enterprise carries on business in the second state through a permanent establishment.

Question 21

What business profits can be taxed by virtue of an enterprise carrying on business in another state by way of a permanent establishment?

Answer 21

The profits attributable to that permanent establishment which it might be expected to make if it were an independent and separate enterprise from the one of which it is a PE.

Question 22

If income can be taxed under both a specific DTA article and the Business Profits article, which will usually prevail?

Answer 22

The specific article.

Question 23

How do DTAs deal with transfer pricing between associated enterprises?

Answer 23

Article 9 of the Model Convention directs that if conditions are made or imposed between associated enterprises which would not otherwise have applied between independent enterprises, any profits that would have accrued to one of the enterprises but for the conditions may be included in its profits and taxed accordingly.

Question 24

If an adjustment to profits is applied under article 9 of the Model Convention, and this leads to double taxation in one state in principle, how is this dealt with in the other state?

Answer 24

The other state must make an appropriate adjustment so as to relieve double taxation, though how this is done is left to the other member state.

Question 25

How are dividends usually taxable under a DTA?

Answer 25

Taxable in the state of the recipient but can also be subject to withholding tax in the paying state (although the rate of tax can be reduced, sometimes to zero, if specific conditions are met).

Question 26

Does the UK impose withholding tax on dividends?

Answer 26

No.

Question 27

What are payments of interest usually subject to at source in principle under article 11 of the Model Convention?

Answer 27

Withholding tax.

Question 28

Does it make a difference to DTA withholding tax provisions if the loan is secured, or if there is a right under the loan to participate in profits?

Answer 28

No.

Question 29

If the beneficial owner of dividend royalty or interest income carries on business through a permanent establishment in the state in which the dividend royalty or interest arises, and is effectively connected with that permanent establishment, do the relevant treaty provisions apply?

Answer 29

No, they are commonly disapplied.

Question 30

What is the difference between the Model Convention’s approach to transfer pricing in relation to business profits and transfer pricing in relation to interest and royalties?

Answer 30

The adjustment to interest is dealt with under a rule which refers to a ‘special relationship’ rather than ‘associated enterprises’. The two terms overlap to a degree but a special relationship also includes relationships by blood or marriage or ‘community of interests’.

Question 31

How are royalties and interest often taxed under DTAs?

Answer 31

(1) Taxable only in the beneficial owner’s state or (2) taxable in the recipient’s state but potentially also subject to withholding tax in the payer’s state.

Question 32

In order to benefit from DTA provisions, treaties often provide that the recipient must be subject to tax on the relevant payment. What restriction does this usually equate to in terms of who can benefit from DTA provisions?

Answer 32

Tax-exempt businesses cannot obtain Treaty benefits or reliefs on their income, profit or gains.

Question 33

What do DTAs usually provide as regards capital gains arising from the disposal of immoveable property?

Answer 33

Gains derived by a resident of one state from the disposal of immovable property in another state can be taxed in that second state.

Question 34

Where is income from employment usually taxed under a DTA?

Answer 34

In the state where the employee is resident - but if the employment is carried on in the other contracting state, the remuneration may (subject to conditions) be taxed to that extent in the other state.

Question 35

If someone is employed on a ship or aircraft engaged in international traffic, where are they taxed for the purposes of most DTAs?

Answer 35

The state in which the enterprise operating the ship or aircraft has its place of effective management (or is resident).

Question 36

Where do most DTAs provide for pension and similar remuneration in respect of past employment to be taxed?

Answer 36

The state in which the person is resident.

Question 37

How is income taxed which is not otherwise taxed under a DTA?

Answer 37

Unless the income is effectively connected with the activity of a PE that a resident of a contracting state has in the other contracting state, the income is taxable only in the recipient’s state of residence.

Question 38

What sort of double taxation do DTAs seek to eliminate?

Answer 38

Juridical double taxation - ie the taxation of the same income or gains in the hands of the same person in both contracting states.

Question 39

Most DTAs ban discrmination on what grounds?

Answer 39

Nationality.

Question 40

What is the Mutual Agreement Procedure or “MAP” for the purposes of a DTA?

Answer 40

A procedure to alleviate double taxation arising not from the DTA but from the fact that the two states interpret the DTA differently.

Question 41

How does the Mutual Agreement Procedure work?

Answer 41

The person affected by the double taxation requests that the ‘competent authority’ (ie the tax authority in the person’s state of residence) consider the matter. The competent authority will then seek to resolve the matter by mutual agreement with the relevant tax authority in the other contracting state.

Question 42

What is a TIEA

Answer 42

A Tax Information Exchange Agreement which provides for exchanges of tax information where the states do not have a DTA (usually because one of the jurisdictions is a tax haven).

Question 43

What is the territorial scope of the UK for the purposes of DTAs that it has entered into?

Answer 43

Great Britain and Northern Ireland and the UK continental shelf. The Isle of Man and the Channel Islands are therefore outside the scope of the DTA territory.

Question 44

How do “limitation of benefits” articles in DTAs usually work?

Answer 44

They deny residents of third party states access to the DTA simply by establishing legal entities in either contracting state for the main purpose of obtaining the benefits of a DTA.

Question 45

What is the risk arising from conduit arrangements, or arrangements whereby income is simply passed through a territory that benefits from a DTA with the UK?

Answer 45

That HMRC may apply the decision in Indofood International Finance Ltd v JP Morgan Chase Bank [2006] to challenge the alleged ‘beneficial ownership’ of income under the structure concerned.

Question 46

What difficulty can arise in relation to partnerships or similar entities under DTAs

Answer 46

One state may regard the partnership as a legal entity in itself whereas the other may regard it as transparent and not itself subject to tax (and therefore not itself able to benefit from the DTA).

Question 47

Is relief authoamtically provided by HMRC from withholding tax that would otherwise arise under a DTA ?

Answer 47

No, it must be applied for. In the absence of authorisation, tax must be withheld at the relevant rate.

Question 48

What is the time limit for claiming credit for foreign tax under a DTA in respect of corporation tax?

Answer 48

No later than the fourth anniversary of the end of the accounting period in which the overseas income is charged to UK tax or, if later, one year after the end of the accounting period in which the foreign tax is paid.

Question 49

What is the time limit for claiming credit for foreign tax under a DTA in respect of income or capital gains tax?

Answer 49

No later than the fourth anniversary of the end of the tax year in which the income or gains is chargeable or, if later 31 January following the tax year in which the foreign tax is paid.