DOUBLE TAX TREATIES

1
DOUBLE TAX TREATIES

• Why do we have them?
• What effect do they have?

2
WHY HAVE DTTs

• Not practicable to operate domestic law rigidly
• Alternative would probably be extra statutory
  concessions ie with no quid pro quo
• Encourages international business

3
DEVELOPMENT OF DTTs

• initially double taxation not a problem - low tax
  rates
• foreign income taxed on remittance basis (ie net
  of overseas taxes)
• First World War led to increased tax and use of
  arising basis
• pressure for relief led to unilateral relief
• first bilateral Treaties signed in 1940s
• effect of OECD (SDT F4.401)
• INTM151010

4
WHAT EFFECT DO THEY HAVE?

• Help define taxable presence more precisely
• Remove or reduce withholding taxes
• Reduce incidence of double taxation
• Provide mechanism for relieving double taxation
• Provide authority to negotiate corresponding
  adjustments
• Help define quantum of taxable income

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KEY DTT ARTICLESOECD MODEL (SDT F4.402)

• Definition of resident (including tie breaker
  tests) (Art 3,4)
• Employment income (Art 15)
• Business income (Art 7)
• Permanent Establishment (Art 5)
• Interest, dividends and royalties (Arts 10-12)
• Transport (Art 8)
• Capital gains (Art 13)

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STATUS OF DTTs

• TA 1988 s788 authorises DTTs and imports them to
  domestic law
• s788 also authorises exchange of information with
  treaty partners
• treaties can reduce or remove liability to tax
  but cannot impose a liability
• so starting point is always domestic law

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DOMESTIC LAW
"Tax under this Schedule shall be charged in
respect of- (a) the annual profits or gains
arising or accruing- (iii) to any person,
although not resident in the United Kingdom
from any trade exercised within the United
Kingdom" Schedule D charge (TA 1988 s18)
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In the first place, I think there is a broad
distinction between trading with a country and
carrying on a trade within a country. Many
merchants and manufacturers export their goods to
all parts of the world, yet I do not suppose
anyone would dream of saying that they exercise
or carry on their trade in every country in which
their goods find customers.. . . If all that a
merchant does in any particular country is to
solicit orders, I do not think he can reasonably
be said to exercise or carry on his trade in that
country. Lord Herschell in Grainger Son v
Gough
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VARIATION OFDOMESTIC LAWFOR NON RESIDENT COS
A company not resident in the United Kingdom is
within the charge to corporation tax if, and only
if, it carries on a trade in the United Kingdom
through a permanent establishment in the United
Kingdom TA 1988 s11
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• Section 6 The charge to corporation tax and
  exclusion of income tax and capital gains tax
• Corporation tax shall be charged on profits of
  companies,
• The provisions of the Income Tax Acts relating
  to the charge of income tax shall not apply to
  income of a company if (a) the company is
  resident in the United Kingdom, or (b) the
  income is, in the case of a company not so
  resident, within the chargeable profits of the
  company as defined for the purposes of
  corporation tax by section 11(2).

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Non resident companies

• Is company trading in the UK (as opposed to
  trading with the UK)? If not then no UK
  liability.
• If yes, is company carrying on that trade through
  a UK permanent establishment? If not then liable
  to income tax at basic rate unless exempted by
  DTT.
• If yes, then liable to corporation tax unless
  exempted by DTT.
• Cannot be both income tax and corporation tax

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(1) ... a company has a PE in a territory if, and
only if (a) it has a fixed place of
business there through which the business of the
company is wholly or partly carried on, or (b)
an agent acting on behalf of the company has
and habitually exercises there authority to do
business on behalf of the company. This general
definition is subject to the following
provisions. (2) For this purpose a fixed place
of business includes (without prejudice to the
generality of that expression) (a) a place
of management (b) a branch (c) an
office (d) a factory (e) a workshop
(f) an installation or structure for the
exploration of natural resources (g) a
mine, an oil or gas well, a quarry or any other
place of extraction of natural resources (h)
a building site or construction or installation
project. FA 2003 s148
13
For the purposes of this Convention, the term
resident of a Contracting State means any
person who, under the laws of that State, is
liable to tax therein by reason of his domicile,
residence, place of management or any other
criterion of a similar nature. But this term
does not include any person who is liable to tax
in that State in respect only of income from
sources in that State or capital situated
therein.
14
Business profits The profits of an enterprise
of a Contracting State shall be taxable only in
that State unless the enterprise carries on
business in the other Contracting State through a
permanent establishment situated therein. If the
enterprise carries on business as aforesaid, the
profits of the enterprise may be taxed in the
other State but only so much of them as is
attributable to that permanent establishment.
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BUSINESS INCOME
A resident of the other country is only
taxable in the UK to the extent that the profits
are attributable to a permanent establishment
that the person has in the UK. If a taxable
presence exists the attributable profits are
measured on an arms length basis.
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Permanent establishment 1 For the purposes of
this Convention, the term permanent
establishment means a fixed place of business
through which the business of an enterprise is
wholly or partly carried on. 2 The term
permanent establishment includes especially
(a) a place of management (b) a branch (c)
an office (d) a factory (e) a workshop, and
( f) a mine, an oil or gas well, a quarry or any
other place of extraction of natural resources.
3 A building site or construction or
installation project constitutes a permanent
establishment only if it lasts more than twelve
months. 4 Notwithstanding the preceding
provisions of this Article, the term permanent
establishment shall be deemed not to include

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(a) the use of facilities solely for the purpose
of storage, display or delivery of goods or
merchandise belonging to the enterprise (b) the
maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the
purpose of storage, display or delivery (c) the
maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the
purpose of processing by another enterprise (d)
the maintenance of a fixed place of business
solely for the purpose of purchasing goods or
merchandise or of collecting information, for the
enterprise (e) the maintenance of a fixed place
of business solely for the purpose of carrying
on, for the enterprise, any other activity of a
preparatory or auxiliary character (f) the
maintenance of a fixed place of business solely
for any combination of activities mentioned in
sub-paragraphs (a) to (e), provided that the
overall activity of the fixed place of business
resulting from this combination is of a
preparatory or auxiliary character.
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PERMANENT ESTABLISHMENT

• A fixed place of business
• Certain items specifically included
• Certain items specifically excluded (eg some
  support and ancillary functions)
• HMRC have stated that they do not regard a web
  site of itself as constituting a PE
• OECD view is that it might