HMRC publishes draft legislation to tackle tax avoidance using double taxation agreementsSaturday, August 6th, 2011
HMRC proposes a different method to counter prevent continuing exploitation of the provisions of DTAs.
The UK has some 120 bilateral double taxation agreements (DTAs) with other countries, the purpose of which is the avoidance of double taxation, i.e. situations where tax liabilities on the same payments in both countries, and the prevention of fiscal evasion.
In the past, the government’s approach to schemes that take advantage of the provisions of DTAs by means of tax avoidance schemes has been to legislate to close them down as they arise or to rely on anti-avoidance measures in the DTAs themselves. This approach has not been successful and the government is proposing broader anti-avoidance measures to prevent further tax loss.
The Model Tax Convention on which the UK’s DTAs are based is defined so that countries “do not have to grant the benefit of a double taxation convention where arrangements that constitute an abuse of the convention have been entered into.” The proposed new legislation is intended to ensure that theUK’s DTAs are interpreted and applied in accordance with that principle.
In the context of the application of DTAs to UK residents, the proposed legislation, in effect, states that, even though a provision in the DTA states that either no tax, or tax at a lower rate, is due on specified income, it will nevertheless be liable to tax if
- a scheme is put in place by one or more persons,
- the particular provision would not apply to the income in the absence of the scheme, and
- the main purpose, or one of the main purposes, of a person in putting the scheme in place is to ensure that the provision does apply to the income.
The definition of “UKresident” may have to be changed so that a person resident in both countries but treated as resident in the other country for the purpose of the DTA is nevertheless treated as a UK resident for the purpose of the new legislation.
With regard to non-UK residents, the proposed legislation, in effect, states that, even though a provision in a DTA states that certain categories of income are not subject to income tax in the UK, it will nevertheless be charged to UK income tax if
- a scheme is put in place,
- the particular provision would not apply to the amount of the income in the absence of the scheme, and
- the main purpose, or one of the main purposes, of a person in putting the scheme in place is to ensure that the provision does apply to the amount of the income.
Comments on the draft legislation are sought by HMRC from interested parties, to arrive not later than 22 September 2011. A final version of the draft legislation will be published in the Autumn, with further opportunity to comment.