Harriet Brown of Old Square Tax Chambers – leading barristers in the field of international and double taxation – discusses how to use double tax treaties to benefit your clients.
With increasingly high levels of taxation and greater transfer of information between jurisdictions, it has never been more important to ensure that clients are receiving all of the reliefs and exemptions from tax that they can get under relevant double tax treaties.
Double taxation agreements contain a plethora of reliefs, exemptions and non-discrimination provisions that can be used to assist clients resident in more than one jurisdiction, or those with interests outside their jurisdiction of residence. It is essential that you ensure that they are claiming as many reliefs as they can and by doing so you can obtain significant savings for your clients.
What Are Double Tax Treaties?
Double taxation treaties are simply agreements between two states (usually countries, but can also include agreements between smaller political units – see for example the tax agreements between the UK and its Crown Dependencies of Jersey, Guernsey and Isle of Man). They are designed to protect against the risk of double taxation where the same income is taxable in two states, provide certainty of treatment for cross-border trade and investment and prevent excessive foreign taxation, including higher tax rates, and other forms of discrimination against UK business interests abroad.
Most double taxation agreements are based on the OECD model. This is a model double tax convention from which countries can take provisions for agreements with individual countries. This is helpful because it means that many tax conventions are in a similar format.
However, this does not apply to the UK’s double tax agreement with the United States. The USA has its own standard form of agreement, to which it requires other countries to sign. The UK’s agreement with the United States takes this form. It is important to have a clear understanding of the operative provisions of both types of agreement (as well as older form double tax agreements entered into by the UK prior to the OECD model).
How Do I Claim Double Tax Relief?
The key to accessing double tax relief is usually to be dual resident, i.e. a tax resident in both of the parties to the double tax agreement under their domestic law, or someone who might be considered to have two home countries. “Treaty resident” means that the client is – according to the test set out in the tax convention – resident in one or both of the two signatory countries. Where the client has dual residence, (i.e. is resident in both countries under their domestic law), a “tie-break test” in the double tax agreement gives a single treaty residence.
In the unusual circumstances where the tie-break test cannot decide in which of the two countries the client is treaty resident, then the tax authorities of the two countries have to decide between them where the client will be considered resident for the purposes of tax liability.
Determining treaty residence requires a detailed consideration both of the client’s situation and complex provisions and case law. Consequently, it is important to be sure that you understand the consequences of your client’s situation in the context of the tie-break test. If you are not sure about their treaty residence you should seek advice before claiming treaty residence on any tax return in the other home country or the UK.
Once treaty residence has been established there is the possibility of relief – usually by tax credit, but sometimes by exemption – from foreign tax or from tax in the UK. The key reliefs that should be considered are those from income tax and capital gains tax.
Capital Gains Tax Reliefs
Capital gains tax relief has become particularly important for those who are dual resident since the UK domestic law changed so that capital gains of non-residents on UK situate real property became chargeable and, similarly, capital gains of residents on non-UK situate real property also became subject to tax (indeed these domestic law changes were the catalyst for the UK to amend and ultimately replace its double taxation agreements with the Crown Dependencies of Jersey, Guernsey and the Isle of Man).
Additionally, however, it can help with gains on other sorts of property that are chargeable in more than one jurisdiction – for example because the taxpayer is resident in one jurisdiction but the gain arises on property situate in another jurisdiction.
Income Tax Reliefs
There is a great deal more utility for our clients in double tax treaties. They offer significant relief in relation to income tax, including employment income, pensions income, royalties and other intellectual property income, interest and dividends.
Generally, the double tax agreement will provide for a credit for foreign tax paid (a foreign tax credit) but on rare occasions, a complete exemption in either the UK or other home country can be obtained. This will depend on the terms of the original treaty. The income reliefs available are particularly important from those whose home country is the United States since the United States still taxes its citizens on their worldwide income, and they are required to pay taxes there whether resident or not. Claiming the proper reliefs in such a situation is essential.
Negotiating when income tax reliefs are available in relation to foreign income can be fraught. It is something on which you should seek expert advice as early as possible to maximise the possibility of obtaining relief.
What If I Make an Inaccurate Tax Relief Claim, or HMCRC Believe I Have?
Where an erroneous claim for double tax relief is made in a tax return it can prejudice future claims that have been made accurately. It is essential to ensure that any claim on a tax return is accurate, and that the reason for the claim is adequately explained to HMRC.
Where claims for double taxation relief have already been made and HMRC is challenging them, it is essential to act swiftly to combat any denial of the claim. This can be particularly important in the case of the withholding of excessive withholding tax (generally by foreign tax authorities on interest payments or dividends from foreign companies) because these matters can take time to resolve. However, it remains the case that in any dispute with HMRC or a foreign revenue authority you must take advice both as to the legitimacy of the claim and the best way to ensure that HMRC allows the claim.
The UK has a network of other 130 double tax treaties. It is important that you act now to ensure that you and your clients are utilising all the reliefs available to you and to ensure that claims made are being made correctly.
How Can the Tax Barristers at Old Square Tax Chambers Assist Your Claim?
Harriet Brown, and Old Square Tax Chambers, have many combined years of experience in advising on treaty residence, claiming reliefs and dealing with opposition to claims by HMRC and other revenue authorities. If you wish to instruct us in relation to your double tax matter we can be contacted here.
