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DOUBLE TAX TREATIES

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					 DOUBLE TAX TREATIES


• Why do we have them?
• What effect do they have?
         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
   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
    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
      KEY DTT ARTICLES
    OECD 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)
          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
           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)
“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
     VARIATION OF
     DOMESTIC LAW
 FOR NON RESIDENT CO’S

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
Section 6 The charge to corporation tax and exclusion
   of income tax and capital gains tax
(1) Corporation tax shall be charged on profits of
   companies, …
(2) 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).
         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
(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
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.
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.
       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 arm’s length basis.
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:
(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.
          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

				
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