Ref: IT 30 November 2018 David Price Tax Treaty Team BAI International Relations and Capacity Building Zone C, Floor 9 10 South Colonnade Canary Wharf E14 4PU Via email: taxtreaty.team@hmrc.gsi.gov.uk Dear David Stakeholder Consultation: Review of Double Taxation Treaties 2018 We refer to your letter dated 5 October 2018 and welcome the opportunity to input into your review of the priorities for the UK s network of double taxation agreements (DTAs) for the coming year. As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. Our stated objectives are for a tax system which includes greater simplicity and clarity, so people can understand how much tax they should be paying and why, and greater certainty, so businesses and individuals can plan ahead with confidence. Treaty network Q1: How could our existing DTAs be improved? (a) After Brexit we suggest that UK companies may want to see some existing treaties renegotiated because they:
Review of Double Taxation Treaties 2018: CIOT comments 30 November 2018 may suffer in relation to withholding tax, albeit at a reduced rate for example on dividends paid from Germany/ Italy and royalties involving Luxembourg - compared to the current protection under the Parent/ Subsidiary and Royalties/ Interest Directives and in comparison to comparable payments within the EU in future. may not be 'equivalent beneficiaries' in relation to qualifying ownership requirements for treaty benefits under US treaties Does HMRC have any plans to seek to renegotiate its treaties with EU countries after Brexit? This should be prioritised (and a strategy developed to demonstrate that, while the UK does not levy withholding taxes, it would still be in these countries interest to seek to restore the pre-brexit fiscal outcomes). (b) The permanent establishment (PE) requirements in UK DTAs vary considerably, and have been impacted with practices changing over the years, post-beps recommendations and the 2017 UN Model continuing to encourage developing countries to take slightly different positions on, for example, service PEs. It would be helpful going forward if HMRC could work towards a consistent position across the UK s treaty network. We would support an approach consistent with the position the UK has taken under the OECD Multilateral Instrument (MLI) in relation to Article 5 of the OECD Model Tax Convention (MTC), and in particular, Articles 10, 12, and 13 of the MLI. In the longer term, and to the extent that an emerging international consensus emerges regarding the pre and post BEPS dependent agent provisions in Article 5 of the MTC, we would suggest that consideration is given to changing the PE provisions in DTAs so that these reflect BEPS conclusions under Action 7 and repeal (or simplify) the UK s diverted profits tax (DPT) such that the UK is more aligned with international trading partners. We would be interested to know whether HMRC is finding that DPT is preventing constructive renegotiation of its treaty provisions in relation to PEs because it would not be favourable for a treaty partner to accept a lower threshold in respect of PEs while the UK s domestic law also has DPT. In the short to medium term, one approach would be to negotiate to amend Article 5 within treaties and to include an exemption from DPT for countries with treaties that deal with the same concerns. (c) It would be helpful to have a consistent approach to the principal purpose test (PPT) and preamble in DTAs, and further published guidance on how this should be interpreted. Q2: Are there any aspects of DTAs that we have recently signed that could be improved? The DTA landscape has changed significantly recently as a result of the MLI. While the MLI has provided a mechanism by which many treaties can be amended without bilateral negotiations, it has as a practical matter complicated the position for taxpayers. We would urge the UK to seek to amend treaties changed by the MLI as soon as practical in order to remove this complexity and uncertainty. Technical-documents/tech/subsfinal/IT/2018 2
Review of Double Taxation Treaties 2018: CIOT comments 30 November 2018 We note that HMRC has begun to produce synthesised texts of DTAs. Synthesised texts is an OECD concept and on 14 November 2018 the OECD published Guidance for the Development of Synthesised Texts. Whilst these are intended to provide information to taxpayers and others on the modifications that will have effect on a particular treaty, they are not authoritative (the original text and MLI are) and are confusing. For example, looking at the PPT in each of the Serbia and Slovenia treaties, the wording of the synthesized texts is different due to the interaction of the compatibility clauses with the existing provisions. The Slovenia treaty could be read to mean that PPT only applies to the dividends, royalties, and interest articles, because that is where there were previous anti-abuse provisions in place, while it is quite clear in the Serbia treaty that it applies to the whole treaty. In reality, we do not think that there is supposed to be any difference between these two treaties and the position would be clarified by the UK government negotiating new authentic texts. An updated text would be easier to use and, we would hope, could be relied upon. Pending this, does HMRC have a schedule/timetable of treaties in respect of which it intends to publish synthesised texts? We would expect that HMRC is preparing synthesised texts of treaties with countries that have ratified the MLI (where changes will come into force on 1 January 2019). We anticipate that other countries may ratify the MLI during 2019 and it would be most useful if synthesised treaties could be produced by reference to the size of the economy and trade flows of the countries concerned. Q3: Are aspects of our existing DTAs un-competitive compared with agreements those treaty partners have made with other countries? As mentioned above, following Brexit the UK s DTAs with EU member states may become less competitive when compared to the Directives operating between EU countries. We would also note that other issues should be considered when assessing the UK s competitiveness. In recent years the UK has introduced measures into domestic law which (arguably) are outside of the scope of its treaties but which impact on the UK s international position. In addition to DPT the recent Budget announced a UK digital services tax (DST), which would apply to residents of treaty partners. In addition, the rules being implemented around offshore receipts in respect of intangible property extend the UK s taxing rights beyond those that other countries enforce. Together, these measures contribute to the actual and perceived competitiveness of the UK. It is regrettable that the UK has chosen to act unilaterally in these areas ahead of the international work DPT was introduced before the BEPS report was finalised and DST has been announced ahead of the conclusion of the OECD s work towards a long term global solution to reflect the challenges of the digitalisation of the economy. And more regrettable still that these provisions are being introduced without automatic sunset clauses. We suggest that these unilateral measures could be more harmful than negotiating a less competitive treaty. Technical-documents/tech/subsfinal/IT/2018 3
Review of Double Taxation Treaties 2018: CIOT comments 30 November 2018 We would also urge caution around the Platform for Collaboration on Tax s Offshore indirect asset transfer toolkit. Even though this is not yet final, it is encouraging some countries to try to broaden their capital gains taxing rights (whether on definition/ interpretation of 'immovable assets' or the UN substantive shareholding option) Q4: Are there any gaps in the DTA network you wish to highlight, bearing in mind our criteria for prioritisation listed above? We understand that businesses would welcome DTAs with Peru and Brazil in particular. Specific Issue: fees for technical services We wrote to HMRC in 2014 when the UN Committee of Experts on International Cooperation in Tax Matters was considering whether to introduce into the UN Model Convention an article dealing with technical assistance fees. Such an article has since been introduced as Article 12A in the 2017 UN Model Double Taxation Convention. We agree with the UK s approach of not agreeing to a DTA which includes such a provision and the reasons given. We attach the letter we wrote to HMRC in 2014 and believe that our reasons for cautioning against such a provision in that letter remain valid today. Yours sincerely Joy Svasti-Salee Chair, International Taxes Sub-Committee The Chartered Institute of Taxation The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. Technical-documents/tech/subsfinal/IT/2018 4
Ref: Intl. 29 July 2014 Andrew Dawson Head of Tax Treaty Team via e-mail: andrew.dawson@hmrc.gsi.gov.uk Dear Andrew Technical Assistance Fees Article We understand that the UN Committee of Experts on International Cooperation in Tax Matters (Committee) is currently considering whether to introduce into the UN Model Convention an article dealing with technical assistance fees. We understand that such an article would not prevent a state, where technical assistance is received in that state (or received outside that state by a resident of that state), imposing tax up to the relevant treaty rate on any fees for the technical assistance, where the provider has no permanent establishment in that state. We are writing to you, in your capacity as a member of the Committee, to express our concern about this proposal. Treaties are intended to avoid double taxation and to remove obstacles from international trade. In our view an article permitting withholding tax on technical assistance fees would introduce uncertainty and make investment in countries adopting it less attractive. Any such article would make double taxation for the provider of the assistance much more likely. We suggest that it is unwise to introduce new provisions on the provision of technical services for the following reasons: (1) To the extent that such a provision permits taxation on a gross basis, for example by way of withholding tax on payment for such services, not only will unrelievable double taxation arise, but also taxation in the country of consumption at rates in excess of the actual profit on the provision of such services. Technical services do not represent pure income profit. There is inevitably a significant cost element; for example, by way of salary for employees engaged in providing the services. These difficulties are not
UN Model Convention Technical assistance fees: CIOT comments 29 July 2014 mitigated by a low rate of withholding tax which is inevitably arbitrary and which has no connection with the actual profit on such transactions. Actual profit can only be determined on a case-by-case basis. Such provisions can make the provision of cross-border technical services unviable financially and, therefore, plainly inhibit international trade in services. (2) Such provisions give rise to considerable difficulties because they result from a misunderstanding about the true source of the income from technical services, and go against the grain of the existing Model Convention. Technical service articles in existing treaties conflate income from personal exertion with income derived from an asset. The correct understanding of how the source of income in relation to the taxes is addressed by the model convention was explained by the Appellate Division of the South African Supreme Court in CIR v Lever Bros &Unilever Ltd 1946 AD 441 as follows: [T]the source of receipts, received as income, is not the quarter whence they come, but the originating cause of their being received as income and that this originating cause is the work which the taxpayer does to earn them, the quid pro quo which he gives in return for which he receives them. The work which he does may be a business which he carries on, or an enterprise which he undertakes, or an activity in which he engages and it may take the form of personal exertion, mental or physical, or it may take the form of employment of capital either by using it to earn income or by letting its use to someone else. Often the work is some combination of these. This analysis underpins the allocation of taxing rights in the Model Convention. In cases involving personal exertion, mental or physical, (which includes the provision of technical services), the source is the personal exertion. In the model convention, the state other than the residence state of the service provider has taxing rights if, and to the extent that, such personal exertion is undertaken in that state. See articles 5 and 7, 8, 14, 15 and 17. Where the source of income is an asset, then the state other than the residence state of the owner of that asset has taxing rights. See articles 6, 10, 11, 12, 13. (3) Provisions that permit income from personal exertion exercised outside a state but consumed in a state confuse the essential principle of the taxes that are the subject of the Model Convention with other taxes based on consumption. They are inequitable because they permit taxation in a state where there is neither source nor residence. This applies both to the taxpayers and to states who are required then to relieve resulting double taxation from activity carried on by their residence entirely within their state. This is not only an issue for developed countries but also for developing and emerging economies seeking to export their own expertise. (4) Existing treaty provisions dealing with technical services are a source of considerable dispute. For example, such provisions are common in Indian treaties. There are more than 30 cases that have gone to the Indian Income Tax Appeal Tribunal and Courts on these provisions in the last four years, indicating the difficulty that both taxpayers and tax administrators have in applying such provisions. In our view, the conceptual flaws about the true source of such income are at the heart of these difficulties. P/tech/subsfinal/Intl/2014 2
UN Model Convention Technical assistance fees: CIOT comments 29 July 2014 One of the underlying purposes of tax treaties is to remove barriers to international trade and new provisions on the provision of technical services would be contrary to that purpose. Permitting a state, to impose tax on fees paid for technical assistance received in that state, regardless of whether or not that provider has a permanent establishment in that state is inequitable and should be most strongly resisted. Permitting tax in these circumstances would distort international taxation and make double taxation much more likely. We therefore encourage the Committee to refrain from adopting such proposals. Yours sincerely Glyn Fullelove Chairman, International Taxes Sub-Committee The Chartered Institute of Taxation The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. P/tech/subsfinal/Intl/2014 3