Double Tax Treaties: An ex-Insider’s View of HMRC’s Treaty Position – Andrew Parkes

---

During my time at HMRC, I worked with the Tax Treaty team on the two Bank Levy Double Taxation Relief treaties and delivered training to HMRC staff on the UK’s treaties generally.

Interestingly, HMRC does have its own model treaty, but this is not published. It is, however, closely modelled on the OECD model convention. This is partly because HMRC works very closely with the OECD and for many years, the Chair of Working Party 1 at the OECD was also the head of HMRC’s Tax Treaty Team. HMRC’s influence on the OECD model can be seen, for example, with the change in the non-individual residence tie-breaker in Article 4 from place of effective management to Competent Authority agreement, and in how beneficial ownership is interpreted for Articles 10, 11 and 12.

The UK’s approach to treaties is to seek to reduce withholding tax rates to zero, especially for dividends from subsidiaries to holding companies.

With respect to Permanent Establishments, the UK does not like service PE’s and ideally construction sites should have a 12-month lifespan before creating a PE.

The UK currently deviates from the OECD model with respect to Art 5, mainly around what is considered preparatory or auxiliary and the definition of ‘Dependent Agent’. However, HMRC is consulting on whether to change the UK’s domestic definition of a PE to match that in Art 5 of the 2017 model, which if carried through, will likely cause a change in their negotiating position for DTAs.

Recently, HMRC has also begun looking for a “property rich” provision in Article 13 regarding capital gains to go with the UK’s expansion of the Capital Gains charge to shares in non-UK companies that derive at least 75% of their gross asset value from UK land.

HMRC is keen that treaties are not abused and looks for anti-avoidance provisions in the DTA, from the pre-amble to the inclusion of a principal purpose test. They also look for a provision to limit treaty relief where taxation is based upon remittance, i.e. if the income is only taxed if it is remitted, then treaty relief is denied if the income is not remitted.

Finally, HMRC’s view is that treaties do not stop a country from taxing its own residents.

HMRC consults with stakeholders once a year regarding where business and the tax profession would like HMRC to concentrate as regards the Treaty Team’s resources. Here is a link to last year’s letter from HMRC, and the reply from the Chartered Institute of Taxation.

---