OECD Issue
The Organisation for Economic and Co-operation Development was established in 1961. Its members now comprise most Western Eurpoean Countries. In 1963, the OECD produced its first model double taxation agreement entitled ‘Draft Double Taxation Convention on Income and Capital’.Its purpose was provide a basis for standardisation of double taxation agreements concluded between member countries.The UK’s tax relation with other countries are increasingly being governed by multiateral agreements, particlularly those from the Eurpoean Community. In 1977, a directiveon the mutual assistance by the competenet authorities of the member states was introduced.
And in 1982, OECD model agreement defines ‘person domiciled in a contracting state’ as ‘any person whose estate or whose gift, under the law of that state’, is liable to inheritance tax. It clearly therefor covers persons other than individuals. However, this term does not include a person whose estate or gift is liable to tax in that state only in respect of property situated there.
Double Taxation Relief
In the UK, double tax is reduced by a system of double tax relief, these relieves are outlined in a series of agreements between countries on how they will each handle this problem. Relief given against a UK tax liability in recognition of a liability to a foreign tax . There are three methods of giving relief:
- Treaty relief may exempopt some income from tax in one country and give credit for foreign taxes on ther income.
- Relief can unilaterally be given to allow the foreign tax paid as a credit against the UK tax liability.
- Relief can be given by duducting the foreign tax in computing the profits of the business. Thus treating the foreign tax like any other business expenses.
Income Tax and Capital Gains Tax
Historical Background
Income tax was first imposed in the UK in 1799,effectively became permanent from 1842. Double taxation appears to have become an active issue during the latter half of the 19th century primarily ,the British Empire were beginning to introduce forms of taxation of their won.
Early Agreement relating to double taxation relief
A bilateeral double taxation agreement was entered into with the Irish Free State in 1926 which adopted the principle of taxation on the basis o the country of residence of taxpayer rather than the country of the source of the income . This was only agreement conclued by the UK relating to income generally which adopted this principle, it still applies in the limited agreements relating to shipping and air transport profits.
End of WWⅡbrought major new development of double taxation agreement with US in 1945.And many agreements with European countries and other major trading partners followed in the 1950s and 1960s and the UK now has the most extensive network of agreements allover the world.
Example of double taxation of Income tax
- A UK resident company which has a branch overseas is liable to UK corporation tax on its worldwide profits, including the income of the foreign branch.
- A UK resident company is undercharging overseas affiliated companies or is being overcharged by them in respect of the supply of goods or services.
- An individual who is resident, ordinarily resident and domiciled in the UK and who reveives income from abroad may be subject to tax both in the country in which the income arises and in the UK.
- A UK resident individual who receives remuneration in respect of an employment carried on abroad may be subject to tax in the country in which the duties of the employment are carried out and also in the UK.
Foreign tax available for credit
The foreign taxes which are available fro credit relief under an agreement are those taxes which are specified in the frelevant agremnet. As far as unilateral tax credit relief is concerned , provide that referneces to tax payable or paid under the law of t a territory outside the UK include (a) taxes which are charged on income and which correspond to UK income tax and (b) taxes which are charged on income or chargeable gains and which correspond to UK corporation tax. In future the question of whether or not a foreign tax is admisible for unilateral relief will be determined by examining the tax within its legislative context .
Capital Gain Tax
- A UK resident individual who disposes of assets situated abroad may be liable both to foreign income tax and to UK Capital Gains Tax.
- An individual or other person may be resident in more than one country and liable to tax on worldwide gains in the both countries.
Double taxation relief on chargeable gains
The general requirement for tax credit relief under an agreement is that tax payable under the law of the foreign country on gains from souces within that country is allowed as a credit against any UK tax computed by the same gains which the froeign tax is computed. The amount of the credit for foreign tax may not exceed the lesser of the foreign tax paid and the UK capital gains tax charged at the taxpayer’s marginal rate. However, indicates that the relief is conditonal on the subject of the overeas tax being identified with the gains on which the UK liability arises.
Limitation and Quantification of Credit
In accordance with the ‘root income’ principle, relief is given from foreign tax against UK tax computed by reference to the same income or gain, irrespective of the year or period for whtich it is assessed in the UK. Where an individual has foreign income from more than one source on which tax credit relief is claimed, this procedure is appplied to each sourve of income in succession.
The tax credit available in the UK is equal to the full amount of the overesas tax borne, limited to the UK tax liabibility on the same income or gian , Credit is therefore given for the lower of the overeas and UK taxes payable.
Inheritance Tax
UK inheritance tax (IHT) is chargeable on transfers of value by person domiciled ( or deemed to be domiciled) in the UK whereever the assets concerned are situated. IHT is also chargeable on transfers of value of most UK assets by Non- UK domiciled persons.
According to the laws of different countries , liability to these taxes may depend upon the domicile, residence or nationality of the person concerned and on the location of the assets. A transfer of value may therefore be subject to inheritance taxes in more than one country , Accordingly , measures are necessary (either by agreement or unilaterally ) to avoid or relieves such potential double taxation
Relief under double taxation agreements
IHTA1984, s158 provides that an Order in Council may be made with a view to giving relief from double taxation in relation to IHT and any tax imposed under the laws of any territory which is of a similar character to IHT, or is chargeable on or by reference to death or gifts inter vivos.
Existing double taxation agreements relating to estate duty continue to apply as if any provision in the agreement relating to estate duty extended to IHT on transfers on death.
The problems of exemptions to double taxation
- A person domiciled in the UK who makes a gift of a foreign asset may be liable to foreign gift tax on the diaposal and may also be liable to UK inheritance tax(IHT) .
- A person not domiciled in the UK may be liable to IHT, as well as gift or inheritance tax in his own country.
- A UK domiciled person going abroad to live permanently remains UK domiciled for at least three years under IHTA1984, s 267and therefor remains subject to IHT on his estate wherever it is situated.
The Problem of Allowances for Debts
International death tax problems may arise which probably do not fall within the strict definitaion of double taxation concerns allowances for debts.
Conclusion
Double taxation arises mainly due to the overlap of the residence principle and the source principle. The choice of the system of double taxation relief can detrmine the extent to which a country is able to preserve its tax base .although simpler to operate tan the credit system , use of a basic exemption system is likely to lead to a country’s residents transferring their moible capital to tax havens.
Double taxation is a pejorative term for an elusive concept. As the type and structure of economic activities become more complex, it becomes increasingly difficult to decide what consituates ‘equal’ treatment.
Even the most modern from the OECD Draft Convention of 1966, will not eliminate double taxation resulting from the growing use of company death duties legislation. Following the intruduction of limited onshore pooling,the UK government continued to explore ways in which the double taxation system might be improved.
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References
- The Economics of Taxaton Simon James/ Christopher Nobes , Prentice Hall
- The Political Economy of Taxation Alan Peacock / Francesco Forte
- The British Tax System J.A.Kay/ M.A. King 5th edition
- UK Taxation for Student---A Simplified Approach Malcolm Finney 2nd edition
- Tolley’s Double Taxation Relief B Taylor, 3rd edition
- International Taxation Handbook Colin Read / Greg.N. Greegoriou
- International Double Taxation of Estates and Inheritances Wolfe D. Goodman
- Essay in Taxation Edwin Seligman
- Taxation-Policy and Practice Andy Lymer/Lynne Oats 12th Edition
- An Introduction to Taxation Dora Hancock 1994/5 Edition
- Tax Handbook Anthony Foreman/ Gerald Mowles Zuric
- Principles of International Taxation Angharad Miller / Lynne Oats , Tottel Publishing
- Tax and Accountancy Dictionary David Collison ,Lexis Nexis
- International Corporate Tax Planning John Dixon, Ernst&Young and Malcom Finney , Lexis Nexis
- International Business Taxation Sol Picciotto
- Issues in Business Taxation John Pointon
- International Tax Glossary
