The Government is currently consulting on draft legislation intended to ensure that taxpayers cannot rely on double taxation agreements (DTAs) to avoid tax.
It was announced in the March 2011 Budget that legislation will be included in Finance Bill 2012 to counter avoidance schemes that exploited the provisions of DTAs.
Previous anti-avoidance legislation has tried to close schemes on a loop-hole by loop-hole basis. For example, a popular scheme which exploited partnerhips was closed in 2008, see Contractor loses fight against retrospective tax . Sometimes, however, difference in the tax treatments between jurisdictions is the real issue see George Anson V HMRCfor uncertainly involving the UK's tax treatment of income from a Delaware company.
The purpose of the draft legislation is to provide a more general anti-avoidance provision to ensure that individuals, companies and other persons cannot benefit from the provisions of a DTA where the claim to such benefit is part of an arrangement whose main purpose is to reduce a liability to UK taxation.
The draft legislation contains separate measures dealing with tax avoidance by UK residents and non-UK residents.
The effect of both measures is that a provision of a DTA will not limit the right of the UK to tax income or gains where certain conditions are met.
The proposed legislation will apply where a DTA makes provision that income, profits or gains of a UK resident are either not subject to UK tax, not to be subject to UK tax at a rate exceeding the rate specified in the DTA or not to be treated as income, profit or gains of a UK resident and chargeable to UK tax.
Where certain avoidance conditions are met, the proposed legislation will apply such that the provision in the DTA will not prevent the income, profits or gains either being charged to UK tax, being charged to UK tax at a rate exceeding that specified in a DTA or being treated as the income, profits or gains of the UK resident and chargeable to UK tax.
The avoidance conditions are that:
- A scheme is put in place by one or more persons;
- The provision would not apply to the income, profits or gains in the absence
- of the scheme; and
- The main purpose, or one of the main purposes, of a person in putting the
- scheme in place is to ensure that the provision does apply to the income, profits or gains.
This phase of the consultation ends on 22 September 2011.
