In a statement, Exchequer Secretary to the Treasury David Gauke said the responses thus far received had “made it clear that the proposed legislation, as drafted, could cause significant uncertainty for compliant UK businesses and overseas investors about its intended scope and its practical effect”.
In other words, explained Gerry Brown, Prudential’s head of trusts and taxation, there was concern that the proposed changes “might have hit genuine business transactions as well as those with primarily a tax-avoidance motive, while at the same time also probably affecting inward investment into the UK”.
Double tax agreements (DTAs) are bilateral treaties which commit the signatory countries not to tax individuals or, as in this case, businesses, on income that they have already paid tax on in the other jurisdiction.
In his statement, Gauke stressed that the UK tax authorities “will continue to challenge specific arrangements that clearly seek to abuse provisions in a DTA [double tax agreement]”.
What is more, he added, “if the Government concludes in the future that alternative approaches for legislating against DTA abuse are necessary, it will consult on these alternatives in line with the Tax Consultation Framework.”
Gauke said the UK was committed to providing “certainty to taxpayers” – and thus, by halting the consultation and not planning to include it in Finance Bill 2012, was acknowledging concerns in this area.
“This decision reaffirms the Government’s commitment to open and transparent consultation and demonstrates the value of consultation.”
Brown and others tax industry experts welcomed the decision.
The Government, Brown said, clearly believes that it already has “sufficient ammunition to combat any schemes that are designed with a tax avoidance motive”, although he noted that it has left the door open to the possibility of introducing targeted legislation in the case of “specific instances where the government thinks there is a significant tax avoidance motive”.
At PwC, tax partner Peter Cussons said the concern was for Britain’s network of “120-plus” tax treaties, which he described as the largest such network in the world and “a significant asset” that the proposed changes might have endangered.
“We were concerned, along with others, that introduction of such a broadly drafted domestic tax treaty override would have led to significant uncertainty and consequently lower investment in and from the UK, and [that it would] go against the generally accepted international tax law principle of treaties taking precedence over domestic provisions”, Cussons added.
“It is reassuring that the Government have recognised this concern so swiftly.”
‘Treaty shopping’
In an exclusive column on the government’s DTA consultation here last month, Prudential’s Brown explained that tax evaders keen to exploit the “complexity of cross-border taxation” have sometimes made use of DTAs to “treaty shop”.
One widely used scheme, he noted, involved channelling the UK fee income of a UK resident IT contractor through a Manx partnership to a Manx interest in possession trust.
“The partnership paid profits to the trustees, who then made payments to the UK resident contractor in his capacity as beneficial owner of an interest in possession under the trust," Brown explained.
"Because of the DTA provisions and the legislation then in force, the income channelled to him was subject neither to UK income tax nor to Manx tax.”
This arrangement was ultimately defeated by HM Revenue & Customs through the use of retrospective legislation.
