Upper Tribunal Tax and Chancery Chamber

[2024] UKUT 00152 (TCC)

Fecha: 21-Feb-2024

Ground 1: meaning of Article 12(5) of UK-Ireland treaty

Ground 1: meaning of Article 12(5) of UK-Ireland treaty

43.

The approach to the interpretation of the UK-Ireland treaty was common ground between the parties. The FTT noted at [83] that the principles enumerated in cases such as Smallwood v The Commissioners for Her Majesty’s Revenue and Customs [2010] STC 2045 per Patten LJ at [26] to [29], The Commissioners for Her Majesty’s Revenue and Customs v Anson [2015] STC 1777 per Lord Reed at [54] to [56] and [110] and [111] and Fowler v The Commissioners for Her Majesty’s Revenue and Customs [2020] STC 1476 at [16] to [19] made it clear that:

(1)

double tax treaties had to be interpreted in accordance with Articles 31 and 32 of the Vienna Convention on the Law of Treaties; and

(2)

consequently, a double tax treaty had to be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose” (see Article 31(1)).

44.

It was also common ground (see [111]) that, even where they post-dated Article 12(5) of the UK-Ireland treaty, OECD and UN materials could be taken into account in interpreting the treaty: see, for example, Robert Walker J in Memec plc v Inland Revenue Commissioners [1996] STC 1336 at 1349d.

45.

Unlike the FTT (reflecting the submissions of the parties) who started with the ordinary meaning of the words used in Article 12(5) of the UK-Ireland treaty, we start our analysis by considering the object and purpose of the treaty having regard to the relevant OECD and other materials. That, of course, is not a substitute for considering the text of the provision or the various textual points that the parties make on it. However, it will enable us to put the text in context.

46.

In this connection, we are reminded of the comments of Lady Rose in the Supreme Court in Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd [2022] UKSC 18 at [102] to [107] where she deprecated the approach of starting with dictionary definitions before considering the context and purpose of the statutory scheme, noting that this accorded with an earlier judgment of the Supreme Court in Bloomsbury International Ltd v Department for Environment, Food and Rural Affairs [2011] 1 WLR 1546 where Lord Mance had said this at [10]:

‘the notion of words having a natural meaning’ is not always very helpful …, and certainly not as a starting point, before identifying the legislative purpose and scheme.

47.

A provision similar to Article 12(5) of the UK-Ireland treaty is not included in the OECD model convention. But the commentary on the OECD model convention (the 2015 version – which was the one in force at the material time) does contain material that, in our view, should be taken into account in determining the object and purpose of Article 12(5) of the UK-Ireland treaty.

48.

In the commentary on Article 1 of the OECD model convention, paragraphs 7 to 26 contain material under the heading “Improper use of the Convention”. The commentary notes that:

7.1

Taxpayers may be tempted to abuse the tax laws of a State by exploiting the differences between various countries’ laws. Such attempts may be countered by provisions or jurisprudential rules that are part of the domestic law of the State concerned. Such a State is then unlikely to agree to provisions of bilateral double taxation conventions that would have the effect of allowing abusive transactions that would otherwise be prevented by the provisions and rules of this kind contained in its domestic law. Also, it will not wish to apply its bilateral conventions in a way that would have that effect.

It is also important to note that the extension of double taxation conventions increases the risk of abuse by facilitating the use of artificial legal constructions aimed at securing the benefits of both the tax advantages available under certain domestic laws and the reliefs from tax provided for in double taxation conventions.

This would be the case, for example, if a person (whether or not a resident of a Contracting State), acts through a legal entity created in a State essentially to obtain treaty benefits that would not be available directly. […]

9.1

This raises two fundamental questions that are discussed in the following paragraphs:

— whether the benefits of tax conventions must be granted when transactions that constitute an abuse of the provisions of these conventions are entered into (see paragraphs 9.2 and following below);

[…]

[Rest of para. 9.1 and para. 9.2 not reproduced because they relate to how domestic law might prevent treaty abuse]

9.3

Other States prefer to view some abuses as being abuses of the convention itself, as opposed to abuses of domestic law. These States, however, then consider that a proper construction of tax conventions allows them to disregard abusive transactions, such as those entered into with the view to obtaining unintended benefits under the provisions of these conventions. This interpretation results from the object and purpose of tax conventions as well as the obligation to interpret them in good faith (see Article 31 of the Vienna Convention on the Law of Treaties).

9.4

Under both approaches, therefore, it is agreed that States do not have to grant the benefits of a double taxation convention where arrangements that constitute an abuse of the provisions of the convention have been entered into.

9.5

It is important to note, however, that it should not be lightly assumed that a taxpayer is entering into the type of abusive transactions referred to above. A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions. (our emphasis)

49.

The commentary then goes on to observe that where specific avoidance techniques have been identified or are especially problematic, it will often be useful to include provision directly addressing the concern. At paragraph 11, the commentary refers to a particularly prevalent form of “improper” use of the OECD model convention discussed in the Conduit Report. It notes that there has been a “growing tendency towards the use of conduit companies to obtain treaty benefits not intended by the Contracting States” and how “this has led to an increasing number of member countries to implement treaty provisions (both general and specific) to counter abuse”. The commentary then discusses a wide number of examples of possible solutions open to member countries to deal with particular cases. Among the examples set out at paragraph 21.4 under the heading “Anti-abuse rules dealing with source taxation of specific types of income” is a form of provision that is, in all material respects, the same as Article 12(5) of the UK-Ireland treaty.

50.

Paragraph 5 of the Conduit Report sets out four different examples of abuse. The first example describes how a person who is a resident of a non-treaty State (State X) beneficially owns interest which arises in another State (State B), which has a treaty with State A. The resident of State X sets up a company in State A and transfers the bond to the company. Interest is paid to the company free of withholding tax as a result of the treaty between State A and State B. The company is subject to no or very low tax in State A. The interest received by the company is then transferred to a resident of State X as a loan.

51.

As noted in paragraph 6 of the Conduit Report, the conduit company “takes advantage” of the treaty provisions but the economic benefit goes to a person (resident in State X) not entitled to use the treaty. The problem is created exclusively by the treaty itself: the domestic tax laws of the source country (in which the advantage arises) are adequate as the State generally taxes all non-residents (including the conduit company). Paragraph 7 of the Conduit Report explains why this is unsatisfactory:

(1)

treaty benefits are economically extended to persons resident in a third State in a way unintended by the contracting States;

(2)

income may be wholly exempted from taxation or subject to inadequate taxation; and

(3)

the State of residence of the ultimate beneficiary has little incentive to enter into a treaty with the source State as it can indirectly receive the treaty benefits without the need to provide reciprocal benefits.

52.

In our view, the UN report on the model double taxation convention between developed and developing countries is consistent with the commentary on the OECD model convention and the Conduit Report but adds little to the detailed commentary that we have set out above.

53.

BLM relied upon some non-statutory Parliamentary materials. There was a dispute as to whether those materials were admissible. We express no view on that issue and nothing that follows should be taken as suggesting that we consider that the materials are admissible. Nevertheless, we have considered the materials to which BLM referred, concluding that they do not take the analysis any further.

54.

On 2 December 1998, in the Standing Committee debate on the 1998 Order (which, among other things, altered the UK-Ireland treaty to include Article 12(5) in its present form), Ms Dawn Primarolo (the then Financial Secretary to the Treasury (“the FST”)) noted in her opening statement that:

The third protocol [which amended Article 12(5)] introduces tighter anti-avoidance provisions, aimed at countering arrangements intended to take advantage of the convention. Such an arrangement could consist of routing interest from the UK through Ireland to a third country to take advantage of the relief from UK tax under the convention.

55.

The first sentence says nothing more than is said in a number of places in the commentary on the OECD model convention. The second sentence is couched in terms of an example (“such an arrangement could”) and mentions the paradigm example of a conduit company in the same manner as the OECD materials.

56.

The FST concluded the debate by answering a question posed by the Opposition spokesman (Mr Nick Gibb) as to the intention in changing the wording of Article 12(5) of the treaty. She responded to this query at the very end of the debate in this way:

The article is an anti-abuse measure designed to prevent artificial arrangements which exist mainly to obtain the benefits of the convention.

57.

That simply indicates that Article 12(5) is an anti-abuse measure. The reference to preventing “artificial arrangements” is in our view just a different way of saying what the FST said at the beginning of the debate.

58.

In the light of the OECD materials, the parties were rightly agreed that Article 12(5) of the UK-Ireland treaty is in the nature of an “anti-abuse” provision. Indeed, as noted above, the relevant commentary in the Conduit Report (at paragraph 6) actually uses the language of “takes advantage of” in circumstances where it is plain that abuse or unintended benefits of a treaty are in contemplation. The question raised by both BLM’s Respondent’s Notice and HMRC’s Ground 1 is what type of “abuse” Article 12(5) seeks to counteract.