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Double-Taxation Agreements

By admin
12 Oct 2023
Manage Tax Risk

Double-Taxation Agreements what they are and why you may need to be aware of them

As a UK resident you are subject to taxation on your worldwide income and gains on an arising basis i.e. in the tax year in which the income/gain arises (unless you are non-UK domiciled which is far too broad a discussion to include here).

This means that, even if you have offshore income or gains on which you have paid tax in another country, you still need to declare it to HMRC and pay any tax due.  When working on worldwide disclosures, a common misconception we hear is that “I paid tax on it in X so I assumed I didn’t need to declare it here too”.

The astute amongst you might spot that declaring the same income in two countries means double taxation, but that’s not necessarily the case.  In the UK, relief for tax paid overseas is given in one of two ways:

  1. With reference to the applicable double-taxation agreement (“DTA”), or
  2. Where no DTA exists, or the income/gain is not specified, by unilateral relief.

Unilateral relief means deducting the overseas tax paid from your UK tax liability, but only so much of it as relates to that specific source of overseas income/gain (if you think about it logically, you shouldn’t be able to receive a refund of UK tax for tax you’ve paid to a different tax authority).  This means preparing separate calculations inclusive and exclusive of the overseas source. Where a person has multiple sources of offshore income/gains, this can get complicated.

The UK has Double-Taxation Agreements with more than 130 countries.  These set out a tie-breaker clause (where a person is resident in both jurisdictions) and the tax rates and preferences for different sources of income and gain.  Whilst most Double-Taxation Agreements follow the same format, they all differ slightly so it’s important to undertake a review as errors can result in HMRC enquiry and the potential for tax-geared penalties.

Determining UK tax residence [insert article] is not necessarily straight forward, particularly where you are internationally mobile, or in a year of transit, and each country has its own set of rules for determining tax residency in a given year.  In addition, most countries have tax years which don’t align with the UK, so it’s not always easy to see how you can be resident in more than one country at the same time.

Where this happens, you should look to the relevant clause of the Double-Taxation Agreement (if there is one) and follow the steps, which generally follow this format:

  1. Where you have a permanent home
  2. Where your social and economic ties are closest
  3. Where you have your habitual abode
  4. The country in which you are a national
  5. By mutual agreement by the competent authorities

If the answer to a question is neither, both, or cannot be determined, then you move onto the next step.  The Double-Taxation Agreement also sets out the procedure for mutual agreement although the fact that it refers to the authorities as “competent” might be considered laughable.

Once a person’s residency has been determined using the above you then need to look at each source of income/gain in turn to ascertain the tax treatment:

  • is it taxable in one or both states
  • if both, who gets priority and where is relief claimed
  • what is the applicable rate

Having worked on a considerable number of worldwide disclosures, and particularly in view of the Failure to Correct legislation [article], we’d suggest this is done in advance of moving countries, or as soon as possible after you start receiving offshore income.  It’s not just about the UK tax liabilities – in many cases pensions are taxable where you are resident, and employment income is taxable where the duties of that employment are performed. Both of these income streams are often subject to tax at source and if you’ve ever tried to claim a tax refund you know this isn’t an ideal situation to be in!

If you’re unsure about your circumstances and would like to discuss any of the above, please do not hesitate to contact us.

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This article about Double-Taxation Agreements is written by Cate Jackson

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