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Interpreting Double Tax Treaties - Macklin Case

7th Nov 2013
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The first tier tribunal case of Macklin v HMRC TC02943 is a reminder that care must be taken when interpreting double tax treaties.

In this case the claim for an exemption for pension income under Article 17 of the UK-US double tax treaty was denied because the pension scheme was not 'established in' the US.

In reaching their decision, the tribunal was influenced by the exchange notes to the treaty which listed the types of pension schemes that were intended to benefit from the exemption - whilst the list wasn't exhaustive, it was indicative of the intention of the relevant parties to the treaty.

How to Interpret Double Tax Treaties

The approach for interpreting double tax treaties was set out in the case of IRC v Commerzbank and has since been endorsed by the Court of Appeal in both Smallwood & Anor and Bayfine. 

The approach set out by the courts is as follows:

1. Look at the clear meaning of words, bearing in mind the purpose of the enactment,

2. The interpretation should look at the international convention of the words and not English law,

3. As per the Vienna Convention, the treaty "should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose",

4.  In cases of ambiguity or absurdity 'supplementary means of interpretation' may be used,

5.  Commentaries and decisions of foreign courts may have persuasive value,

6.  Aid to interpretation should not be used as a substitute for studying the terms of the treaty

More Detail on the Macklin Case

Article 17 of the UK-US double tax treaty specifies that where a person receives pension income, it is taxable only in the country in which the taxpayer is resident.

The taxpayer, Mr Macklin, was UK resident in the years in question therefore in the absence of any other provision, the pension income would be taxable in the UK (with the taxable amount being reduced to 90% of the pension as per the normal foreign pension rules).

However, the treaty goes on to say that the pension income will be exempt in the country of residence if the pension scheme is established in the other country and would have been exempt from tax had the individual been resident in that other country.

It was accepted that the second half of this condition was met, however HMRC contended that the World Bank pension scheme (which the taxpayer contributed to whilst working in the USA for the World Bank) was not 'established in' the US.

The taxpayer on the other hand said that whilst the pension scheme was not strictly set up in the US, it is by agreement between the World Bank and the IRS (the US tax authority) treated as being 'created and organised' in the USA and should therefore be treated as being established in the US for the purpose of interpreting the UK-US double tax treaty.

On balance, the tribunal felt that the pension scheme could not be said to be established in the US because it did not meet US tax rules regarding pension schemes.

Pitfalls to Avoid when Claiming Double Tax Relief

See our recent blog regarding common pitfalls when claiming double tax relief


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By David Treitel
16th Nov 2013 15:29

This case could have been much more happily settled had the advisers not wanted to argue this was a pension plan at all (as it plainly is not a UK registered plan).  There is no shadow of doubt that this is not a domestic qualified US pension nor is a UK registered plan.  Consequently the income coming out from the plan is no more than simple deferred earnings (which should be tax free in the UK) plus some element of growth which is probably UK taxable. Why on earth did it get to the Tribunal?

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