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HMRC internal manual

International Manual

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Double Taxation applications and claims: HMRC reaction to Indofood case

  1. As can be seen from the above, the Court did not interpret the various DTAs in the light of Indonesian law but adopted an interpretation consistent with OECD interpretations. Following legal advice, HMRC’s view is that the “beneficial ownership” decision, as far as it relates to Double Taxation Conventions (DTCs), is now part of UK law. The decision is also likely to be of persuasive force where related issues for UK DTCs are being considered and that, where it is relevant, HMRC is obliged to follow it. Since the Court of Appeal decision is fully consistent with the UK’s existing policy HMRC does not think that, in general, the case will have a significant impact on its current practice.
  2. The key point is that, in Indofood, the Court of Appeal has simply confirmed that, in line with the OECD Commentary, beneficial ownership “should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance” and that tests of the legal structure, and of the commercial and practical substance of the scheme, should be adopted to determine beneficial ownership. The Court of Appeal decision is consistent with HMRC’s view of all DTC articles referring to beneficial ownership. This covers the Articles on interest, royalties and if appropriate dividends. The comments made in this guidance regarding interest will also apply to royalty and dividend payments.
  3. It is HMRC policy that, where there is treaty abuse (such as, say, “treaty shopping”), interpreting “beneficial ownership” in what the Court of Appeal called its “narrow technical” UK domestic law meaning would not give effect to the purpose and object of the DTC of preventing fiscal evasion, indeed it would be contrary to the object of the DTC to allow such treaty abuse. On the other hand, interpreting “beneficial ownership” in what the Court of Appeal called its “international fiscal meaning” clearly gives effect to the purpose and object of the DTC by excluding abusive cases such as “treaty shopping” from the benefits of a DTC.
  4. Although, in the context of DTCs, beneficial ownership will take what the Court of Appeal decision accepted as an “international fiscal meaning” rather than a UK domestic meaning, in HMRC’s view there are unlikely to be many cases where the difference is material. The issue would only arise when the substance of an arrangement amounts to an improper use of the relevant DTC in the light of the DTC’s object of prevention of fiscal evasion and avoidance, for example “treaty shopping”. Treaty shopping is only likely to take place where the “real” beneficial owner of the income, such as “the immediate underlying lender” in the case of interest, is resident in a state with which the UK has either no DTC or a DTC less favourable than the DTC applicable to the intermediate lender, or if the recipient of an income stream into which an intermediate lender has been interposed is resident in such a state (regardless of whether they themselves are the beneficial owner). These are the only situations where HMRC believe further consideration of the “international fiscal meaning” will be needed.
  5. Where both the intermediate and the underlying lender are resident in states with which the UK has essentially similar DTCs, no issue is likely to arise, even where the intermediate lender is not, under the so-called “international fiscal meaning” of the phrase, the beneficial owner of the interest, as there would be no fiscal evasion or avoidance. This is because in these circumstances it is unlikely that the effect of the arrangement is the avoidance of UK withholding tax, since the level of UK withholding tax would have been the same with or without the intermediate lending.