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March 9, 2015

Double Tax Treaty Case Update - Macklin v HMRC

The upper tier tribunal recently overturned the decision in the 2013 first tier tribunal case of Macklin v HMRC.

The case involved the interpretation of the UK-US double tax treaty and in particular whether a pension scheme operated by the World Bank was "established in" the US.

Whereas the first tier tribunal focused on exchange notes to the treaty which led them to conclude that the term "established in" referred to a pension scheme established under and in conformity with the relevant states tax legislation, the upper tier tribunal found that the term "established in" referred to the pension scheme's physical location.

The case highlights the difficulties that can arise when applying double tax treaties to individual cases.

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

Pitfalls to Avoid when Claiming Double Tax Relief

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

Contact us today to discuss your tax requirements.
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