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Tax treaties: consultation on ‘broader anti-avoidance measure’

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HMRC are seeking views on draft legislation, earmarked for Finance Bill 2012, to counter tax avoidance schemes exploiting double taxation agreements.

Peter Cussons, International Corporate Tax Partner at PwC, said the move was an understandable but ‘in terms of legal certainty regrettable’ measure designed to block ‘what HMRC sees as abuse of tax treaties’. 

The government said at Budget 2011 that it would introduce legislation to ‘ensure that relief from tax is not given where a claim is made under UK double taxation treaties and where tax avoidance arrangements have been made in relation to the claim’.

‘These arrangements attempt to access the benefits of treaties when they are not properly due to secure the result that items of income, profit or gain are not subject to tax in the UK,’ HMRC said in a technical note published last week.

‘The past response to these schemes has been to legislate to close them down as they have arisen or to rely on anti-avoidance measures in DTAs themselves. However, avoidance activity exploiting the provisions of DTAs has continued and the government now considers that a broader anti-avoidance measure is required to prevent further loss of tax in this area.’

Cussons explained in a client briefing that where, for example, the UK treaty with the Netherlands gives a better tax outcome than the UK treaty with Belgium, a UK borrower ‘might structure via a Dutch intermediary company a borrowing that is funded ultimately by a Belgian lender’.

HMRC would ordinarily view this as 'treaty shopping', he wrote. Not all UK tax treaties contain provisions to prevent this, and negotiations over new tax treaty terms ‘can take years’. But the new development is ‘yet another targeted anti-avoidance rule within the increasingly unwieldy UK tax code’, he added.

The proposed measure is sanctioned by the terms of the OECD’s commentary to the model tax convention, HMRC said. Comments are invited by 22 September.