Expatriate taxation - CIOT - The Chartered Institute of Taxation

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CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 6 Issue 6: Economic Employer Test - Treaty claims under Article 15 6.1 The issue here is whether the so-called “economic employer test”, announced by the UK Government as its interpretation of the OECD model treaty rules, can apply to treaties agreed “before” the latest changes were announced. Applicable law 6.2 The sole piece of legislation that exists for income tax is ICTA 1988 section 788. It basically says that Her Majesty may by Order in Council declare that arrangements made in a Double Taxation Agreement with another country shall have effect. The arrangements have to meet the conditions set out in section 788(3) which provide, so far as they affect expatriate employees: a) for relief from income tax; b) for charging the income from UK sources on persons not resident in the UK; c) for determining the income attributed; and d) for conferring a tax credit under ITTOIA 2005 section397(1). Current practice 6.3 Practice varies depending on the accounting firm, and there is no agreed practice within HMRC as it has been possible to do a compromise deal on the issue. There are two main areas of difficulty surrounding when a treaty claim under the relevant bilateral equivalent of Article 15 of the OECD model will be allowed by HMRC. 6.4 The main area frequently debated is whether there is an Economic employer in the UK such that the provisions of Article 15(2) cannot apply. 6.5 Article 15 (2) broadly gives exemption from tax in the UK for income earned by a person who is for the purposes of the treaty a non resident of the UK and a resident of the treaty partner, provided they meet three conditions set out in Article 15(2). These are: a) that the employee is in the UK for less than 183 days in whatever 12- month period the treaty specifies (it varies from treaty to treaty); b) that the employee is paid by or on behalf of an employer that is outside the UK; and c) that the earnings are not recharged or borne in the UK to a permanent establishment of the employer. I have loosely translated the words, but they reflect most treaties. 6.6 To say there has been much debate on the meaning of the word “employer” in Article 15(2) condition 2 would be a gross understatement. The OECD is still issuing refinements on the exact application of the Model Treaty and the extent of the application of Article 15. Peter Ashby 26 6.2.07
CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 6.7 Herein lies the problem. The tax law in the UK is set by Parliament in an Act of Parliament. That law cannot be changed by the OECD. Only Her Majesty may do that, by revoking the Order or amending its terms. It is accepted that the ECJ may interpret UK law when there are conflicts between UK law and European law that the UK has signed up to implement (eg the Treaty of Rome), but this does not affect the interpretation of Article 15. 6.8 For many years, therefore, professional advisers interpreted Article 15 to mean that the word “employer” had to have the legal definition of the word under UK law, as there is no definition of the word “employer” within the treaty. 6.9 Applying that concept, anyone seconded to the UK for a period which amounted to less than 183 days in the relevant period was entitled to claim relief from double taxation by claiming exemption from UK tax. 6.10 In June 1995, HMRC announced in Tax Bulletin 17 the introduction of a 60- day rule for Article 15. There was no backing change in legislation. In July 1996, Dawn Primarolo (Financial Secretary to the Treasury) announced in Parliament that the treaty was to be interpreted as though the word “employer” was meant in the economic sense, and held that those in the UK for less than 60 days but payrolled from their home location would not be employed in the UK for the purposes of the treaty. The position between 61 days and 183 days was left unclear, although HMRC interpreted it to mean that, after 60 days, there would be a presumption of a UK employer. Tax Bulletin 17 contained the following: “The United Kingdom is a member country of the OECD and the terms of modern United Kingdom Double Taxation Agreements, including the condition concerning payment of remuneration, are based on the OECD Model Convention. The Revenue seeks, as far as possible, to apply Double Taxation Agreements consistently with the guidance in the Commentary on the Model Convention. Consequently, the Revenue now intends to take an approach consistent with the guidance in the Commentary on the Model Convention in cases where remuneration is paid by a non-resident but the cost of that remuneration is borne by an "economic employer" in the United Kingdom. Inspectors dealing with claims to exemption from employees who commenced a work assignment in the UK after 1 July 1995 and with all claims for 1996-97 onwards, will take into account the terms of the Commentary on the OECD Model Convention. They will not accept claims where the cost of an employee's remuneration is borne by a United Kingdom company which acts as the "economic employer".” 6.11 HMRC followed it up in Tax Bulletin 25 with the following: “In July this year, in response to a question during a Standing Committee debate on the proposed UK/Argentina Double Taxation Agreement, the Financial Secretary to the Treasury provided useful clarification of the circumstances in which a UK company might be regarded as an employer in the absence of a formal contract of employment between the employee and the UK company. The Minister indicated that the Inland Revenue would not consider that a short term business visitor was sufficiently integrated into the business of a UK company for it to be regarded as the employer where the employee concerned is in the UK for less than 60 Peter Ashby 27 6.2.07
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Expatriate taxation - CIOT - The Chartered Institute of Taxation

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