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The Upper Tribunal in Haworth v HMRC [2024] UKUT 00058 (TCC) upheld the interpretation of the “place of effective management” test for determining tax treaty residence, confirming that it is distinct from the “central management and control” test used to ascertain corporate residence.
The case revolved around a complex tax avoidance scheme involving corporate trustees and double tax treaties.
The case involved Jersey-based trustees of a family trust that held shares in a UK-incorporated company.
The trustees participated in a “round the world” tax avoidance scheme designed to avoid UK capital gains tax on a share disposal.
The scheme involved resigning UK trustees in favor of Mauritian trustees to dispose of shares, taking advantage of the UK-Mauritius Double Tax Treaty.
Article 4(3) of the Treaty provided a tie-breaker test for determining the residence of a person liable to tax in both contracting states, with the deciding factor being the “place of effective management.”
The trustees in Mauritius, who would not incur UK capital gains tax on the disposal, replaced the existing Jersey trustees.
The newly appointed trustees then disposed of shares, following which UK-resident trustees were reappointed. HMRC contended that the scheme was fraudulent, as the commercial reality pointed to the effective management being in the UK, negating the tax benefits claimed.
The First-tier Tribunal (FTT) applied the test for the “place of effective management,” which required considering the centre of top-level management.
It found that the trustees in the UK, along with their advisors, orchestrated and supervised the tax avoidance scheme, suggesting that the management of the trust effectively rested in the UK.
On appeal, the Upper Tribunal confirmed that the test used to determine the place of effective management differed from the central management and control test used to ascertain corporate residence.
The “top-level management” approach requires assessing where key management and commercial decisions are made, not just the location of individual trustees.
The appellants argued that the test for the place of effective management should be aligned with the central management and control test, emphasizing that the Mauritian trustees made the final decisions regarding the disposal of shares.
However, the Upper Tribunal upheld the FTT’s interpretation that the test should consider the broader circumstances, including the planning and implementation of the scheme.
The fact that certain decisions were taken in the UK and that the trustees acted under external influence was sufficient to challenge the notion of effective management in Mauritius.
The Upper Tribunal’s decision reinforces that the place of effective management test is distinct from the central management and control test.
This interpretation carries significant implications for international tax planning, as it suggests that assessing the “effective management” must consider the overall context and not just isolated decisions by trustees or corporate entities.
The ruling provides clarity on the application of the “place of effective management” test in double tax treaties, indicating that it should be interpreted with a broader perspective.
This decision could impact cross-border tax planning and the structure of trusts where treaty residence plays a critical role in tax liability.
This decision may also lead to greater scrutiny in tax avoidance schemes that rely on offshore entities to avoid UK tax liabilities.
Future cases involving the interpretation of double tax treaties will likely refer to this decision, emphasizing the importance of considering the context in which tax decisions are made.
It remains to be seen whether the case will be appealed to the Court of Appeal, which could lead to further clarification or modification of the established interpretation of the “place of effective management.”
If the Court of Appeal chooses to address the case, it could potentially depart from the decision in Smallwood, leading to a broader interpretation of tax treaty residence.
If you have any queries about this article on Haworth v HMRC, or any other UK tax matters, then please get in touch
The Supreme Court of Pakistan has delivered a key judgement in the Snamprogetti Engineering case, offering clarity on the contentious issue of what constitutes a permanent establishment (PE) and the consequent tax obligations of foreign entities providing services in Pakistan under the Pakistan-Netherlands Double Taxation Treaty (DTT).
The case involved a Dutch-resident company, Snamprogetti Engineering, engaged by a Pakistani firm to deliver engineering services and procure spare parts over two years for a fertilizer complex project in Pakistan.
The company filed its tax return, claiming exemption from income tax for its engineering services income based on Article 7 of the DTT, asserting it had no PE in Pakistan.
The Assessing Officer (AO) contended that Snamprogetti had established a PE in Pakistan under paragraphs 3 and 4 of Article 5 of the DTT, due to its involvement in the project’s construction and engineering aspects and the necessity of its physical presence in Pakistan.
This interpretation was initially contested and led to a series of appeals.
The Appellate Tribunal Inland Revenue (ATIR) initially sided with the AO, asserting the project’s indivisibility and exceeding the four-month threshold for constituting a PE.
However, the Supreme Court’s analysis diverged, focusing on the specifics of Article 5 of the DTT and international tax principles.
The Supreme Court found no evidence of the petitioner’s involvement in construction activities, rendering paragraph 3 of Article 5 irrelevant.
It concurred with the Commissioner Appeals (CIRA) in calculating the service duration, emphasizing that breaks between service periods could be aggregated.
If these periods totaled more than four months within a twelve-month span, a PE would be established.
Nonetheless, since Snamprogetti’s personnel were present in Pakistan for only 97 days, falling short of the four-month criterion, the court concluded that the company did not constitute a PE under paragraph 4 of Article 5 of the DTT.
This landmark decision underscores the importance of accurately interpreting the terms of international tax treaties, particularly concerning the designation of a PE.
It reinforces the principle that the aggregate service duration, interspersed with breaks, is crucial in determining the existence of a PE.
The ruling provides significant relief and clarity to foreign companies engaged in similar contractual arrangements in Pakistan, confirming that the absence of a PE negates the local tax obligations on income derived from such services, provided the conditions of the applicable DTT are met.
The Supreme Court’s judgement is a definitive stance on the application of the Pakistan-Netherlands DTT to cases of foreign entities providing services in Pakistan.
It establishes a clear precedent for evaluating the taxability of international companies’ operations in Pakistan, ensuring that tax obligations are adjudicated in strict accordance with the stipulated treaty provisions.
If you have any queries about this article on this case and / or the Pakistan Netherlands double tax treaty, or any other Pakistani tax issues, then please get in touch.
In a landmark decision on 8 February 2024, the Karnataka High Court overruled a Central Excise and Service Tax Appellate Tribunal (CESTAT) Order.
This previous ruling recognised Venture Capital Funds (VCFs) set up as Trusts as ‘distinct entities’ from their investors, thereby subjecting them to service tax for providing asset management services.
The CESTAT’s decision was based on the premise that VCFs, by managing portfolios or assets for their contributors, were rendering taxable services.
This interpretation was challenged in the High Court, leading to a significant legal examination of the nature of VCFs under tax law.
The High Court’s judgment clarified that the Finance Act, 1994, which governs service tax, does not recognise ‘trusts’ as juridical persons.
This distinction is crucial as the CESTAT had argued that since trusts are treated as juridical entities under the Securities and Exchange Board of India (SEBI) regulations, they should also be considered the same for taxation purposes.
The High Court disagreed, emphasising that statutory definitions must align with the objectives and purposes of the specific legislation in question, in this case, the Finance Act.
The Court further deliberated on the nature of VCFs’ operations, highlighting their role as ‘pass through’ entities.
This means that VCFs aggregate funds from contributors and invest these funds based on the investment manager’s advice, without altering the fundamental ownership of the assets.
The High Court recognised this function, affirming that VCFs act in a trustee capacity, managing investments without directly offering taxable services to the investors.
Central to the High Court’s ruling was the application of the doctrine of mutuality, which posits that a service cannot be rendered to oneself.
In the context of VCFs, the Court observed that the relationship between the contributors and the trust is inherently mutual.
The funds invested by contributors are managed in trust, negating the notion of a service transaction between two separate entities.
This ruling is a significant victory for Venture Capital Funds set up as Trusts, affirming that their asset management activities do not constitute taxable services under the Finance Act, 1994.
The Karnataka High Court’s decision brings clarity to the taxation status of VCFs, ensuring that their operations are not unduly burdened by service tax liabilities.
This judgment not only aligns legal interpretation with the operational realities of VCFs but also supports the broader investment ecosystem by recognising the unique structure and function of venture capital investments.
If you have any queries about this article on VC Funds Not Subject to Service Tax then please get in touch.
In an important judgment, the CESTAT New Delhi has ruled in favor of a prominent online travel company, involved in facilitating hotel room bookings via its website and mobile application.
This decision overturns the service tax demand raised by the Revenue Department, which had classified the service under ‘short-term accommodation’ rather than ‘tour operator’ service.
The Tribunal emphasised that the online portal acted as a facilitator, connecting hotels with customers.
Scrutinising the ‘Privilege Partnership Agreement’ between the online portal and hotels, and the ‘User Agreement’ with customers, it was clear that the portal’s role was limited to providing an online booking platform.
Consequently, it did not directly render hotel accommodation services.
Challenging the Department’s stance, the Tribunal clarified that the definition of a ‘tour operator’ extends beyond individual transactions.
The portal, engaged in organizing tours including accommodation arrangements, rightfully fits into the ‘tour operator’ category.
Therefore, it is eligible for a significant 90% abatement as per the relevant notifications.
The Tribunal noted that for a service to be classified under short-term accommodation, it must be provided directly by the hotel.
The online portal, lacking the necessary licenses and infrastructure, could not be equated with a hotel.
This understanding further fortified the classification of the portal’s service as that of a tour operator.
This ruling sets a precedent for similar cases, impacting how online travel agencies are taxed.
It underscores the distinction between being a service provider (hotel) and a service facilitator (online portal).
Moreover, it provides clarity on the applicability of tax abatements in the travel and hospitality sector.
The CESTAT’s decision is a significant development in the tax position for online portals offering hotel booking services.
It delineates the thin line between direct service provision and facilitation, a crucial distinction in the digital age where online platforms are ubiquitous.
This ruling not only offers relief to the online travel company in question but also paves the way for similar businesses to understand their tax liabilities better.
It is a testament to the evolving nature of tax laws and their interpretation in the context of modern, technology-driven services.
For businesses operating in this area, it’s crucial to stay abreast of such legal precedents and ensure compliance with the nuanced interpretations of tax laws.
If you have any queries on this article on the India tour operator service, or Indian tax matters more generally, then please get in touch.
In a notable judgement delivered on 18 December, EnviroServ Waste Management secured a significant victory in the Supreme Court of Appeal (SCA) against the South African Revenue Service (SARS).
This case, which revolved around the tax treatment of hazardous waste processing at landfill sites, marked a rare win for the taxpayer, primarily on tax technical grounds rather than procedural issues.
The SCA’s decision in EnviroServ Waste Management’s case hinged on the interpretation of “ancillary” versus “indispensable” activities in manufacturing processes.
This distinction is critical, as it affects the tax allowance on assets – a striking difference between a 40/20/20% allowance and a mere 5% annual allowance.
The case judgment can be found here:
180media.phttps://www.saflii.org/za/cases/ZASCA/2023/180media.pdfdf (saflii.org)
The Court’s emphasis was on Section 37B, which SARS contended applied to EnviroServ’s activities.
However, the legislative intent alone wasn’t sufficient. The Court underscored the importance of the actual words used in the Act, which, in this instance, favored the taxpayer’s interpretation.
The judgment reminds us that one should not accept a singular interpretation of legislative wording. Precedent plays a crucial role, as evidenced by the SCA’s reliance on existing rulings defining “plant” to include permanent structures attached to the soil, subject to a functionality test.
Interestingly, the Court noted that falling under the USPs’ provisions doesn’t automatically result in penalties. SARS must prove actual prejudice, dismissing the notion of “automatic prejudice”.
EnviroServ argued that the excavation sites, or “cells”, where waste is chemically treated, should be classified as “plant” or “machinery”.
This classification is pivotal for depreciation claims, significantly impacting the rate at which these assets can be depreciated.
The SCA, led by Acting President Justice Nambitha Dambuza, concurred with EnviroServ. Contrary to SARS’s contention, the cells were not mere waste disposal assets or “buildings” as per Section 13 of the ITA.
The SCA recognized that the primary function of these cells was the conversion of hazardous waste into non-hazardous material, aligning with EnviroServ’s business purpose.
This ruling not only provides clarity and closure to a protracted tax dispute for EnviroServ but also sets a significant precedent in the realm of tax law, particularly concerning the classification of assets for tax purposes.
The judgment is a reminder of the complexities inherent in tax legislation and the importance of nuanced interpretations.
If you have any queries about the EnviroServ tax case, or any tax issues in South Africa, then please get in touch.
When it comes to tax planning, consecutive gifting or “Kettenschenkung” can be an attractive way of optimizing the use of tax brackets and personal tax allowances.
This concept allows for the transfer of assets to family members over time, which can help to keep the gift tax burden low and preserve family assets.
Recently, the German Federal Fiscal Court clarified the conditions for consecutive gifting in its ruling (dated July 28, 2022 – II B 37/21).
The case that was brought before the court concerned the donation of a house by a father to his daughter, who then donated half of the house to her husband.
The tax authorities argued that the father’s donation must be taxed as if he had donated half of the house directly to his son-in-law. This would have resulted in a higher tax burden for the son-in-law, as the tax allowance for family members is higher than for third parties.
However, the court clarified that the determination of the respective donor and beneficiary in cases of consecutive gifting is based on whether the person passing on the asset has an independent decision-making power regarding the disposal of the gifted asset.
Therefore, a valid consecutive gift structure requires at least two successive gifts that are legally effective, and the intermediary donee must obtain the right to fully dispose of the gifted assets without any obligation to transfer them to another person.
Consecutive gifting can be an effective structure in cases where a direct gift would lead to an increased gift tax burden. However, it is important to carefully consider the requirements established by case law in order to achieve the intended tax benefits.
If the intermediary donee intends to pass on the gift to another person, close attention must be paid to the implementation of consecutive gift arrangements.
The contractual agreements must clearly emphasize the power of disposition of the first donee, and all provisions must be avoided that could result in an obligation of the first donee to transfer all or part of the gift to another person.
It is worth noting that the potential for tax optimization is not limited to private assets but can also be used for tax planning in the context of business succession.
The personal allowances under the German Inheritance and Gift Tax Act are higher among family members than among third parties, which can be effectively utilized to minimize the tax burden and preserve family assets.
Consecutive gifting can be a valuable tool for tax planning and asset preservation, but it is important to carefully consider the legal requirements and contractual agreements in order to achieve the intended tax benefits.
With the right approach, this concept can be a powerful strategy for families and businesses alike.
If you have any queries about consecutive gifting in Germany, or German tax more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
In this case, the “it” being the tax return… so say the IRS, anyway.
Yes, it has been reported in Law 360 that the Internal Revenue Service (“IRS”) has issued a determination against Beyonce asserting that she owes the agency $3m in taxes, interest and penalties.
A petition was filed on Monday by the IRS. In it, they argued that Beyonce had failed to report royalty income in 2018.
In addition, it also stated that she had incorrectly claimed deductions for the same and the following year. This included the Qualified Business Deduction and also deductions for legal and professional fees and management fees.
The US tax agency says that she owes back taxes of $805k for the 2018 year and $1.4m for the 2019 year.
In addition, the IRS has imposed penalties of $161k and $288k for each respective year. On top of this, interest is estimated at around $264k.
Enough to make anyone… er… Sasha Fierce.
Musical tax miscreants – IRS hall of fame
It’s no secret that the world of music is filled with glamour, fame, and fortune. But beneath the shimmering surface, some of our most beloved artists have found themselves in the crosshairs of the Internal Revenue Service (IRS). When the taxman comes knocking, even the brightest stars can find themselves in a financial bind. Let’s take a look at some other music legends who’ve hit a sour note with the IRS.
We are told that Beyonce rejects these claims and has asked for a trial to help settle the dispute.
The US tax court case is Beyonce Knowles-Carter v Commissioner under docket number 5695-23.
If you have any queries about this article on Beyonce IRS investigation, or US tax matters in general, then please get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
On February 24, 2023, the Wisconsin Tax Appeals Commission made a decision regarding Skechers’ licensing transaction with its subsidiary, Skechers USA Inc. II (SKII).
The Commission upheld the Department’s assessment that the transaction lacked a valid business purpose and economic substance.
Skechers entered into a license agreement with SKII upon the formation of the subsidiary, which resulted in significant royalty deductions claimed on Skechers’ Wisconsin tax returns. However, the Department disallowed the expense and assessed the intercompany transactions between Skechers and SKII as sham transactions.
The Commission agreed with the Department’s assessment, stating that Skechers failed to prove that the transactions had a valid business purpose other than tax avoidance. While there may have been some non-tax benefits related to intellectual property, Skechers did not consider these before forming SKII. The Commission also found that there was no economic substance to the royalty payments, as Skechers could not provide any evidence of a change in business practices, profitability or intellectual property before and after the creation of SKII and the transactions at issue.
In upholding the Department’s assessments, the Commission determined that Skechers failed to provide persuasive evidence or testimony that the licensing transaction with SKII had a valid business purpose and economic substance.
This decision highlights the importance of ensuring that intercompany transactions have a valid business purpose beyond tax avoidance and demonstrate economic substance. Failure to do so may result in the disallowance of claimed expenses and potential tax assessments.
A new ruling was issued by Judge Yardena Seroussi in respect of an appeal to the Real Estate Tax Appeals Committee. The ruling concerned how luxury apartments should be taxed.
The Appeals Committee considered whether a land appreciation tax exemption should be granted to several sellers during the sale of a luxury apartment.
It was claimed by the vendors that they were entitled to the full sum of the maximum exemption for a single apartment prescribed by law.
However, the Israel Tax Authority held that the exemption applies only to sales of an entire apartment unit and not each share in a multiple ownership arrangement. Accordingly, it calculated its tax on the maximum exemption per seller—not according to their actual portion of ownership.
The owner of a single apartment is entitled to an exemption from land appreciation tax, up to the amount permitted by law.
At the moment, this amount stands at ILS 4.6 million.
It is worth noting in the case that:
The Israel Tax Authority had decided that the exemption was available in respect of the entire apartment rather than to each individual seller.
However, the Appeals Committee ruled that the exemption applied to the sale of a single apartment and therefore the exemption should be granted to each separate vendor.
This was on the basis that the sellers were not part of the same family unit
It seems quite likely the Israel Tax Authority will appeal this ruling.
If you have any queries about this Israel Real Estate Tax Appeal or Israel tax matters in general, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article