The basic rule of international tax appears to be straightforward: each country seeks to tax the profit derived from the economic activity carried on in that country.
On the face of it this seems quite simple, and indeed it can be where independent enterprises are concerned. But what if the enterprises are not independent? For example, an internet service provider headquartered in California might wish to reduce the level of its profits taxable in the UK by overcharging its UK subsidiary for matters such as the use of patent rights.
In order to avoid a loss of tax in this way, governments throughout the world have brought in “transfer pricing” rules which impute for tax purposes an arm’s length price for goods and services where the actual amount charged between connected parties is not arm’s length. This is where many arguments begin. How does one determine what is really the true “arm’s length” price?
It might also be tempting for a UK resident individual to avoid UK taxes by transferring his wealth abroad, perhaps to a tax haven, maybe setting up an offshore trust or offshore company which does not pay tax in the jurisdiction in which it is situated. We have the “Transfer of Assets Abroad” and “Settlements” legislation to stop this. It generally operates by bringing such foreign income and gains into the UK tax net. But equally, UK
Plc does not want to make the UK tax regime so unfriendly that it stops wealthy foreigners from coming to live here. We, therefore, have the specialist “non-domicile” tax rules which make tax less onerous for foreigners living in the UK than for native UK citizens. Clearly such rules can be difficult to justify politically. There is a thin line to follow.
Of course, this merely skims the surface. Huge complications lie underneath. Take, for example, the German Niessbrauch (a particular specialisation of mine). This is a legal concept which exists in Germany, but not the UK, whereby it is possible to separate the ownership of an asset from the ownership of the income that asset produces. Given that there is no equivalent legal structure on this side of the North Sea, how does HMRC seek to
tax an individual with a Niessbrauch interest who happens to come to live here? And also, regardless of HMRC’s thoughts on the matter, what is really the true position? That as they say, is a very interesting question.
If we can help decipher the complicated world of international tax please do not hesitate to contact us.