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Philip Baker

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US Suspension of BEPS 2.0 Talks - Hobson's Choice for OECD!

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US Suspension of BEPS 2.0 Talks - Hobson's Choice for OECD! superadmin Thu, 18/06/2020 - 18:07

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Philip Baker

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To a degree there is nothing surprising about the announcement that the US Treasury Secretary has written to four European Finance Ministers indicating that the US wishes to suspend its participation in talks on the development of Pillar 1 of the digital economy taxation project (sometimes referred to as the BEPS 2.0 project) until 2021. The original date for agreement on this was June 2020, and that was probably the last date possible for agreement before the US became embroiled in the presidential elections. The revised date of October 2020 for agreement was probably never a runner, as the US would be immersed in the election by that time. (If John Bolton is to be believed, Donald Trump has in fact never stopped thinking about re-election). It was always pretty certain, therefore, that no progress would be made until well into 2021 in any event. By that stage there may be a new incumbent in the White House and a new administration, but even if there is no change there will be a period of time before any new officeholders decide which way they want to go on this. To that extent, the letter is simply a recognition of an inevitable position.

For those with a relatively long memory, the same thing occurred in 2000 with the Harmful Tax Competition project. The US could not commit to take the project forward in late 2000 because of the presidential elections, and it was not until well into 2001 that the new administration took a position. The project then fundamentally changed direction in accordance with the US administration's wishes. Some may hope that an incoming US administration in 2021 will breathe new life into BEPS 2.0.

That being said, there are several points that can be made about the reported content of Secretary Mnuchin's letter and the manner of notification.

It is interesting that the US notified its position by letter to the Finance Ministers of the UK, France, Italy and Spain. One assumes that the OECD was copied in, at least as a courtesy. Those are the countries that have Digital Service Taxes (DSTs), and are subject to the US s. 301 enquiry. However, the BEPS 2.0 project is supposed to be a project of the Inclusive Framework, with 137 members. This provides some evidence (of something we already knew): that the Inclusive Framework is not inclusive, and that it is the same OECD member countries that still dominate the discussions.

The timing of the letter is also interesting. On June 2nd the Office of the US Trade Representative announced that it was opening the s. 301 enquiries into the DSTs proposed by 9 countries and the EU. Apparently the letter about Pillar 1 was sent on 12th June. The Financial Times broke the story yesterday evening, 17th June (shortly before the Manchester City - Arsenal match kicked off). So, someone must have leaked it to the FT some time on 17th. Meanwhile, the Steering Group on the Digital Economy has been meeting via video link for the last three days, 15th-17th. There must have been some pretty desperate discussion going on in the fringes of the video meetings to try to keep the US on board, culminating in the US confirming by the end of the meeting that it was still calling for a suspension.

If reports are accurate, the letter suggests that the US is willing to go ahead with discussion towards reaching agreement on Pillar 2 - the minimum tax proposal. That is not too surprising. Pillar 2 is built on the US GILTI proposals, and it is understood to be the US position that, having adopted GILTI, it needed to do nothing to comply with Pillar 2. The real question, therefore, is whether other countries (and the OECD itself) are interested in going ahead with Pillar 2 alone. Many countries saw Pillars 1 and 2 as a package, and the stalled progress on Pillar 1 will give countries that were never very keen on Pillar 2 a perfect excuse for not going ahead. Reaching agreement on Pillar 2, and presumably then the withdrawal of DSTs, could make agreement on Pillar 1 less likely. Countries that have withdrawn DSTs can no longer offer to do that to secure agreement. So, the choice may become: take Pillar 2 now so that the OECD can say it has achieved some success in this area, or hold out on Pillar 2 in the hope that a new administration will move forward on Pillar 1 next year.

The OECD now faces something of a dilemma. Choices for the OECD include abandoning the digital taxation project, keeping it ticking over on the back burner until next year, or suspending work on it until into 2021.

It would be very difficult to abandon work on the digital economy entirely. Recall that taxation of the digital economy was Action Point 1 of the original BEPS Project. Some would say that it was the core reason for the BEPS project. It was the part of BEPS 1.0 that was not completed. Abandoning the work on BEPS 2.0 entirely would mean admitting failure on the BEPS project. It would also mean abandoning the aspirations of those countries that had hoped that the issue of redistribution of taxing rights would be finally addressed (it was excluded expressly from BEPS 1.0).

The OECD could put the project on the back burner and continue to do some work on the detail of Pillars 1 and 2 in the meantime, in the hope that it can keep some impetus going, even without US support. This is perhaps the most likely option as the OECD already has staff working on the two Pillars.

The OECD could put work on BEPS 2.0 on hold completely till the new US administration is in place in 2021. There are, after all, many other agenda items on which the OECD and the Inclusive Framework countries could focus. So far, the OECD's work on Covid has largely focused on cataloguing what actions individual countries have taken; there is a leadership role that needs to be filled here in directing work on tax support for the ending of lock-down, and the longer-term recovery of fiscal systems. There are plenty of other issues to look at: environmental taxation, taxation of wealth and the reduction in disparities of wealth, even taxpayers' rights!

What the incident of this newer Mnuchin letter rams home, however, is the need for a fundamentally new institutional architecture for international tax. At heart, the OECD remains a consensus organisation. Consensus sounds appealing, but what it means in practice is that individual countries - or at least some individual countries - can block progress on important reforms. In particular, it ties work on international taxation to the timetable of the US election process (as it did in 2000). What is needed is a new institutional architecture based on coalition building between states, with states involved on a true basis of equal participation. That either means that the Inclusive Framework has to morph into such an organisation, but to do so it must cut itself off from its OECD roots. Alternatively, and less radical, the old UN Fiscal Commission needs to be revived (with the current UN Tax Committee as an expert body linked to that Commission). Goodness knows, there is enough essential work for that revived Commission to get on with.

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Tracing the origin of MLI - A flashback!

superadmin — Wed, 14 Jun 2017 11:15:59 +0000

Tracing the origin of MLI - A flashback! superadmin Wed, 14/06/2017 - 16:45

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This article was published in the IBFD Bulletin of January 2006.

1. INTRODUCTION

One of the problems which comes with success is how to improve upon it. By any measure, the OECD Model Tax Convention on Income and on Capital is phenomenally successful. In slightly over 40 years since its first draft was published, more than 2,000 double taxation conventions (DTCs) have been concluded, most of them based on the OECD Model or its offshoot, the United Nations Model Double Taxation Convention between Developed and Developing Countries. Being “based on” the OECD or UN Model means that, in most of these DTCs, 90% or more of the text of the DTC follows exactly the wording of the OECD or UN Model. The pattern of bilateral DTCs, concluded between pairs of states for the purpose of coordinating their tax systems, is itself a reflection of the approach endorsed by the OECD.

But with this success comes a major problem: how to improve upon the wording that has become standard in so many individual bilateral DTCs. What if the standard “boilerplate” wording, which constitutes 90% or more of the wording of these DTCs, has become inadequate or out of date or simply merits improvement? One of the most pressing problems in international tax practice at the present time is how to devise a simple system - consistent with the bilateral nature of existing DTCs and the constitutional traditions of the many countries concerned - for amending the wording of large numbers of bilateral DTCs in a short period of time.

The traditional method of updating and amending bilateral DTCs has been the conclusion of an amending protocol between the two contracting states. That method is always available if the two states wish to change the wording of the DTC, not because of any fundamental issue between them, but simply because the OECD Model boilerplate needs updating. The negotiation of large numbers of bilateral protocols, however, is time-consuming, and it runs the risk that one or both contracting states may wish to open up other issues during the negotiations which can delay or even terminate the process. In addition, in countries that have a parliamentary procedure for the approval of DTCs and their protocols, in principle each protocol must be taken separately through this procedure.

The United Kingdom, for example, has more than 100 comprehensive DTCs in force. Amending these DTCs, even if only to reflect changes in the OECD Model, would require an enormous effort in negotiations. In addition, each protocol concluded would need to be taken through the scrutiny committee in Parliament by a separate Order in Council. More realistically, if the United Kingdom decided to update the wording of its existing DTCs, this is likely to form part of the general process of updating the UK's DTC network; based on present practice, it would take 15 to 20 years before most of the network was updated to reflect the new form of words.

2. AMENDMENTS TO THE OECD COMMENTARIES

In light of the difficulty in amending large numbers of bilateral DTCs, the OECD's preferred approach in recent years has been to make few amendments to the articles of the OECD Model itself.[1] Instead, the OECD's preferred approach has been to amend the Commentaries, which were adopted alongside the OECD Model. As a result, the Commentaries have been amended - sometimes to major extent - on average every two years over the last decade.

Amending the Commentaries, however, is far from an adequate solution to the updating of the texts of DTCs themselves. There are several problems with this approach. First, the exact status of the Commentaries remains unclear as a matter of international law, though courts in a growing number of countries have referred to the Commentaries as an aid to interpretation. There is a view, however, that the more frequently the OECD amends the Commentaries, the less authority the Commentaries have. Even if a court is willing to refer to the Commentaries, the wording of the Commentaries cannot alter or override the clear wording of the articles of a specific DTC. Frequent amendment also makes it difficult to determine exactly what was the wording of the Commentaries at a particular time. Major doubts remain as to whether amendments to the Commentaries can have any impact on DTCs concluded prior to the amendments or to tax years prior to the amendments.[2] In some cases, the amendments to the Commentaries state that they merely clarify a pre-existing view adopted by the OECD Member countries. Even where this is stated, it cannot be certain that a court will accept the amended Commentaries as a reflection of the pre-existing meaning. Since amendments to the Commentaries are published after approval by the OECD Committee on Fiscal Affairs (CFA) and by the Council of the OECD, the exact date on which an amendment to the Commentaries was made may be difficult to determine and is unlikely to coincide with the beginning or end of a tax year in particular states.

For a whole variety of reasons, therefore, amending the OECD Commentaries is not a substitute for amending the articles of the OECD Model itself where what is really needed is a change to the wording of the articles. Correlatively, where change is needed, there is no substitute for amending the actual terms of specific DTCs between pairs of contracting states.

3. EXAMPLES OF THE NEED TO CHANGE THE WORDING OF ARTICLES OF DTCs

It may be helpful to give some examples of instances where it would be desirable to change the wording of the articles of specific DTCs and where amending the OECD Commentaries would not suffice.

A simple example is where the articles of the OECD Model are themselves amended. For example, the July 2005 version of the OECD Model contains a number of amendments to Art. 26 on the exchange of information. These amendments were prepared by Working Party No. 1 and approved by the CFA and the Council of the OECD. Though Austria, Switzerland, Belgium and Luxembourg have made reservations on Art. 26, the vast majority of the OECD Member countries clearly accept the new wording of Art. 26. Assuming that each of these countries adopts the new wording for future treaty negotiations, it will take decades before the new wording is reflected in the majority of DTCs in force.

A second example where it would be helpful to have a method for the rapid amendment of large numbers of DTCs is where translation errors come to light. A recent project on the translation of the OECD Model into Spanish and Italian identified a not insignificant number of occasions where the existing texts of DTCs in those languages do not accurately reflect the English and French texts of the OECD Model, even though the Spanish and Italian texts were intended to do so. Where a project like this identifies a number of errors in translation, it would be helpful to have a simple and rapid system for bringing all those language versions into line with the versions adopted by the OECD.

An extremely good example of the need for a method to amend the wording of large numbers of DTCs is the current work of the OECD on the attribution of profits to permanent establishments. [3]This work was, quite expressly, [4]not constrained by the existing wording of Art. 7 of the OECD Model. The Working Party determined the most appropriate approach to the attribution of profits, even though that approach might not be consistent with the existing wording of the OECD Model.

As the work progressed, views have varied as to whether implementation of the authorized OECD approach would require amending the wording of Art. 7, whether it could be achieved simply by amending the Commentary on Art. 7, or whether an alternative approach might be needed. At the very least, most people accept that, if the OECD adopts the authorized approach as the only correct approach to the attribution of profits and no changes are made to the wording of Art. 7, there will be a period of substantial uncertainty in many countries before it becomes clear whether or not the courts of that country will accept that the authorized approach is consistent with the wording of existing articles based on Art. 7.

Because there have been few amendments to Art. 7 since it was first published in 1963, the vast majority of DTCs currently in force contain wording similar to that in Art. 7. In particular, virtually all contain reference to the “separate enterprise” concept. How attractive it would be if any uncertainty could be removed by amending all, or virtually all, the business profits articles in existing DTCs by introducing wording that clearly supports the authorized approach. At present, however, there is no method for achieving this, and a highly unsatisfactory period of uncertainty may be the outcome. In the final analysis, the courts in some countries are likely to find that the authorized approach is not consistent with the existing wording of Art. 7, and even greater disparity between the practice of states will have resulted.

A final example where it would be useful to have a method for amending large numbers of existing DTCs in a single and rapid process has arisen within the European Union. Though at present the issue is under debate, increasingly views are being expressed that the existing DTCs between the 25 EU Member States may need to be amended to bring the DTCs into conformity with Community law. Exactly what, if any, changes are needed may become clearer over the next few years. To take one example: suppose that it becomes clear - e.g. as a result of a decision of the European Court of Justice - that the articles of all existing DTCs dealing with associated enterprises and with the mutual agreement procedure need to be amended to ensure conformity with the 1990 Arbitration Convention.[5]One suggestion that has been mooted is for the European Commission to prepare a form of words which could be adopted by the Member States in their DTCs. The question then arises as to how this wording might be incorporated into existing DTCs. Again, a simple and rapid process for amending multiple bilateral DTCs would be highly desirable.

4. SOME POSSIBLE SOLUTIONS TO THE PROBLEM

One possible solution to the problem of multiple amendments of bilateral DTCs is for the CFA, when it adopts an amendment to an article of the OECD Model, to also adopt a standard form protocol that a pair of states could conclude in order to incorporate the amendment into their existing bilateral DTC. This has the attraction that it preserves the essentially bilateral nature of DTCs, particularly given that some governments seem averse towards any move which suggests a growth of multilateral agreements in the direct tax area.

The preparation of standard form protocols, however, is not an ideal solution. These protocols would require a degree of separate negotiation: for example, the two countries would need to ensure that the protocols reflected their particular treaty practice and would need to identify the treaty article being amended and the effective date of the amendment. In countries having a parliamentary procedure for the approval of such protocols, each one would need to go through this procedure. Presumably, in some way, the CFA would have to indicate that the standard protocols could only be adopted in exactly the form approved by the CFA. If pairs of states altered the wording of the protocol or began to enter into wider negotiations around the protocol, much of the purpose will have been defeated.

As an alternative to standard form protocols, a more efficient solution advocated here is the adoption by the OECD of multilateral framework agreements for amending existing DTCs.

Under this approach, when the OECD decided that it is necessary to amend the wording of the OECD Model which is found in a large number of existing bilateral DTCs, the OECD would prepare a multilateral agreement, which would be concluded between all the OECD Member countries (and be open to non-OECD countries), to provide a framework for the amendment. The agreement itself would not make any amendments. Instead, it would provide a framework within which individual pairs of states could agree that the amendment in the framework agreement would apply to their existing bilateral DTC. The simplest method for doing so would be for the framework agreement to provide a declaration, signed by the representatives of the two states, to be deposited with the Secretary General of the OECD. The framework agreement would then set out the consequences of the declaration. In particular, the agreement would provide for the amendment to be made to the wording of the existing DTC. No further changes would be permitted or necessary: the procedure would be as simple as possible.

As a matter of public international law, there is no reason why a bilateral convention cannot be amended by a multilateral convention. [6]The attraction of a multilateral framework agreement, however, is that it preserves the essentially bilateral nature of DTCs by providing for the amendment to be made through a bilateral declaration.

The declaration signed by each pair of states would need to contain certain essential information. It would identify: (a) the DTC to be amended, (b) the particular article and paragraph of the DTC to be amended, (c) the effective date or dates of the amendment in each contracting state, and (d) the language or languages in which the amendment was adopted. [7]The multilateral framework agreement would contain the amended wording in the OECD's working languages of English and French plus, in all probability, two or three other languages commonly used - for example, Spanish and German. Where one or both of the pair of states concluding a declaration used another language, that other language version would be appended to the declaration. This would mean that the amended wording appeared in the same language versions as the original DTC.

Proceeding by way of a framework agreement that facilitates the amendment of existing DTCs has many advantages. First, because the amended wording fits into an existing DTC, there is no need to repeat all the definitions and other contextual material that appear in the existing DTC.

Second, the process of making a declaration within the framework of a multilateral agreement should simplify the process of making multiple amendments. Where, for example, the members of the CFA agree on an amendment to the OECD Model, each state effectively signals its willingness to conclude a series of declarations with its existing treaty partners to make the agreed amendment.

The process is not, of course, in any way restricted to the OECD Member countries. The framework agreement could provide that any state could become a party to the multilateral framework agreement and then conclude declarations with the other states with which it has a DTC.

This approach should also simplify the parliamentary procedures in countries where they are necessary. If, for example, a country became a party to the multilateral framework agreement and then concluded declarations with a significant number of its treaty partners, the multilateral agreement (with the relevant declarations appended) could go through the parliamentary procedure as a single item, at a single sitting. For example, if the United Kingdom concluded declarations with e.g. 40 of its treaty partners, a single Order in Council could bring into force the multilateral framework agreement together with the 40 declarations appended to it, and this would operate as an amendment to each of the 40 existing DTCs.[8]

A draft of a possible multilateral framework agreement is attached as an appendix to this article.

5. CONCLUDING REMARKS

Something needs to be done about the runaway success of the OECD Model. So much of the existing system of international tax law relies on a network of bilateral DTCs. This network, however, needs to be capable of flexibility and of development so that existing DTCs can be amended to take account of new circumstances and new thinking. The existing methods of amending the network - by individual protocols or by the unsatisfactory compromise of amendments to the OECD Commentaries - are inadequate to the task. A new process is needed. Hopefully, this article goes some way to suggest a possible solution to the problem.

APPENDIX: DRAFT MULTILATERAL FRAMEWORK AGREEMENT

The States Parties to this Agreement

Desiring to provide a framework for the expeditious amendment of provisions contained in existing conventions for the avoidance of double taxation

Have agreed as follows:

Article 1 States Parties to this Agreement may, after the date of entry into force of this Agreement, conclude a Declaration in the form set out in Schedule 1 to this Agreement, and either State may then deposit the Declaration with the Secretary General of the Organisation for Economic Co-operation and Development. The conclusion of such Declaration shall have the consequences set out in Article 2 below.

Article 2

With respect to those States whose names appear in Parts 1 and 2 of the Declaration, the convention (by whatever name known), brief details of which are set out in Part 3 of the Declaration, shall have effect from the date or dates specified in Parts 4 and 5 of the Declaration as if the provisions contained in Schedule 2 to this Agreement were inserted in place of the provisions identified in Part 6 of the Declaration (and any renumbering of the provisions of the convention shall follow accordingly). The language version or versions of the provisions inserted shall be that or those specified in Part 7 of the Declaration together with any other language versions which the States Parties to the Declaration may append to it.

Article 3

Any State, whether a member country of the Organisation for Economic Co-operation or not, may become a party to this Agreement by depositing the instruments of accession with the Secretary General of the Organisation.

Article 4

This Agreement shall enter into force on the _____ day of _____ in the year _____.

In witness whereof the undersigned Plenipotentiaries have signed this Agreement.

Done at Paris on the _____ day of ______ in the year ______.

Schedule 1: Form of Declaration

Declaration in accordance with the Multilateral Framework Agreement dated the ____ day of _____ in the year _____.

Part 1: (name of State A)

Part 2: (name of State B)

Part 3: (date and title of the existing double taxation convention to be amended)

Part 4: (date from which the amendment takes effect in State A)

Part 5: (date from which the amendment takes effect in State B)

Part 6: (article [and paragraph] number in the existing convention which is to be amended)

Part 7: (language version(s) of the amending wording)

Signed on behalf of State A:

Signed on behalf of State B:

Schedule 2: Amended text for insertion

(1) ....

[1] For example, the 2005 update to the OECD Model makes amendments to Art. 19 (Government service) and Art. 26 (Exchange of information)

and a minor amendment to the French text of Art. 15 (Income from employment), but otherwise leaves the OECD Model unchanged. At the same time, the amendments to the Commentaries are extensive.

[2] See, for example, Lang, M., “Later Commentaries of the OECD Committee on Fiscal Affairs ...”, Intertax (1997), at 7. See also Avery Jones, John F., “The Effect of Changes in the OECD Commentaries after a Treaty is Concluded”, 56 Bulletin for International Fiscal Documentation 3 (2002), at 102 (summarizing the discussion in the OECD/IFA seminar at the IFA Congress in 2001).

[3] See OECD, Discussion Draft on the Attribution of Profits to Permanent Establishments, Parts I to IV.

[4] Id., Part I, Para. 3.

[5] Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.

[6] See Aust, A., Modern Treaty Law and Practice (Cambridge University Press, 2000), Chap. 12.

[7] The assumption here is that the language version(s) adopted would be the same as the language(s) in which the original DTC was concluded. On that basis, the declaration would simply replace the wording in the various language versions, and any rules in the original DTC dealing with priority between language versions would then apply.

[8] Sec. 788 of the Taxes Act refers to arrangements specified in an Order in Council made “in relation to any territory”; assuming that the singular includes the plural, the arrangement could be made in relation to multiple territories.

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UK and Indian retroactive tax law - A world of difference

superadmin — Mon, 16 Apr 2012 06:35:53 +0000

UK and Indian retroactive tax law - A world of difference superadmin Mon, 16/04/2012 - 12:05

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Philip Baker

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Retroactive Tax Legislation in the United Kingdom

In recent weeks, much attention has been paid to the use of retroactive tax legislation in the United Kingdom, and comparisons have been made between that practice and the proposed retroactive changes in the Indian budget announced on 16^th March 2012. Many of these comments have been ill-informed, and have failed to reflect an accurate understanding of theUK practice. This practice is explained here.

There is no absolute ban on retroactive tax legislation in theUnited Kingdom, though such legislation is rarely adopted. The United Kingdom has no written constitution under which retroactive tax legislation can be challenged; however, for policy reasons retroactive tax legislation is generally avoided, and such legislation can be (and on some occasions has been) challenged for conformity with the provisions of the European Convention on Human Rights. In general, retroactive tax legislation is only adopted either (i) to counter highly artificial tax avoidance schemes, or (ii) occasionally, after a court decision, where the judgment was contrary to the generally understood tax law position and the result of the decision is likely to have major impact, for example on existing commercial arrangements. Since the 1970s, there have been strict guidelines for the procedures to be followed and approvals to be obtained before retroactive legislation is enacted.

While a fully comprehensive survey of all tax legislation over the last 70 years has been impossible, a careful examination has identified only 11 (eleven) occasions since the end of the Second World War in 1945 when retroactive tax legislation has been enacted in the UK to impose a tax burden where none existed before (or a higher tax burden) on taxpayers in the income or corporation tax field.

Two examples of the quite specific and very limited scope of retroactive tax legislation may clarify the UK practice.

References have been made in the media to the change in 2008 to deal with “post-Padmore Schemes”. There is quite a long history here. In the early 1980s, a Mr. Padmore was one of the UK-resident partners in a partnership established inJersey. He argued that the profit he earned from working in theUnited Kingdomfor the partnership was exempt from all UK income tax because of the UK-Jersey tax treaty. The Inland Revenue challenged his claim and won before the first-level tribunal. However, on appeal, the High Court in December 1986 held that Mr. Padmore was exempt from UK tax, and this decision was upheld by the Court of Appeal. There was then a danger that individuals resident in the United Kingdom would set up similar partnership. So, at the time of the budget in 1987, theUKChancellor announced that legislation would be introduced to restore the previous understanding of the law and this amended legislation would apply for all tax years, including previous tax years. This effectively denied the advantages of the tax avoidance scheme to people who had sought to enter into such partnerships during the previous six years (the usual period for which the Inland Revenue could reopen assessments), so this 1987 legislation had an element of retroactivity about it. An important factor was that Mr Padmore (and some others who had gone to court against the Revenue) were excluded from the tax charge: to respect the rule of law, court decision in favour of taxpayers were “grandfathered” and excluded from the retroactive effect.

During the early 2000s, it came to the attention of the Inland Revenue that a variation on the original Padmore Scheme had been developed by some tax planners, which was designed to circumvent the 1987 legislation. The 1987 legislation said that any UK-resident individual who was a member of a foreign partnership could not rely upon a tax treaty to obtain exemption from tax on income earned in theUnited Kingdom. The new variation on the scheme drove a coach and horses through this legislation by using trusts, set up usually in the Isle of Man. Under the new scheme, the UK-resident individual did not personally become a member of the foreign partnership; instead, one or two trusts established by the individual for his own benefit became the partners in the partnership.

This highly artificial scheme, designed specifically to circumvent the 1987 legislation, was widely marketed by some tax consultants. The Inland Revenue learnt that individuals such as consultants in hospitals were using this scheme to try to avoid all UK tax on their UK-source income. In practice, these individuals simply signed a couple of documents, paid a cheque to their tax advisors, and assumed that this artificial scheme wiped out their UK tax liability.

Given that the UK had legislated in 1987 to counter the original “Padmore scheme”, individuals who entered into this new, “post-Padmore” variant could have had no realistic and legitimate expectation that their tax avoidance arrangements would have been successful. In 2008, the UK Government legislated to amend the legislation that had been introduced in 1987 and did so with effect for all years. The result was that for years prior to 2008 that were still open to assessments, the scheme failed to avoid tax.

This was a wholly egregious, highly artificial and aggressive, marketed tax avoidance scheme, and no-one entering into the scheme had a legitimate expectation that the scheme would work to avoidUKtax on their UK-source income. This illustrates the relatively extreme circumstances where retroactive tax legislation is used in theUnited Kingdom.

A second example that has been discussed in the Press is one that arises from the Finance Bill that is currently (i.e. in April 2012) before the UK Parliament. It concerns an arrangement entered into by banks, most specifically Barclays, to buy back their debt without generating a taxable profit.

For much of the last twenty years, various banks, including Barclays, have been involved in structured finance arrangements, some of which have involved artificial arrangements designed to obtain a tax advantage not intended by the legislation. An example is the so-called “STARS” transactions, which are currently the subject-matter of litigation in the United States. Because of their involvement in complex tax avoidance arrangements, in 2009 the United Kingdom Government promulgated a “Code of Practice on Taxation for Banks”. Banks that signed up to the Code agreed to cease any artificial tax avoidance activities. Barclays signed up to this Code.

Towards the end of 2011, it came to the attention of HM Revenue & Customs that a bank (understood to be Barclays) was involved in an arrangement involving debt buyback. The arrangement did not appear to HMRC to be in accordance with the intention of legislation adopted in 2010, or the Code. In February this year, the UK Government announced that it would legislate in this year’s Finance Act to amend the 2010 legislation to defeat this scheme. In general, the changes would operate only from the date of the announcement; however, an aspect of the changes would operate from the beginning of December 2011. In effect, this denied the bank (thought to be Barclays) the benefit of the arrangement it had entered into.

This recent example of legislation operates retroactively for less than three months. It does so to target one particular arrangement that the Revenue have been aware of since the end of 2011. It does so in conformity with published codes of practice.

These two examples, in 2008 and 2012, show the infrequent and targeted use of retroactive tax legislation in theUnited Kingdom. Both were concerned with arrangements where the participants had no expectation that they would be able to retain the tax benefits that they had hoped to achieve.

Since the 1970s, the United Kingdom has had published principles that identify the circumstances and procedures when retroactive legislation may be enacted. Originally, these were found in the “Rees Principles” which were first announced in a Parliamentary debate in 1978. Under those principles, retroactive legislation would only be enacted where there had been: a precise warning identifying a specific tax avoidance scheme; discussion by the Government with representative bodies; the publication of draft legislation as soon as possible; and the enactment of that legislation in the next available Finance Bill.

After the current coalition Government came to power, HM Revenue & Customs published for discussion in 2010 a draft Protocol on the announcement of such retroactive tax legislation. This Protocol was adopted in March 2011 and replaces the Rees Principles. To ensure that the UK Government respects this Protocol, it is monitored by a committee of tax professionals.

A survey has identified that, in the years since 1945, retroactive changes to impose a new or higher tax charge in the UK direct tax system have occurred on only 11 occasions. Nearly all of these have been to counter aggressive and artificial tax avoidance schemes. On every occasion that has been identified, any taxpayer who had successfully won a final court decision in their favour was “grandfathered”, so that the amended legislation did not adversely affect them. This respects the rule of law by not overturning decided court cases.

To compare the relatively infrequent and targeted use of retroactive tax legislation in the United Kingdom with the wholesale announcement of broad retroactive changes to tax law which were announced inIndiain March, is to show a total misunderstanding of the UK position. To state that the UK uses retroactive legislation, therefore the proposed changes in India should be regarded as acceptable, is to fail to understand the differences between different types of retroactive tax legislation. Not every type of retroactive tax legislation is the same: there is a world of difference between the occasional use of targeted changes designed to counter specific tax avoidance arrangements where the participants in the arrangements had no legitimate expectation that they would be successful, and the type of wholesale retroactive changes to the tax law that are proposed in India.

To draw a parallel: at the time of the Boer War at the turn of the 20^th Century, the British Government used “concentration camps” in South Africa to hold families of their Boer enemies. The practice was highly regrettable. However, to suggest that the British did this, therefore the German concentration camps of the Second World War period were no different, fails to recognise the immense difference.

In the same way, not all retroactive tax legislation is the same. To the contrary, the very narrow, targeted, and procedurally safeguarded circumstances in which the UK employs retroactive tax legislation shows how enormously different are the proposals in India from the practice in the UK (and, for that matter, in the vast majority of other countries).

Nature of issues

retroactive legislation

Retroactive tax

UK direct tax system

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