UK Withholding Tax Treaty Relief – Taxpayers Gain
HMRC’s rejection of the claim was based solely on DTT Section 12(5), which denied relief where it was a “primary purpose…of any person affected by the creation or disposal of the claim … to benefit” from the relevant provisions of the CDI. It has been argued that this anti-avoidance rule applied because the claim was ultimately acquired by the Irish company from a Cayman-incorporated company which itself would not have been able to recover the UK WHT , the economic effect of the transaction price being to share the benefit of the UK WHT recovery between the parties.
While the case was based on the facts, the decision notes that HMRC’s lawyer admitted that a natural inference from HMRC’s position was that any similarly worded anti-avoidance rules would block access to benefits of the treaty in all cases where a buyer in a treaty jurisdiction acquires collateral from a seller in a non-treaty jurisdiction, the market price reflects the fact that some market participants have less exposure to UK WHT , and the seller is aware that the buyer is such an actor. Essentially, HMRC argued that a seller in this scenario should be understood as having the primary purpose of seeking to benefit from the DTT relief provisions between the UK and the buyer’s jurisdiction.
As the FTT noted, this stance (if correct) could have “a huge impact” on the market. This is particularly the case, given that there is a clear overlap with the TPP now included in many UK TDIs who may refuse treaty benefits if “obtaining that benefit was one of the primary purposes of any agreement or transaction which directly or indirectly gave rise to this advantage”. .
Although the FTT decision contains many points of interest, for those considering the application of the TPP to typical market transactions, the focus will be on the FTT’s reasoning for rejecting HMRC’s arguments on this point.
Firstly, the FTT considered that, given the potential impact on the market, HMRC’s position could not reflect the intended scope of Article 12(5).
Second, while strongly rejecting the idea that Article 12(5) and its equivalents could only apply to transactions involving “artificial” elements, the TTF concluded that, in context, it required ” something more” than the simple sale of a receivable at a market price which reflects the fact that certain market participants have tax attributes that the seller does not have. In particular, when it comes to an outright sale, the FTT considered that the sole objective of the seller would be to realize the claim at a price reflecting the market.
While this conclusion will be reassuring with respect to other transactions involving outright sales, the distinction made by the FTT between this scenario and those in which the seller retains an indirect economic interest in the receivable (considered a typical feature of “treaty shopping (arrangements) leaves room for debate as to the status of less straightforward transactions, for example, it is unclear how the TTF would value equity lending and repurchase transactions which constitute a significant portion of the market.
Transactions of this type frequently form “chains,” limiting many participants’ visibility into who (if anyone) will ultimately seek redress and under what treaty. In this context, the FTT’s view that this kind of visibility was essential for Article 12(5) to be effective may become particularly significant. However, as with much of the FTT’s analysis, the key question will be to what extent this finding (if upheld on appeal) can be read within the context of the TPP and the provisions similar.