I. I. BRAIDE
BSM 151: COMPARATIVE INTERNATIONAL TAX LAW
WORD COUNT: 5110excluding footnotes
CITL COURSE WORK 2012
Scotia a small oil and gas producing state has a number of DTR Conventions which follow the form of the OECD Model. Its convention with its neighbour Anglia is particularly advantageous reflecting the good relationship with this neighbouring state. However, Scotia has become concerned about the way some individuals and corporations from beyond its boundaries are using its convention with Anglia.
Despite heavy flows of money through the treaty route, there appears to be little advantage to either Scotia or Anglia.
1. Consider why this might be the situation.
2. Discuss the formal steps and legal techniques Scotia might take, to reduce what it sees as an abuse of its treaty network using specific examples from the international experience, current and past.
3. What particular issues might be relevant to the situation in relation to UKCS and oil and gas production?
Approximately 5000 words and submitted by 14th December 2012 1pm.
Contents Pages
Introduction……………. 4
An overview of the situation……………….. 4- 5
Tax Treaties……………….. 5- 6
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Abuse of Tax Treaties……………………………………….6- 9
Tax Havens………………………………………………………………9- 10
Effects of Tax Havens on Tax Revenue………………… 10- 12
Considering the situation at hand…………………………… 12- 13
Tax Havens and Tax Evasion……. 13- 14
Tax Avoidance and Tax Evasion…………… 14- 16
Steps and legal techniques to reduce an abuse of treaty network……. 16- 20
Relevant issues in relation to the UKCS and Oil & Gasproduction. ………20- 22
Conclusion………………. 22- 23
Bibliography………………..23- 25
Introduction
This paper will explore the activities of tax havens, tax treaties and the relationship with non tax havens. tax haven activities enhance the activities in nearby non-havens. Double taxation conventions, which are an essential element in facilitating economic relations between states and encourage flows of capital and labour; and the impact of bilateral tax treaties on foreign direct investment FDI, will beanalysed. Treaty formations may actually reduce investment more than they reduce tax evasion. The invasion of other countries on the treaty convention Scotia enjoys with Anglia will be critically analysed. There appears to be little advantage to either Scotia or Anglia as other individuals and corporations have found a tax haven in their territory. This situation has allowed investors to slash their tax bills by channelling money that is destined there. In-depth studies will be devoted to the formal steps and legal techniques of how Scotia should tax foreign investors, to reduce what it sees asan abuse of its treaty network using specific examples from the international experience, current and past. Relevant issues to the situation in relation to the UKCS and oil and gas production will be highlighted.
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Although taxes are compulsory contributions imposed by relevant authorities to the citizens it should be noted that it enable such authorities in provision of public goods and services that can be used by all citizens without discrimination. In essence, taxes are said to be a source of revenue which can be utilized to meet the requirements of the members of the public. From the constitution of the ...
An overview of the situation.
Regulatory dialogue between states with widely diverging tax systems has emergedas a key feature of Organization for Economic Cooperation and Development(OECD), International Monetary Fund (IMF), and European Union (EU) initiativeson Offshore Finance Centers (OFCs) or tax havens. This has broughttogether states of differing dimensions in size, population, economy, and power.
Where there is a discrepancy in power between states there is often a temptationto assert a command-and-control regulatory approach. This was the initialreading of the OECD’s Harmful Tax Practices Project that demanded tax havens—mostly small states in Europe, the Pacific, Indian Ocean, and the Caribbean—repealfinancial secrecy legislation and commit to Tax Information Exchange Agreements (TIEAs).
As these initiatives have unfolded there has been a transition away fromregulation by command-and-control towards responsive regulatory dialogue in whichtax havens have been encouraged to cooperate through engagement and activeparticipation.
Offshore Finance Centers have come under increasing international scrutinyas sites of questionable tax planning activities and potential money-launderingconduits, gaining pace in 1998 with the release of the OECD’s report on“harmful tax practices.”
Tax treaties
Tax treaties are bilateral agreements between countries, which is designed to facilitate commerce and minimise double taxation of income and gains. Without tax treaties, taxpayers would be subject to double taxation on income and it could hinder global business transactions.
It also prevents tax evasion through an open exchange of information ensuring that residents are not subjected to discriminatory tax treatments in foreign jurisdictions and providing certainty to residents regarding their potential tax liabilities abroad.
This is in order to reduce the burden of double taxation that would arise in the absence of international agreement. Transnational investment and global welfare will be enhanced if double taxation is alleviated. States seek to negotiate and agree on treaties with other states in order to mutually divide and share tax jurisdiction. There are over 2500 bilateral tax treaties now in existence, of which most are based on the OECD and UN models.
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Tax treaties are considered international agreements under public international law and are subject to interpretation according to international law principles. Rules for the interpretation of international agreements are laid down in the Vienna Convention on the law of Treaties, VCLT. Articles 31-33 VCLT, deals with the “interpretation of treaties”, and provides the framework for assessing the role of the OECD Model Convention and the OECD Commentary in the interpretation process. It is generally recognised that the rules on interpretation contained in the Vienna Convention codify existing international customary law. They thus apply to all international treaties.
However, tax treaties have been exploited and abused by states or corporations who, in the first instance, are not meant to benefit from these treaties. These abuses are discussed below;
Abuse of tax treaties
Treaty shopping
Tax treaties are subject to abuse because of the fact that they reduce tax liabilities. A common form of abuse is when a tax payer resident in a country not party to the treaty attempts to gain access to the benefits of that treaty agreed on by other nations.
A tax treaty reflects a balance of advantages agreed to by the contracting states when the treaty is negotiated. Treaty shopping occurs where this balance is undermined by persons who are not resident in either contracting state seeking treaty benefits that would not directly be available to them. The OECD published an influential report on this issue called the (‘OECD Conduit Report’) in 1987.
Disadvantages of treaty shopping
The following year, the UN published its own report on treaty shopping (‘UN Treaty Shopping Report’), where it described treaty shopping but reached different conclusions about its acceptability. In that report, an example of three countries, Canada, Netherlands and Bermuda, was given as an illustration. An enterprise resident in Bermuda wished to invest in Canada. There is no tax treaty between Canada and Bermuda and if the Bermudian enterprise invested directly with Canada, it would face the prospect of paying Canadian Capital Gains Tax on investment and Canadian Withholding Tax on any dividends or interest payments it received. Instead, the Bermudian enterprise turns to the Netherlands to invest indirectly in the Canadian company. In the OECD Conduit Report, the entity based in the Netherlands acts as a ‘conduit for channeling income’ from Canada to Bermuda. The OECD Conduit Report observed that such an arrangement acts to the detriment of the host state because throughthe treaty it has ceded tax jurisdiction to the conduit’s purported state of residence.
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Absence of Reciprocity
In the OECD Conduit Report, the main concern put forward was that treaty shopping doesn’t encourage reciprocity. Treaty benefits negotiated between two contracting states are extended to third country residents without that country having to make any concessions of its own. For instance, Canada’s tax treaties are meant to provide benefits to residents of Canada and residents of its treaty partner on a reciprocal basis. The concern is that, if third- country residents are able to exploit Canada’s tax treaties to secure reductions in Canadian source taxation, the benefits would flow in only one direction: third country residents would enjoy Canadian tax reductions for their Canadian investments, but Canadian residents would not enjoy reciprocal tax relief fortheir investments in that country. The OECD commentary lays emphasis on the fact that treaty shopping does not agree with the balance of advantages negotiated in the particular treaty.
Exemption of Income from Tax
The OECD identified that treaty shoppingarrangements may result in transnational income being exempted from taxationaltogether or being subject to ‘inadequate taxation’.Put simply, the OECD’sview is that tax treaties are designed to prevent double taxation, not to create double non-taxation, a view which is reflected throughout the current OECD Commentary. There have been arguments from various commentators that existing treaties based on the OECD Model and the UN Model cannot easily be seen as serving the objective of preventing double non-taxation.
The UN Treaty Shopping Report suggests that developing countries may have double non- taxation as a goal of their tax treaties. Developing countries that grant reliefs on inward investment may regard it as desirable that equal relief be granted in the other Contracting States in order to avoid frustration of their own reliefs. India has been aggressive in challenging structures involving investments routed through its treaty partner Mauritius, because Mauritius imposes minimal taxation on foreign-owned investment entities.
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Discourages incentives
The OECD and UN identified that treaty shopping destroys the incentive forcountries to negotiate and conclude new treaties. In the conduit arrangementdescribed above, the state where the ultimate investor is resident (Bermuda) has littleincentive to enter treaties of its own when its residents can simply take advantage ofother state’s treaty networks.Thus the practice is inconsistent with the laudable goalsof enhanced global tax harmonization and inter-nation equity. In particular, tax havenstates will continue to dwell outside treaty networks, depriving both developed anddeveloping nations of public funding that would otherwise be generated throughtaxation.
Tax Havens
Tax havens have simply been described as a country that doesn’t seek to attract real investment, but instead promotes tax evasion to attract and increase foreign capital held in its jurisdiction through the use of lenient tax laws and strict bank secrecy.
Switzerland is one of the oldest and the best known tax haven in the world. Tax evasion was considered a civil rather than a criminal offence in Switzerland. It became a criminal offence when the Swiss Banking Law of 1934 was passed. The Cayman Islands, which is one of the largest offshore banking centers, is a well known tax haven as well.
The Effects of Tax Havens on Tax Revenue
Lost Tax Revenue
Tax Havens cause a decrease in the tax revenue of a state. In 2006, the US senate published a report that offshore tax havens hold over $11 trillion of high-net-worth individuals assets worldwide. As a result of offshore accounts, these individuals evadeabout $40 to$70billion in US taxes each year. If this figure is combined with the Internal Revenue Service (IRS) estimates of corporate tax evasion through the use of tax havens by corporations, the total loss in tax revenue will be much higher.
Worldwide estimates of lost Tax revenue
The high foregone tax revenue in the US represents only a fraction of the global problem. As of March 2005, it was estimated that over $255 billion in tax revenue is lost worldwide on account of tax havens each year. Individuals, who had $1million or more of liquid financial assets, were located in offshore accounts. Apart from industrialized states, developing countries are losing tax income too as a result of tax evasion of their rich elites. These lost tax revenues could help fund the creation of additional and necessary commercial infrastructures, improve the quality of education and healthcare systems, and provide funding for various other important public programs that would enhance the overall standard of living in developing states.
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Tax Havens decrease Aggregate Social Welfare
Free market competition existing between firms, facilitates efficiency, innovation and social welfare. This is a general view among economists. Each state should be able to provide public goods like infrastructure and education that is paid for by either low or high taxes. States, with a democratic setting, can maximise its citizens’ social welfare by enacting tax laws that reflect the citizens’ preferences as to the portfolio of public goods provided. If a citizen disapproves of the laws enacted, they can relocate to a country that provides the desired level of taxation and public goods to increase and maximise utility.
Tax Havens divert economic activity
Tax havens accelerate the process of tax competition between governments.Countries competing for mobile foreign investment may have incentives to reduce taxes to levels below what they would be in the absence of foreign competition. There are circumstances in which international tax competition drives optimizing governments to reduce all capital tax rates to zero. Tax havens creates an opportunity of tax avoidance, allowing other countries to maintain high capital tax rates without suffering dramatic reductions in foreign direct investment. This situation brings about the proliferation and widespread use of tax havens, which may retard what, would otherwise be an aggressive competition between other countries to reduce taxes in order to attract and maintain investment.
Tax haven abuse can be controlled by a number of means:
Pressure from the OECD and EU- Members of these bodies can unite by speaking with one voice against tax havens with economic and trade sanctions.
Transfer Pricing Rules- This can be used to limit tax haven abuse. The disadvantage is that it applies to only non- arm’s length transactions and it does not cover all types of haven abuse.
Company Residence Rules- The failure of governments to adequately define company residence for tax purposes has resulted in tax abuse.
Exchange Controls- This may prevent transfer to havens. With the deregulation of the financial and foreign exchange markets, exchange controls are no longer appropriate for dealing with tax havens.
Considering the situation at hand.
Back to the situation at hand, despite heavy flows of money through the treaty route, there appears to be little advantage to either Scotia or Anglia. The question mentions a “heavy flow of money” which is similar with the India- Mauritius treaty situation. A recent article in the wall street journal, threw more light on the 1983 India- Mauritius tax treaty. There was an influx of foreigners who rushed to set up companies in Mauritius to benefit from its tax treaties, boosting employment and living standards. Setting up a company there was cheap, as low as $10,000 while the gains of doing business were enormous. Companies like JP Morgan Chase, Citigroup and Pepsi now have sister companies in Mauritius. The two countries have had several talks to revise the treaty and crack down on the illicit flow of funds, brought about by the tax avoidance of foreigners.
India is making efforts to check abuse of double taxation. It was noted that investors routing their investments through Mauritius into India, don’t pay capital-gains tax either in India or in Mauritius. Mauritius became an attractive route for investments by third-country residents into India through treaty abuse.Under the treaty, investors sending money into India can’t be taxed by India because they pay capital-gains tax in Mauritius at a very little rate. This is a huge advantage to investors.
Exactly what illicit financial flows are and how they affect the developing world can often be abstract and difficult to understand. In a Prezi presentation, Ann Hollingshead described illicit financial flow as flows of money that are illegally removed from developing countries. They are sometimes proceeds of money laundering, crime, terrorists financing, the wealth of a rich man who is evading taxes on his income or a corrupt official who has stolen from his nation’s wealth. They always involve money that is illegally earned. $1 trillion in illicit financial flows leaves the developing world every year, which is ten times the amount of foreign aid that flows in. This amount is a tremendous loss for the developing world, and directly contributes to untold amounts of poverty and lost opportunity.
Tax havens are attractive places to put illicit money because they offer secrecy in various forms.
It has been argued that treaties are intended to reduce tax evasion rather than promote foreign investment but for certain specifications, treaty formation may actually reduce investments. Since treaties can reduce tax avoidance and other tax saving strategies by firms, they might actually have a dampening effect on Foreign Direct Investment, FDI. One possible reason for the non- promotion effect of treaties on FDI activity is that treaties reduce firms abilities to evade taxes through transfer pricing or treaty shopping.
Tax Havens and Tax Evasion
The use of tax havens for tax planning and avoidance requires a regulatory response that seeks to curb such activities only where they are viewed as exploiting domestic legislation in an unacceptable way. Two instances of this are Controlled Foreign Company Rules and Transfer Pricing Regulations. The use of tax havens for tax evasion involves fraudulent activity and requires the use of criminal sanctions, for which information about tax haven is required. The use of Information Exchange is used to consider this. There has been a significant increase in the use of Taxation Information Exchange Agreements TIEA, which was first used by the US in the early 1980s with certain countries in the Caribbean and Central America. The OECD’s definition of tax evasion was endorsed by all OECD members except Luxembourg and Switzerland.
Tax avoidance and Tax Evasion
Tax avoidance is the legal exploitation of the tax regime to one’s own advantage, to attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full disclosure of the material information to the tax authorities. The using of tax deductions, changing one’s business structure through incorporation or establishing an offshore company in a tax haven are a few examples. On the other hand, tax evasion is the deliberate misrepresentation and concealment of the true state of the affairs of the tax payer to the tax authorities, in order to reduce their liabilities like under declaring income, profits or gains.
In Canadian treaties, “the preamble stipulates that the purpose of the treaty to prevent tax evasion does not constitute a general anti-abuse rule applicable for three reasons. First, tax evasion is not synonymous with tax avoidance, and in cases of abuse, the issue is avoidance. Secondly, although the preamble refers to the prevention of tax evasion, treaties generally do not include provisions todeal with evasion. Finally, the domestic tax benefit provision contained in most Canadian tax treaties… coupled with the principle that treaties do not levy taxes, supports the argument that the preamble to treaties does not include a general anti-abuse rule.”
COMPARABLE UNCONTROLLED PRICE
The Comparable Uncontrolled Price Method (CUP), which is an effective method against tax avoidance, has the ‘Arm’s Length Principle’ of the OECD, that prices charged within multinational companies or permanent establishment (PE) of a business must be comparable to those that would be charged between independent enterprises. The CUP effectively protects tax against transfer pricing and guarantees fairness of trade.
However, in practice, many CUPs are rejected because they cannot match one or more comparability criteria, such as similar markets, volumes and position in the supply chain. Many practitioners prefer to use an alternative method rather than apply adjustments to a CUP. The argument is those adjustments distances the CUP from what was actually agreed in the open market.
To effectively close the loopholes in tax avoidance schemes UKCS, in December 2010, Graham Aaronson QC, led a study that would consider whether General Anti- Avoidance Rule (GAAR) could deter and counter tax avoidance, whilst providing certainty, retaining a tax regime that is attractive to business and minimising costs for businesses and HMRC.
The Committee of Experts on international Cooperation in Tax Matters as a subsidiary body of the Economic and Social Council is responsible for keeping under review and update, the United Nations Model Double Taxation Convention between Developed and Developing Countries. It also provides a framework for dialogue with a view to enhancing and promoting international tax cooperation among national tax authorities and assesses how new and emerging issues could affect this cooperation. The Committee is also responsible for making recommendations on capacity- building and the provision of technical assistance to developing countries and countries with economies in transition. In all its activities, the Committee gives special attention to developing countries and countries with economies in transition.At Budget 2012, the Government announced that it accepted therecommendation of the Report, published 21st November 2011, that a GAAR targeted at artificial and abusivetax avoidance schemes would improve the UK’s ability to tackle tax avoidancewhile maintaining the attractiveness of the UK as a location for genuinebusiness investment. The Government announced that it would consult insummer 2012, with a view to introducing legislation in Finance Bill 2013.
Steps and legal techniques to reduce an abuse of treaty network
THE OECD AND UN MODEL CONVENTION
The issue of treaty abuse needed to be dealt with in the United Nations Model Convention and that of its commentary in a way that article 1 of the OECD Model Convention addresses methods of combating treaty abuse.A sub-committee of the Committee of experts on improper use of tax treaties gave their opinion of these methods. They include:
* Specific legislative anti-abuse rules found in domestic law.
* General legislative anti-abuse rules found in domestic law.
* Judicial doctrines that are part of domestic law.
* Specific anti-abuse rules found in tax treaties.
* General anti-abuse rules in tax treaties.
* The interpretation of tax treaty provisions.
The OECD is similar to the UN models as they are both consistent. The difference is that the UN Model preserves a larger share of taxing rights for the source country while the OECD Model, favours retention of a greater share of taxing rights by the residence country(the country of the investor or trader).
The UN Model would tolerate developing countries more taxing rights on the income created by foreign investments in these countries.
The way these models are applied has major implications for the Finance for Development process. In theory, a balance has been reached internationally between the two models. In effect, the OECD modelfavours capital- exporting rich countries while the UN model favours developing countries.
LIMITATION OF BENEFITS
Treaty shopping erodes existing national tax bases as other individuals and corporations receive an unearned benefit which is not fair to countries that have bilateral treaties and an unfair tax competition. International regimes are not irrelevant to tax policy and there are no international laws to forbid or enforce measures. Article 1 makes reference to providing provisions to limit benefits i.e. a ‘limitation of benefits’ article to those third party states attempting to receive benefits from a treaty not applicable to them.
Therefore, the provisions to limit treaty shopping and tax avoidance are found in beneficial ownership clauses, specific anti- conduit clauses and specific and detailed limitation of benefits, contained in tax treaties. In the UK, the implementation of special rules in the interest and royalty articles and the beneficial ownership rule in articles 10- 12 of the OECD Models also limit treaty shopping. The United States has developed its limitation of benefits and is cited to be the only country to tackle the problem completely.
The US attempted to block treaty shopping by adopting Limitation of Benefits (LOB) provisions in its tax treaties. The limitation of Benefits provisions consist of a set of objective criteria that determines which taxpayers can claim treaty benefits.
There are several tools for treaty interpretation. Articles 31- 33 of the Vienna Convention on the Law of Treaties 1980, the OECD commentaries and judicial adjudication in the courts are the main authorities on treaty interpretation.
The Vienna Convention
This deals with the general interpretation of abuse of treaty rules and obligations. It cannot be used on its own but has to conform to the consensus view of the two contracting states. In accordance with the convention, a treaty should be interpreted in good faith in accordance with the ordinary meaning. Article 32 provides recourse to a supplementary means of interpretation following the application of Article 31 and the application has consequently caused the meaning to become ambiguous or unreasonable. Article 33 provides commentary of treaties that are in different languages.
OECD Commentary
The Commentary to the OECD Model isalso directed at the UN and US Models as they were built from the OECD Model and have common rules of interpretation. These Model Conventions are all non- binding and form the basis for bilateral tax treaties between countries. The Commentary has international acceptance of non OECD states; states that have a degree of certainty and awareness of thetax risks of a state that models its tax relations on the OECD model. Article3(2) of the OECDmodel defines such terms as ‘person’ or ‘enterprise’ to assist with treaty interpretations. The OECD is a global authority on interpretation of treaties as many domestic courts apply the commentary along with its domestic laws. In some cases, the OECD takes precedence to other domestic laws. A set back of the OECD is that it lacks the legal legitimacy that can question its authoritative source of reference.
Judicial Interpretation and case law
Tax disputes matters with an international element are referred to the ECJ. Decisions of the ECJ are applied in national courts, which result in the changes to national laws of member states of the EU and not necessarily the laws of the state that went before the ECJ. The Arbitration procedure is a further mechanism that can be used if mutual agreement between states provides no effective resolution after two years; thereafter an advisory board is set up to decide on the issue of double taxation.
The European Union has no tax model treaty and the European Commission has explained that its general tax policy is to allow member states choose their own tax systems, as long as it meets the wider EU policy aims and objectives. A Code of Conduct for business taxation was adopted by the council for Economics and Finance Ministers in 1997, pursuant to which member states must strategizeto force a change on harmful taxation measures,and to refrain from using any of such measures in the future.
Litigation is not always the best approach for dealing with complex avoidance cases, which can take a long time to resolve.The UK has lost an estimated £13billion per year from tax shelters and this has given rise to talks on the possible introduction of General Anti- Avoidance Rule (GAAR) in the past decade. This is due to the current legislation failing to work effectively.
Relevant Issues in Relation to the UKCS and Oil and Gas production
The OECD Model Tax convention is not clear on the issue of pipelines which run through different jurisdictions. This situation gives rise to double taxation avoidance as countries that have pipelines passing through their jurisdictions are subject to pay tax. The OECD Model considers pipelines in 8 different contradicting tax point of view which leads to uncertainty and interstate disputes.
Oil and gas are the most important resources to be discovered and produced in the UK in the last century. They earn valuable export and tax revenues to support the UK economy. The UK Oil and Gas taxation regime applies to oil and gas exploration, assessment, extraction and production in the UK and UKCS. The taxation of oil and gas production from the UKCS began in 1975 with the introduction of the Petroleum Revenue Tax (PRT), Ring Fence Corporation Tax (RFCT), in the Oil Taxation Act 1975 to ensure that the government secured its fair share of the benefits from oil and gas production in the UK.
Petroleum Revenue Tax (PRT) is charged on profits arising from individual oil fields. Its main objectives were to allow a project to quickly recover its costs, and then tax it at a high rate. Other objectives was to ensure that tax due is payable as early as possible and also to ensure that projects where no economic rent was likely, were protected from the tax. There were a range of reliefs to ensure that the tax delivers these objectives. The fields that are within the charge to PRT are known as taxable fields and those outside it are known as non- taxable fields. Many taxable fields do notpay PRT because of the various reliefs available. However, PRT was abolished on the 16th March 1993 for all fields given development consent on or after that date.
Ring Fence Corporation Tax (RFCT) is a standard corporation tax that applies to companies with the addition of a ring fence. Profits from oil extraction activities are subject to a corporation tax “ring fence”,which means that profits from these activities cannot be reduced by any losses or other tax reliefs from other business activities (RFCT fences off the whole oil exploration trade, not individual fields like PRT).
The Petroleum (Production) Act 1934 provides for payment of royalties to the government. This is an indication that the crown has owned British oil and gas since that time. Before the 1958 UN convention on continental shelf was ratified, the UK passed the Continental Shelf Act in 1964. The UKCS taxation system was reviewed due to the rising oil prices and OPEC emerging in the 70’s. The Labour Government in 1974 introduced the Oil Taxation Act 1975 which still forms the basis of the Petroleum Revenue Tax (PRT) regime for Oil and Gas fields.
The aim of this provision is to prevent these profits from being offset by losses or allowances available from other activities. Capital gains arising on the disposal of field interests or assets were brought within the ring fence from 1984. There is a corporation tax 30% levy on upstream oil & gas activities.
The Supplementary Charge (SCT) was introduced at a rate of 10% in 2002’s Budget. 100% First Year Allowances for UKCS capital expenditure was also introduced. Since the introduction of 100% First Year Allowances, all capital costs are effectively tax deductible as incurred.
SCT was raised to 20% from 1st January 2006 and, in the Budget of March 2011, it was raised again to 32%. It was again announced that from 2012 the government would restrict the ability to claim tax relief for decommissioning, capping relief against SCT at 20%.
The Supplementary Charge SC was to reflect the excess gains of the oil companies due to the higher oil and gas prices and also to secure a “fair deal for the nation” by ensuring a higher share of the profit for the nation. The SC was considered as “a reform for the long term which promotes investment in marginal fields and, in doing so,raises substantial revenue for the Exchequer” as put by then Economic Secretary Ruth Kelly.The SC has been amended twice since its inception through the Finance Act of 2002.
Conclusion
From the discussion above, it can be seen that transnational trade and investment leads to double taxation. Tax treaties which aims to reduce double taxation, is in turn exploited by countries that are not meant to benefit from these treaties. It has been argued that treaties based on the OECD and UN Model cannot fully prevent double non- taxation.It is these exploits that gives rise to the tax haven situation, which has the features of secrecy laws and lack of exchange of information over bank records and customer information. Tax havens can be controlled by using pressure from the OECD and EU, Transfer Pricing Rules, Company Residence Rules and Exchange Control. The US is the only country to develop its Limitation of Benefits LOB, which is a set of objective criteria to determine which tax payer benefits from a treaty.
From the Scotia Anglia situation, it is clear that the treaty formation the two states had, reduced investment more than it reduced tax evasion. Scotia needs to be aggressive in challenging the structures involving investments routed through its treaty partner Anglia. Scotia should review its convention to incorporate changes in the treaty for prevention of its treaty abuse and strengthen the mechanism for exchange of information on tax matters between both states.
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——————————————–
[ 2 ]. ’Abuse of tax treaties’accessed 30/11/12
[ 3 ]. Gregory Rawlings, ‘Taxes and Transnational Treaties: Responsive, Regulation and the Reassertion of Offshore Sovereignty’, January 2007
[ 4 ]. Ibid.
[ 5 ]. Chris Davis, ‘General Anti Avoidance Regulations: An Acceptable Alternative to Limitation on Benefits Provision?’ accessed 3/12/12
[ 6 ]. Geoffrey T Loomer, ‘Tax Treaty Abuse: Is Canada Responding Effectively?’ October 2008,revised March 2009, accessed 1/12/12
[ 7 ]. Michael Lang and Florian Brugger, ‘The Role of the OECD Commentary in Tax Treaty Interpretation’ accessed 4/12/12
[ 8 ]. Chris Davis, ‘General Anti Avoidance Regulations: An Acceptable Alternative to Limitation on Benefits Provision?’ accessed 3/12/12
[ 9 ]. OECD Committee on Fiscal Affairs, ‘Double Taxation Conventions and the Use of Conduit
Companies’ in International Tax Avoidance and Evasion: Four Related Studies (OECD, Paris 1987) 88.
The key points from this report are reiterated in the current OECD Commentary, especially at Art
1 paras 11–21.
[ 10 ]. UN, Department of International Economic and Social Affairs, Contributions to International
Co-operation in Tax Matters: Treaty Shopping, Thin Capitalization, Co-operation between Tax
Authorities, Resolving International Tax Disputes(UN, New York 1988).
[ 11 ]. OECD Conduit Report.
[ 12 ]. Canada–Netherlands tax treaty Arts 10(2), 11(2) and 13(7).
[ 13 ]. OECD Conduit Report (fn 10) 90.
[ 14 ]. OECD Commentary Art 1 paras 8, 9, 11.
[ 15 ]. OECD Conduit Report (fn 10) 90.
[ 16 ]. Geoffrey T Loomer, ‘Tax Treaty Abuse: Is Canada Responding Effectively?’ October 2008,revised March 2009, accessed 1/12/12
[ 17 ]. Ibid.
[ 18 ]. Geoffrey T Loomer, ‘The Vodafone Essar Dispute: Inadequate Tax Principles Create Difficult Choices for India’ (2009) Vol 21(1) Nat’l Law School of India Rev accessed 2/12/12
[ 19 ]. OECD Conduit Report (fn 10) 90; UN Treaty Shopping Report 7.
[ 20 ]. RS Avi-Yonah, ‘Globalization, Tax Competition, and the Fiscal Crisis of the Welfare
State’ (2000) 113 Harvard Law Rev 1573, 1632–48 accessed 2/12/12
[ 21 ]. Timothy V. Addison, ‘Shooting Blanks: The war on Tax Havens’, Indiana Journal of Global Legal Studies, 7-1- 2009
[ 22 ]. Ibid.
[ 23 ]. Ibid.
[ 24 ]. Ibid.
[ 25 ]. Mihir A. Desai, C Fritz Foley, James R. Hines jnr, ‘Do tax havens divert economic activity?’, 28th Nov, 2005 accessed 30/11/12
[ 26 ]. A Miller and L Oats, Principles of International Taxation (3rd Edition Bloomsbury Professional 2012), pg 354
[ 27 ]. Megha Bahree and Deborah Ball, ‘Island Tax Haven Roils India’s ways, The Wall Street Journal’, August 29th 2012,accessed 24/11/12
[ 28 ]. Mukesh Jagota, ‘India, Mauritius working to Resolve Tax- Pact Abuse’, September 5th 2012, accessed 24/11/12
[ 29 ]. Fagan EJ, ‘Financial Integrity Economic Development, illicit financial flows explained with graphics’, September7th,2012, accessed 1/12/12
[ 30 ]. Ibid.
[ 31 ]. Bruce A Blonigen, Ronald B Davies, ‘Do Bilateral Tax Treaties Promote Foreign Direct Investment?’ accessed 25/11/12
[ 32 ]. A Miller and L Oats, Principles of International Taxation (3rd Edition Bloomsbury Professional 2012), pg 345
[ 33 ]. Differences between Tax Avoidance and Tax Evasion accessed 4/12/12
[ 34 ]. Nathalie Goyette, ‘Countering Tax Treaty Abuses: A Canadian Perspective on an International Issue’, The Tax Professional Series (Toronto: Canadian Tax Foundation, 1999).
[ 35 ]. Article 9 OECD Model Tax Convention
[ 36 ]. Elizabeth Hughes, Wendy Nichols, Tax Journal’ The different methods of TP- Pros and Cons’,accessed 7/12/12
[ 37 ]. Financing for development, ‘Committee of Experts on International Cooperation in Tax Matters’ accessed 4/12/12
[ 38 ]. ‘Tax policy making: a new approach’, HM Treasury and HMRC, June 2010: accessed 8/12/12
[ 39 ]. A General Anti Abuse Rule-Consultation Document, 12th June 2012 accessed 8/12/12
[ 40 ]. Economic and Social Council, Committee of Experts on International Cooperation in Tax Matters, 3rd session, ‘Improper use of treaties’ Geneva, 29 October- 2 November 2007
[ 41 ]. Tax Justice Network, ‘Source and Residence: The UN and the OECD’November 27th 2008 accessed 9/12/12
[ 42 ]. OECD Model Tax Convention
[ 43 ]. Victor Thuronyi, ‘International Aspects of Income Tax’ Tax Law Design and Drafting Vol.2 1998- Chapter 18
[ 44 ]. Chris Davis, ‘General Anti Avoidance Regulations: An Acceptable Alternative to Limitation on Benefits Provision?’ accessed 6/12/12
[ 45 ]. Article 31 of the Vienna Convention on the Law of Treaties 1980
[ 46 ]. OECD Model (fn 41)
[ 47 ]. The EU Tax Arbitration Convention, 2001
[ 48 ]. European Commission “Tax policy in the European Union – Priorities for the years ahead” (COM (2001) 260) accessed6/12/12
[ 49 ]. European Commission ‘Harmful Tax Competition’accessed 6/12/12
[ 50 ]. A General Anti-Avoidance Rule for Direct Taxes: A Consultative Document’ 4.8 p. 9 available at accessed 6/12/12
[ 51 ]. A. Sparrow and G. Trefgarne, ’£13bn Legal Loophole to be Closed’ Telegraph Online (March 3,2004) accessed 6/12/12
[ 52 ]. Olsen Knut, ‘Characterisation and Taxation of Cross-border Pipelines’ OGEL 3 (2011),
accessed 8/12/12
[ 53 ]. W. J. Craig, Oil and Gas Taxation Article page 3
[ 54 ]. Greg Gordon, John Paterson, Emre Usenmez,‘Oil and Gas Law: Current Practices and Emerging Trades’ 2nd Edition, Dundee University Press 2011 p139
[ 55 ]. International Tax Review ‘Recent Developments in The Taxation of Oil and Gas Activities in the UK’, 9th July 2012accessed 8/12/12
[ 56 ]. HM Revenue and Customs accessed 8/12/12
[ 57 ]. HM Revenue and Customs, ‘International-Taxation of UK Oil Production’, accessed 8/12/12
[ 58 ]. Oil and gas taxation-Baku seminaraccessed 8/12/12
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