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Tax
Double taxation agreements
By Grahame Jackson,
Tax Partner, Hassans
Before October 15th 2019 Gibraltar had no double taxation agreements which followed the international standard form laid out by the Organisation for Economic Cooperation and Development. Over the last few years the UK has been refreshing its double taxation agreements with its crown dependencies and overseas territories and Gibraltar remained one of the few, if not the only, which had never had such an agreement. It seems that, amid the fog of Brexit and general elections that have descended on both Gibraltar and the UK, a tax agreement was not a major priority. However, on October 15th the Government of Gibraltar and the UK Government signed the first double taxation agreement between the two jurisdictions.
A more robust trading base This has been hailed as a great step forward, a safeguarding of Gibraltar’s trading relationship with the UK, and an opportunity for more agreements and a more robust trading base. But what real difference does a double taxation agreement make?
Double taxation agreements certainly are useful, they bolster the certainty that international traders have when they trade across boundaries and allow multi-nationals to understand how they will be treated in a jurisdiction, but how will they practically effect people? It may be helpful to understand the effect by giving examples of some of the ways the UK Double Taxation Agreement will work in practice.
Let’s imagine a scenario, of an international firm that owns coffee shops. It’s based in the UK, and wants to open a coffee shop in Gibraltar. Prior to the UK agreement, opening a coffee shop would have appeared a daunting task for the company. Their internal tax team would not have understood the tax treatment of that income, or whether opening a local subsidiary would have been the best option, how a branch might have been taxed or whether the tax would have been more
than a local entity would have paid. In short, they would have doubted whether or not this was worth it, or whether it was merely a minefield of cost and complications. They may well have been put off from opening a branch at all, and there would be a subsequent loss of investment in Gibraltar.
Gibraltar tax
With a double taxation agreement all those questions and doubts are eliminated. the company will know that their business profit from Gibraltar will be taxed in accordance with the rules in Article 7 of the UK-Gibraltar double taxation agreement if they use a branch structure. They will know the rules which will govern the distribution of dividends from a Gibraltar subsidiary if they choose to incorporate a local subsidiary, and they will know that there will be no difference in the tax treatment of them based on whether they are a resident or a non-resident in Gibraltar under Article 23 (non-discrimination). The company will still need to pay Gibraltar tax (and will have their UK tax bill reduced by a credit equivalent to that Gibraltar tax under Article 22, Elimination of Double Taxation) but they have certainty as to what the rules are in an internationally recognised form. As treaties
override domestic law that certainty is guaranteed by international law, and the uncertainty caused by domestic political upheavals is somewhat eliminated.
Of course, this will work the other way around. For example, if a Gibraltar bank lends money to a UK company to finance a transaction then under the agreement it knows that the interest payments will be free of tax in the UK (otherwise chargeable at 20%), under Article 11. Students from Gibraltar will know that payments they receive from outside the UK for the purposes of maintenance will not be subject to tax in the UK under Article 19, employees who are seconded to UK from Gibraltar will know (subject to certain rules) that they have 183 days before they become subject to UK tax (Article 14). All examples of certainty not previously available.
The double taxation agreement may only just re-articulate the effect of pre- existing provisions of local law (such as the
granting of double tax relief under Article 22, which would already be given under Gibraltar’s existing rules in section 37 of the Income Tax Act), but because it articulates those rules in a clear, and universally accepted way, it demystifies the process for foreign businesses.
Global trade
Double taxation agreements have contributed immensely to the increase in global trade over the last one hundred years. Businesses crave certainty. They don’t want rules to be unique, esoteric, or complex, they want clarity and if clarity is not available, they want the issues to be consistent. The international framework which delineates the UK\Gibraltar Tax Agreement provides that. The jurisdiction will benefit from an active network of treaties, its trade should increase as a result, and its markets open up to exciting new opportunities.
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