Rachel de Souza

Written by: Rachel de Souza

Rachel de Souza

Partner

Bringing balance to the offshore debate: after Brexit, taxpayers and tax collectors must know where they stand

One of the fundamentals of any tax system must be certainty; both for the taxpayer and the tax collector. The taxpayer needs to know what his liability will be on income he will earn so that he can budget his finances accordingly. Similarly, our tax collectors need to know on what basis they can collect the taxes they demand. 

Brexit has created uncertainty in many different areas, so it would be reasonable to expect it to have an impact on our tax system as well, especially where a resident of one country receives income from another.

The UK, along with most countries (the US being the stand-out exception) levies income taxes according to residence. For example, if I was resident in the UK but worked in Germany, I would expect to pay tax in the UK on my worldwide income and in Germany on my German-source income only. If I worked and was resident in Germany, I would only expect to pay UK tax on UK income.  

It follows that it is important to know who is a resident and who is not. Part of the answer is found in domestic legislation. The UK’s Statutory Residence Test may be complex but it helps us say with certainty whether individuals will or will not be UK-resident for any particular tax year.

On the international stage, taxing rights are decided by the UK’s more than 130 double tax treaties (DTTs). DTTs are agreements between two jurisdictions which are designed to eliminate conflict over taxing rights where the same income is taxable in both places. In some cases, DTTs give exclusive taxing rights to one country. In others, they allow both countries to charge tax, but set out rules to make sure that tax paid in Country A can be deducted from the amount due in Country B.

The UK has a long history of negotiating and implementing bi-lateral tax treaties.  We are world leaders in drafting DTTs, with the OECD often adopting definitions for international protocols based on UK principles. This is also one area where leaving the EU will have minimal impact because DTTs are bi-lateral rather than being negotiated on an EU-wide basis. 

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