Upgrading the UK tax treaty network

HMRC consults with certain stakeholders as part of its annual review of the UK’s network of bilateral double tax treaties with other tax jurisdictions, to understand practical issues for taxpayers and inform its priorities.

The UK already has one of the most comprehensive worldwide tax treaty networks, but the 2022/23 review has highlighted that there are several areas where action is required from HMRC if the UK is going to continue to be an attractive location for overseas investment and as an international holding company location.

The re-emergence of withholding taxes following the UK withdrawal from the European Union

UK businesses lost access to the benefits of the European Union (EU) parent-subsidiary and interest and royalties directives from 1 January 2021, which has resulted in significant adverse consequences for many.

Dividends and other distributions are widely used as an efficient means of moving cash around the EU based members of corporate groups as, in most cases, the EU parent-subsidiary directive provides for nil withholding tax on dividends and other distributions paid between companies resident in EU member states. Since 1 January 2021, however, withholding tax suffered on distributions received from EU resident companies can be an absolute cost to UK resident corporate recipients, as foreign dividends received in the UK are typically exempt from UK corporation tax.

The inability to continue to benefit from the EU interest and royalties directive has also had an adverse impact on cash flow and increased the compliance burden for many groups with UK companies. It has also resulted in additional tax liabilities for those that cannot recover the withholding taxes now suffered against their corporate tax liabilities.

The UK government has previously announced that it is committed to renegotiating double tax treaties with EU member states following withdrawal from the EU. However, there are 27 separate double tax treaties – one for each continuing EU member state – and the process of renegotiating of tax treaties is not known for being either straightforward or quick.

It is incumbent, therefore, on the HMRC treaty team to prioritise renegotiating those treaties that are likely to yield the greatest benefit to UK business, such as the German and Italian treaties, as highlighted in recent comments by the Chartered Institute of Taxation (CIOT) as part of the latest HMRC review.

Renegotiating uncompetitive treaties

New and amended double tax treaties that reduce tax costs and compliance obligations are regularly agreed and ratified by different nations throughout the world. In light of this, it is important that the UK’s treaty network keeps pace with those of other jurisdictions and for the HMRC treaty team to monitor these developments and respond accordingly. By way of example, the CIOT’s comments highlighted that the Netherlands recently agreed a 0 per cent withholding tax rate on royalties with Singapore, whilst the rate on royalties under the UK:Singapore double tax treaty remains at 8 per cent. Such significant differences in tax rates arguably reduce the competitiveness and attractiveness of the UK as a regime for developing and owning intangible assets, a key element of the Government’s plan for UK business to harness the knowledge economy to drive economic growth.

Agreeing new treaties

Whilst the UK has one of the most comprehensive networks of double tax treaties, there are still a number of important trading partners with which a full double tax treaty is yet to be agreed. For example, the UK has a double tax treaty with Brazil that relieves withholding taxes relating to shipping and air transport but does not address wider withholding tax and other issues typically seen in other double tax treaties. Brazil has become a significant trading partner for UK businesses and the absence of a full double tax treaty remains a notable omission from the UK’s double tax treaty network.

For more information, please get in touch with Suze McDonald, Peter Coe or your usual RSM contact.