The United Kingdom Supreme Court’s recent decision in Fowler v Commissioners for Her Majesty’s Revenue and Customs, [2020] UKSC 22, is likely to be seen as an important international tax case and, to that end but possibly without as much justification as discussion in the tax community may make it seem, as a “tax treaty case”.
The case concerns whether South African (resident) deep sea divers working in the North Sea were taxable under UK tax law as it would be applied in the context of the UK – South Africa tax treaty - as the “employees” they were assumed to be or as engaged in an enterprise was a “trade” or “business” (including a deemed “trade”) as the UK tax law deemed them to be in order to provide deductions not otherwise available to employees in computing their income to recognize expenses they would be required to incur as remote workers.
The tax treaty issue and its implications are fairly clear – and unexceptional. If taxed by the UK as conducting a trade or business (including a services business), which is what the UK tax law deemed, the “business profits” article of the treaty would apply and it would have excused the UK tax since the divers lacked a UK taxable presence, a “permanent establishment” under the UK – South Africa tax treaty which, interestingly, includes the extended notion of a “services permanent establishment” in the definition of “permanent establishment”. It was common ground that the divers, Mr. Fowler, did not have UK permanent establishments. If however in applying the treaty the divers were considered to be employees, as they were assumed to be apart from the influence of the UK tax law and accordingly despite how the UK tax law treated them, then despite the UK fiction the treaty’s “employment” article would apply arguably to preserve UK taxation assuming that the article’s requirements for retained source taxation would be satisfied, albeit on a ground that differed under UK law from the treaty classification, and distributive rule, that would need to be applied to have this effect. Hence, the case concerns among other things how the UK tax law should be construed and how, then, it should be applied in relation to, and effectively interpolated into, the tax treaty in the event of what might using treaty terminology be considered a conflict of qualification taking into account the common treaty principle (and article) that defers to the state imposing tax for the meaning of terms not defined in a treaty.[1]
The Court decides that in spite of the UK tax law fiction which imposed tax in the UK on the divers’ income not as employment income but trade or business income, their (assumed) status in South Africa as employees determined that the employment income rather than the business profits article of the UK-South Africa tax treaty applied to preserve the UK’s tax. It is irresistible to speculate that a possible influence on how the case may have been perceived and it is anticipated may be discussed given the tax world’s present over-arching concerns about “double non-taxation” is the possible absence of South African tax for employment exercised outside South Africa although after noticing this theoretical and hypothetical consideration, the Court says that “… the question whether South Africa did tax the earnings of its residents employed abroad was not investigated in these proceedings so it would be inappropriate to place any weight on this consideration in construing the Treaty.” It is for mere speculation to wonder whether not placing “weight” on this speculative possibility entirely neutralizes an awareness of it. The UK-South Africa tax treaty did not and does not include a “subject to tax clause” that essentially preserves source state tax that would otherwise be excused from tax under a treaty if the residence or home state of the taxpayer does not tax the income. The effect of a subject to tax clause is that pertinent income is taxable “somewhere” and not excluded from tax “everywhere”. Readers may recognize this as an intrinsic notion in proposals currently being debated in the international tax community expressed in the Pillar II consultation being orchestrated by the OECD (Organisation for Economic Co-operation and Development) – which address perceived inadequacies and limitations of typical ways in which states resolve intersecting tax claims using tax treaties and advance for consideration what amounts to minimum taxation by countries where taxpayers earn income but lack a typical taxable presence, i.e., a permanent establishment.
The case invokes fine points of tax treaty law about how terms not defined in a tax treaty should be understood in applying a treaty’s distributive rules for reconciling states’ tax intersecting tax claims when the tax charging state “sees” or “treats”, i.e., “deems”, a taxable event to be something other than what in fact and law it is and what the affected taxpayer’s “home” – residence – state “sees” but to which it is indifferent. In that vein though it may be seen as something of a missed opportunity, as the Court dealt with the case, to more carefully and definitively consider the applicability and scope of Article 3(2) of the treaty which, like the same article in many treaties, reserves to the state imposing tax the definition of terms under its tax law that a treaty does not define. No doubt, the tax treaty aspect, as the Court (and other UK courts as the case made its way to the UK Supreme Court) saw it will dominate discussion in the international tax community about this case. In fact, however, this case seems to be as much or more about typical principles statutory interpretation concerning relevant provisions of UK tax law, in the mask however of “high” treaty law that seems to have obscured the essential simplicity of the underlying legal analysis. It is interesting to wonder whether a more generous focus on statutory interpretation would have allowed the resolution in a way that was objectively reasonable and consistent with the objectives of tax treaties to allocate otherwise intersecting taxing rights without a “diving” into the complexities of tax treaty law.
Click here for the decision in Fowler v Commissioners for Her Majesty’s Revenue and Customs, [2020] UKSC 22.
Click here to read Professor Wilkie's comments to the OECD RE: the OECD Proposals
Click here for the OECD "Public consultation document: Global Anti-Base Erosion Proposal (“GloBE”) - Pillar Two"
Click here for the OECD "Public consultation document: Secretariat Proposal for a “Unified Approach” under Pillar One"
Click here for the OECD "Base Erosion and Profit Shifting Project Public Consultation Document: ADDRESSING THE TAX CHALLENGES OF THE DIGITALISATION OF THE ECONOMY"
Click here for the OECD "OECD/G20 Base Erosion and Profit Shifting Project: Addressing the Tax Challenges of the Digitalisation of the Economy – Policy Note"
Click here for the OECD "OECD/G20 Base Erosion and Profit Shifting Project: Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy"
[1] For a insightful critical analysis of this case that is similarly directed to the present comments, as it was being decided by lower UK courts examining the interaction of statutory interpretation and possibly applicable treaty distributive rules in Fowler, see: John Avery Jones and Johann Hattingh, Case Notes, Fowler v. HMRC: divers and the dangers of deeming, [2016] BTR, No. 4, 417-434, John F. Avery Jones, Case Notes, HMRC v. Fowler: more on divers, [2017] BTR, No. 4, 385-398.