TC02943: Michael Macklin
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 October 2013 |
| Neutral Citation | [2013] UKFTT 554 (TC) |
| Date | 10 October 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 554 (TC)
Judge John Walters QC, Derek Speller FCA.
Jonathan Schwarz, Counsel, instructed by Thomas Westcott, Accountants, appeared for the Appellant
David Yates, Counsel, instructed by the Solicitor for HM Revenue & Customs, appeared for the Respondents
Income tax - UK/US Double Tax agreement (SI 2002/2848) - whether pension from the World Bank's retirement scheme was eligible for relief from UK income tax as from a pension scheme established in the USA for the purposes of the Agreement - articles 17 and 3 considered Procedure - whether discovery assessment under TMA 1970, s. 29 competent and the conditions in TMA 1970, s. 29(4) and 29(5) satisfied
The taxpayer's appeal against income tax assessments of pension income received from the pension scheme of his former employer, the International Bank for Reconstruction and Development in Washington DC, USA, on the ground that art. 17 of the UK/US Double Tax Agreement (SI 2002/2848) afforded exemption from taxation, was dismissed.
The pension scheme in question fell outside the definition of "pension scheme" in art. 3(1)(o) of the Treaty, and the taxpayer could not therefore rely on art. 17 to claim Treaty exemption.
The taxpayer (M) had been employed full-time in the US by the International Bank for Reconstruction and Development ("the World Bank") from 1976 to 1998, living there under a US visa. On his retirement he returned to live permanently in the UK. M was at all times UK domiciled.
From retirement, M received pension payments from the World Bank's Staff Retirement Plan ("SRP") into which he had contributed when he was employed. The payments qualified as "foreign pension payments" for UK tax purposes, so only 90 per cent of the amounts fell to be taxed pursuant to ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 575s. 575.
Article 17 of the UK/US Double Tax Agreement (SI 2002/2848) sets out the general rule that a pension beneficially owned by a resident of one State is taxable only in that State. However, art. 17(1)(b) provides that if such pension is from a pension scheme established in the other State and would be exempt from taxation in that other State if the beneficial owner was a resident of such State, the pension is to be exempt from tax in the first State. The definition of "pension scheme" in art. 3 of the Treaty meant that, before art. 17 could engage, it was necessary for the pension scheme - in addition to being "established in the other State" - to be:
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(a) generally exempt from income taxation in the State in which established; and
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(b) operated principally to administer or provide pension or retirement benefits.
M had obtained repayment of income tax paid in respect of the pension, by way of error or mistake claim under TMA 1970, Taxes Management Act 1970 section 33s. 33, notwithstanding that in previous correspondence with HMRC the taxpayer's submission or claim for repayment (on the basis that art. 17(1)(b) afforded exemption) had been rejected. The s. 33 claim had not specifically referred to such previous correspondence. In M's appeal against subsequent assessments of the pension income for tax years 2003/04 to 2008/09, the principal issue was whether the SRP was a pension scheme "established in [the US]" for purposes of the Treaty. Expert evidence of the meaning to be attributed to such expression, and as to related matters, under US law, was adduced by both parties. An ancillary issue was whether a "discovery" assessment for 2003/04 tax year could properly be made under TMA 1970, Taxes Management Act 1970 section 29s. 29.
The Tribunal said the evidence was that the World Bank had been established by Articles of Agreement drawn up at the United Nations' Bretton Woods conference in 1944, and its principal office and headquarters had always been in Washington DC in the USA. The SRP had been set up by trust deed in 1948 pursuant to a resolution of the Directors of the Bank made in Washington, and all management and administration of the SRP had been conducted from the Bank's principal office there. The trust deed was not expressed to be governed by US or any other law. The US IRS had, in 2002, issued a "favorable determination letter" to the Bank in relation to the SRP: by this letter, the IRS determined that the SRP was a plan which met the requirements of IRC section 401(a) in all respects except that it was not "created or organised in the US", and that it would have qualified for exemption under IRC section 501(a) "except for the fact that it was created or organised outside the US". The letter determined that the SRP, and beneficiaries under it, would be entitled to avail themselves of the tax exemptions afforded under those sections.
The Tribunal held that:
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(2) Although it was accepted that the SRP was physically set up in, and at all times administered from, the USA, that was not the meaning to be attributed to the phrase "established in [the USA]" for the purposes of art. 17 of the Treaty.
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(3) The SRP did not have sufficient legal nexus with the USA to support the case that it was "established in" the US for purposes of the Treaty. This followed from the Tribunal's finding that a US Court would not have jurisdiction to exercise primary supervision over the administration of the SRP, because of the immunities offered to the Bank and related entities such as the SRP.
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(4) In interpreting the term "established in [the USA]" it is necessary to take account of the Exchange of Notes of 24 July 2001 as the best evidence of the real intention of the contracting parties to the DTA. Although the list of schemes intended to be included in the definition of "pension scheme" in art. 3(1)(o), as set out in the Exchange of Notes, was not exclusive or exhaustive, the language and structure of the Exchange of Notes was very persuasive in support of the proposition that by the phrase "established in" a Contracting State was meant the concept of being established under and in conformity with the relevant Contracting State's tax legislation relating to pension schemes.
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(5) This fits with the purpose of the provision, which is to recognise the special categories of pension scheme to which the Contracting States have chosen to give exemption from taxation under their respective domestic laws because they are schemes operated principally to administer or provide pension or retirement benefits. The exemption from income taxation in the USA which the SRP enjoys did not arise from its status as a pension scheme, but from the relevantly unconnected privileges and immunities enjoyed by the World Bank.
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(6) In consequence, the SRP falls outside the definition of "pension scheme" in art. 3 of the DTA, and M was not entitled to rely on art. 17(1)(b) to afford exemption from UK taxation. M's appeal was therefore dismissed.
On the ancillary issue of whether HMRC were entitled to make a "discovery" assessment in respect of tax year 2003/04, the Tribunal determined that HMRC were so entitled, and that the conditions in each of TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 4s. 29(4) (neglect, careless conduct, etc of taxpayer) and Taxes Management Act 1970 section 29 subsec-or-para 529(5) (HMRC officer not reasonably expected to be aware of loss of tax) were satisfied in this respect.
This case arguably produces a harsh result for the taxpayer, who will not enjoy equal treatment with other taxpayers in corresponding circumstances.
The Tribunal decision indicated that there were other taxpayer cases outstanding where the same or similar issues were raised, and that the interpretation of the expression "established in a Contracting State" for the purposes of the DTA was a point of general importance.
[1]The appellant, Michael Macklin ("Mr Macklin"), appeals against the decisions of the Respondents ("HMRC") in relation to the income tax years 2003/04 to 2008/09 inclusive, incorporated in closure notices and a refusal of an error claim, that pension payments received by him from the retirement plan operated by his former employer, the International Bank for Reconstruction and Development ("IBRD" or "the World Bank"), did not qualify for any amount of exemption from UK tax under article 17(1)(b) of the UK-USA Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed on 24 July 2001 ("the DTA") - see: SI 2002/2848. Mr Macklin also appeals against the consequential assessments made by HMRC. We refer to this issue in this Decision as "the DTA Issue".
[2]In relation to the income tax year 2003/04 there is an additional issue, which becomes relevant only if our decision is that the pension payments received by Mr Macklin did not qualify for any exemption under article 17(1)(b) of the DTA. The additional issue is whether HMRC are entitled to make a discovery assessment under Taxes Management Act 1970 section 29section 29 Taxes Management Act 1970 ("TMA") in respect of that year. We refer to this issue in this Decision as "the TMA Issue".
[3]The parties provided to the Tribunal a Statement of Agreed Facts ("SAF"). The following introductory facts are taken from the SAF. Mr Macklin is (and was at all relevant times) an individual resident and ordinarily resident in the UK and domiciled within the UK - he is therefore a resident of the UK for the purposes of the DTA - see: article 4(1) thereof. He had been employed full time in the United States by the World Bank from July 1976 to March 1998, living there under a US G4 visa. He retired from the World Bank in March 1998 and at that time returned to the UK, and has lived here since then. He has never been a citizen of the United States. He participated in the World Bank's Staff Retirement Plan ("the SRP") and made contributions as required by the SRP throughout his employment with the World...
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Macklin v Revenue and Customs Commissioners
...of the agreement Art. 17 and 3. The Upper Tribunal has allowed the taxpayer's appeal against the decision of the First-tier Tribunal ([2013] TC 02943). The pension scheme of the taxpayer's former employer, the World Bank in Washington DC, USA, was established in the USA for the purposes of ......