New year, new rules. From 1 January 2022, provisions in the United Kingdom’s double tax agreements (DTAs) with Guernsey and the Isle of Man on the mutual enforcement and collection of taxes come into force. In practical terms, this means that UK tax will from now on generally be enforceable in Guernsey and the Isle of Man (and vice versa). This is an important development for individual taxpayers, trust companies and other professional services providers alike and is indicative of a broader change underway in cross-jurisdictional enforcement of taxes.
Laws? Whose laws?
It is an established principle of international law that a foreign state cannot oblige the officials and courts of another state to enforce its penal or revenue laws as explained in the leading English case of Government of India v Taylor [1955] AC 491. The implications of this rule were, and are, far-reaching. However, they have been tempered in recent years by international agreements under which states agree to enforce one another’s revenue laws in their own territories within pre-defined parameters, notably through:
The availability of these options depends, of course, on the existence and applicability of the agreements in a particular context. In many cases, there are also subtle differences in the scope of what they permit. As Crown dependencies, Guernsey and the Isle of Man have always been outside the scope of MARD and acceded to the Convention only in 2014. However, both used the ability to derogate to rule out any obligation to collect foreign tax debts under the Convention and neither, until recently, was party to similar obligations under a DTA. There was, therefore, effectively no formal pathway to recover unpaid UK tax in either jurisdiction.
Assisting in the collection of taxes
Since its appearance in the OECD Model DTA in 2003, the specimen article 27 on ‘assistance in the collection of taxes’ has only gradually filtered into real-world DTAs. It is nonetheless reproduced almost verbatim in the UK’s two DTAs agreed with Guernsey and the Isle of Man in 2018. It was recently announced that this article would, in both cases, become effective from 1 January 2022. A similar provision can be found in the DTA between the UK and Jersey agreed in 2018 but has not yet come into force.
Article 27 provides far-reaching collection powers. In particular, it is important to note that it will apply to any existing liabilities including those which predated its introduction. The article commits the signatories to ‘lend assistance to each other in the collection of revenue claims’. In this context, a ‘revenue claim’ goes substantially beyond the general scope of the DTA to include ‘an amount owed in respect of taxes of every kind and description … as well as interest, administrative penalties and costs of collection or conservancy related to such amount’. The obligation therefore extends to taxes such as UK inheritance tax, as well as the income and capital gains taxes covered by the DTA. In addition to collection, there are also far-reaching powers for the relevant foreign state (e.g. the UK) to request ‘measures of conservancy’ (freezing orders, for instance) even where it is not yet able to request actual collection.
In collecting UK tax, the provision requires that the UK ‘revenue claim’ is collected by the Guernsey or Isle of Man revenue authority in the same way as their own taxes (or vice versa). In some senses, a claim for UK tax benefits from a privileged status: any relevant limitation period is defined by English law rather than ordinary local laws. Equally, the taxpayer is unable to bring any challenge to the ‘existence, validity, or the amount of a revenue claim’ asserted by HMRC in the Guernsey or Isle of Man courts.
Some safeguards do, of course, exist for the local revenue authorities. Article 28(7) sets out various situations in which they will not be obliged to execute foreign measures. These include revenue claims which run counter to its own public policy or where the foreign state has not taken all reasonable measures on its own account. Notably, both DTAs include an opt-in safeguard against requests for enforcement of measures which are ‘imposed contrary to generally accepted taxation principles’ as found in the Convention.
The road ahead
In anticipation of the entry into force of article 27, enabling legislation has been introduced in the form of the Income Tax (Guernsey) (Amendment) Ordinance 2021 and the Isle of Man’s Recovery of Foreign Taxes Regulations 2021. In both cases, the generic nature of the provisions makes it clear that both jurisdictions anticipate that similar arrangements are likely to be needed for other DTAs in coming years. We can expect to see more measures of this type going forward, perhaps also with more of a focus on how cross-border enforcement is executed in practice. It also remains to be seen whether the UK and Jersey will follow suit and similarly bring into force their reciprocal obligations to enforce each other’s tax.
New year, new rules. From 1 January 2022, provisions in the United Kingdom’s double tax agreements (DTAs) with Guernsey and the Isle of Man on the mutual enforcement and collection of taxes come into force. In practical terms, this means that UK tax will from now on generally be enforceable in Guernsey and the Isle of Man (and vice versa). This is an important development for individual taxpayers, trust companies and other professional services providers alike and is indicative of a broader change underway in cross-jurisdictional enforcement of taxes.
Laws? Whose laws?
It is an established principle of international law that a foreign state cannot oblige the officials and courts of another state to enforce its penal or revenue laws as explained in the leading English case of Government of India v Taylor [1955] AC 491. The implications of this rule were, and are, far-reaching. However, they have been tempered in recent years by international agreements under which states agree to enforce one another’s revenue laws in their own territories within pre-defined parameters, notably through:
The availability of these options depends, of course, on the existence and applicability of the agreements in a particular context. In many cases, there are also subtle differences in the scope of what they permit. As Crown dependencies, Guernsey and the Isle of Man have always been outside the scope of MARD and acceded to the Convention only in 2014. However, both used the ability to derogate to rule out any obligation to collect foreign tax debts under the Convention and neither, until recently, was party to similar obligations under a DTA. There was, therefore, effectively no formal pathway to recover unpaid UK tax in either jurisdiction.
Assisting in the collection of taxes
Since its appearance in the OECD Model DTA in 2003, the specimen article 27 on ‘assistance in the collection of taxes’ has only gradually filtered into real-world DTAs. It is nonetheless reproduced almost verbatim in the UK’s two DTAs agreed with Guernsey and the Isle of Man in 2018. It was recently announced that this article would, in both cases, become effective from 1 January 2022. A similar provision can be found in the DTA between the UK and Jersey agreed in 2018 but has not yet come into force.
Article 27 provides far-reaching collection powers. In particular, it is important to note that it will apply to any existing liabilities including those which predated its introduction. The article commits the signatories to ‘lend assistance to each other in the collection of revenue claims’. In this context, a ‘revenue claim’ goes substantially beyond the general scope of the DTA to include ‘an amount owed in respect of taxes of every kind and description … as well as interest, administrative penalties and costs of collection or conservancy related to such amount’. The obligation therefore extends to taxes such as UK inheritance tax, as well as the income and capital gains taxes covered by the DTA. In addition to collection, there are also far-reaching powers for the relevant foreign state (e.g. the UK) to request ‘measures of conservancy’ (freezing orders, for instance) even where it is not yet able to request actual collection.
In collecting UK tax, the provision requires that the UK ‘revenue claim’ is collected by the Guernsey or Isle of Man revenue authority in the same way as their own taxes (or vice versa). In some senses, a claim for UK tax benefits from a privileged status: any relevant limitation period is defined by English law rather than ordinary local laws. Equally, the taxpayer is unable to bring any challenge to the ‘existence, validity, or the amount of a revenue claim’ asserted by HMRC in the Guernsey or Isle of Man courts.
Some safeguards do, of course, exist for the local revenue authorities. Article 28(7) sets out various situations in which they will not be obliged to execute foreign measures. These include revenue claims which run counter to its own public policy or where the foreign state has not taken all reasonable measures on its own account. Notably, both DTAs include an opt-in safeguard against requests for enforcement of measures which are ‘imposed contrary to generally accepted taxation principles’ as found in the Convention.
The road ahead
In anticipation of the entry into force of article 27, enabling legislation has been introduced in the form of the Income Tax (Guernsey) (Amendment) Ordinance 2021 and the Isle of Man’s Recovery of Foreign Taxes Regulations 2021. In both cases, the generic nature of the provisions makes it clear that both jurisdictions anticipate that similar arrangements are likely to be needed for other DTAs in coming years. We can expect to see more measures of this type going forward, perhaps also with more of a focus on how cross-border enforcement is executed in practice. It also remains to be seen whether the UK and Jersey will follow suit and similarly bring into force their reciprocal obligations to enforce each other’s tax.
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