DECISION
Introduction
1. The
Appellant (Mr Percival) is a British national but since January 2004 he has
been resident in the Republic of Ireland. Since January 2006 Mr Percival has
been in receipt of a British civil service pension in respect of his former
employment with the Inland Revenue. In addition he has other sources of private
pension and savings income in the UK.
2. Mr
Percival submitted a claim to the Irish Revenue for double taxation relief
under the UK/Ireland Double Taxation Convention of 2 June 1976 (“the DTC”) in
respect of his UK sources of income. The Irish Revenue certified the Appellant
as being resident in Ireland for the purposes of Irish tax. As a result Mr
Percival was granted an exemption from UK tax under the terms of the DTC in
respect of his private pension and savings income. No exemption was granted in
respect of his UK civil service pension.
3. Article
17(1) of the DTC provides that:
“Subject to the
provisions of paragraphs (1) and (2) of Article 18, pensions and other similar
remuneration paid in consideration of past employment to a resident of a
Contracting State and any annuity paid to such a resident shall be taxable only
in that State.”
4. Article
18(2), however, provides that:
“(a) Any
pension paid by, or out of funds created by, a Contracting State or a political
subdivision or a local authority thereof to an individual in respect of
services rendered to that State or subdivision or authority, in the discharge
of functions of a governmental nature, shall be taxable only in that State.
(b) However,
such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.”
5. Initially,
Mr Percival sought to challenge the refusal of exemption from UK tax for his civil service pension by appealing against his PAYE coding for the year. Having
been informed of the correct way to challenge the refusal, Mr Percival made a
formal claim on 5 March 2008 for relief in respect of his UK civil service pension. The Respondents (“HMRC”) opened an enquiry into his claim and on
6 November 2008 closed their enquiry by disallowing his claim.
6. On 12
September 2009 Mr Percival sought to appeal HMRC’s decision. HMRC accepted his
reasons for appealing out of time and offered to conduct a review of the
decision under section 49C Taxes Management Act 1970. On 15 February 2011 Mr
Percival was notified of the review’s conclusion to uphold the decision to
refuse relief.
7. Mr
Percival now appeals to this Tribunal.
Mr Percival’s grounds of appeal
8. Mr
Percival’s principal ground of appeal, as set out in the Notice of Appeal to
the Tribunal, is that Article 18 of the DTC contravenes various articles of the
European Convention because the taxation of Government pensions is based on
nationality. His grounds subsequently refer to the Human Rights Act 1998 and
state that it forbids discrimination by nationality. It seems, however, that when
referring to the “European Convention” in his grounds Mr Percival may have had in
mind the treaties establishing the European Union because he goes on to mention
Case C-279/93 Finanzamt Köln-Alstadt v Roland Schumaker concerning the
interpretation of what was then Article 48 of the EEC Treaty.
9. The basis
of Mr Percival’s complaint, as envisaged in his grounds, is that his family
circumstances and income means that he does not pay tax in the Republic of Ireland given the more generous tax allowances there. Evidently Mr Percival
and his wife were entitled in the years in question to a joint income of around
36,000 Euros before they would pay income tax in Ireland. The UK income tax that he suffers on his civil service pension is not refundable there and does
not reflect his family circumstances in the Republic. His grounds rely on the Schumaker
case to make the point that the taxation of individuals is best carried out by
the Member State of residence because that State is best able to determine the
individual’s family circumstances.
10. On the specific issue of
discrimination Mr Percival makes the point that his wife, who is an Irish
national and is resident with him in Ireland is exempt in respect of her UK local authority pension because she is an Irish national (see Article 18(2)(b) of the DTC).
11. In relation to
discrimination, it is clear from the correspondence, if not from the grounds,
that Mr Percival had also been seeking to rely on Human Rights arguments. He had
also claimed to be discriminated against relative to a British national who was
born in Northern Ireland and who could claim Irish nationality, relative to
someone such as Mr Percival who was born in Great Britain.
12. In essence, Mr Percival’s
appeal was founded on the proposition that, as an Irish resident person for the
purposes of the DTC, he was unfairly treated relative to another Irish resident
person who was also an Irish national, because his public pension was taxed in
the UK and exempt in Ireland whereas the same pension paid to an Irish national
in his position would be exempt in the UK and taxed in Ireland.
13. In this regard, we believe
that Mr Percival recognised that the relative balance of taxation might change over
time (and, indeed, it may have done as a result of recent Irish budgets), so
that UK taxation and Irish exemption would be more favourable. In that case a
taxpayer might demand that both countries be held to their agreement. The
question, however, is whether the UK can rely on its agreement with the
Republic in the face of Mr Percival’s challenge.
Mr Percival’s case before the Tribunal
14. In his skeleton argument and
in his submissions before the Tribunal Mr Percival did not advance any
arguments based on the EU Treaties or on the European Convention on Human
Rights. Ms Ford for HMRC noted that Mr Percival was no longer seeking to rely
on these arguments, which HMRC said were unfounded for the reasons that Ms Ford
had advanced in HMRC’s Amended Statement of Case, and she referred to paragraph
4 of Mr Percival’s skeleton argument. In paragraph 4 he states that he will
“restrict my case to just an examination of [the DTC] in particular the DT
article that appears to deal with discrimination by nationality”.
15. This is Article 23(1) of the
DTC, which provides that—
“The nationals of
a Contracting State shall not be subjected in the other Contracting State to
any taxation or any requirement connected therewith which is other or more
burdensome than the taxation and connected requirements to which nationals of
that other State in the same circumstances are or may be subjected.”
16. Mr Percival’s argument was
that, properly construed, Article 23(1) be taken to provide that, “the
nationals of a Contracting State shall not be subjected [while] in the other Contracting State” etc. Thus, to take his circumstances, as a British national resident
in Ireland he was subject to other or more burdensome taxation by the United
Kingdom than his wife was in the same circumstances as an Irish national (or
indeed as compared to any Irish national with similar UK income). Accordingly,
his liability to UK tax should be restricted to the tax that would have been
borne by an Irish national in his circumstances.
17. It was to this argument that
Ms Ford directed her oral submissions, without addressing separately the
European Treaty or Human Rights arguments that she had dealt with in HMRC’s
Statement of Case. As foreshadowed by his skeleton argument, Mr Percival in
opening and in reply addressed the Tribunal clearly and carefully on Article
23(1) without raising any other issues.
18. A decision of this Tribunal
would usually be restricted to the issues raised and the arguments addressed to
the Tribunal. In the present case, however, we have before us a litigant in
person who has not had the benefit of professional advice to assess the
strength of HMRC’s case on both the Community law and Human Rights issues that
he has raised in correspondence with HMRC and in his grounds of appeal. This
Tribunal ought not to dismiss Mr Percival’s appeal just because Mr Percival has
been persuaded to abandon certain arguments if the Tribunal believes that those
arguments should properly be considered in arriving at a decision whether to
allow or to dismiss his appeal. Although we did not hear submissions from Ms
Ford on these issues, her Statement of Case on behalf of HMRC is a model of
clarity. We have therefore taken that written case as representing her
submissions for HMRC on the issues and have assessed them for ourselves.
The discrimination complaint: OECD Model Tax Convention
19. This is not a case in which
the taxpayer complains that he is subject to double taxation. The treaty is
clear: pension income is allocated to and taxed in one only of the two States
and in Mr Percival’s case this is the UK as regards his civil service pension.
Ordinarily, a state is entitled to tax its public sector pensions without
regard to the residence of the recipient because it always retains taxing
rights as the source state. If the recipient takes up residence in another
state, that other state ordinarily becomes entitled as the state of residence
to tax his income. Article 18 of the DTC ensures that only one state may
exercise its taxing right: the United Kingdom as the source state in the case
of its nationals and Ireland as the residence state in the case of its
nationals.
20. Their agreement to that
effect accords with Article 19(2) of the OECD Model Tax Convention on Income
and on Capital, which in its 2010 version provides—
“(a) Notwithstanding
the provisions of paragraph 1, any pensions and other similar remuneration paid
by, or out of funds created by, a Contracting State or a political subdivision
or a local authority thereof to an individual in respect of services rendered
to that State or subdivision or authority shall be taxable only in that State.
(b) However,
such pensions and other similar remuneration shall be taxable only in the other
Contracting State if the individual is a resident of and a national of, that
State.”
21. The OECD 1963 draft model
convention originally dealt with both government remuneration and pensions in a
single paragraph of Article 19 and provided that the source state retained
taxing rights while saying nothing of the residence state’s entitlement. The
1977 Model Convention adopted the current formulation and the DTC therefore
reflects the state of debate in the OECD’s Committee on Fiscal Affairs at the
time. Article 18(2) of the DTC incorporates the words, “in the discharge of
functions of a governmental nature”, which were found in Article 19 of the 1963
Draft Convention but which were omitted from the 1977 Model Tax Convention.
22. The current commentary on
the OECD Model Tax Convention explains that—
“¼ sub-paragraph (a) of paragraphs 1 and 2 are
both based on the principle that the paying State shall have an exclusive right
to tax the payments. ¼ The principle of
giving the exclusive right to the paying State is contained in so many of the
existing conventions between OECD Member countries that it can be said to be
already internationally accepted. It is also in conformity with the conception
of international courtesy which is the basis of the Article and with the
provisions of the Vienna Conventions on Diplomatic and Consular Relations. ¼
An exception from
the principle of giving exclusive taxing powers to the paying State is
contained in sub-paragraph (b) of paragraph 1. It is against the background
that, according to the Vienna Conventions mentioned above, the receiving State
is allowed to tax remuneration paid to certain categories of personnel of
foreign diplomatic missions and consular posts, who are permanent residents or
nationals of that State. Given that pensions paid to retired government
officials ought to be treated for tax purposes in the same way as salaries or
wages paid to such employers during their active time, an exception like the one
in sub-paragraph (b) of paragraph 1 is incorporated also in sub-paragraph (b)
of paragraph 2 regarding pensions. ¼
the only pre-requisite for the receiving State’s power to tax the pension is
that the pensioner must be one of its own residents and nationals.”
23. As this indicates, the United Kingdom has the primary taxing right in respect of public sector pay and pensions
and the exclusion of that right under Article 18(2)(b) of the DTC in the case
of Mr Percival’s wife and other Irish nationals is an exception to the general
rule.
The discrimination complaint: EU law
24. The fact that Article 18 of
the DTC reflects Article 19 of the OECD Model Tax Convention and that Article
19 follows established international practice do not guarantee the validity of
Article 18 as a matter of Community law or under the Convention on Human
Rights. The United Kingdom has agreed to exempt Irish nationals (including
those who are also British nationals) in respect of income over which it has a
primary taxing right but insists on taxing Mr Percival because he is a British
and not an Irish national.
25. Article 18 of the Treaty on
the Functioning of the European Union (TFEU), previously Article 12 of the EC
Treaty, provides that—
“Within the scope
of application of the Treaties, and without prejudice to any special provisions
contained therein, any discrimination on grounds of nationality shall be
prohibited”
26. Furthermore, under Article
20 TFEU (previously Article 17 EC Treaty), every person holding the nationality
of a Member State shall be a citizen of the Union. This is additional to and
does not replace national citizenship. Citizens of the Union enjoy the right
to move and reside freely within the territory of the Member States, subject to
the limitations and conditions laid down in the Treaties and any measures
adopted to give effect to them (Article 20(2)(a) and 21(1) TFEU).
27. On the face of it, Mr
Percival has exercised his Treaty right to reside in Ireland and the United Kingdom now discriminates against him by continuing to tax his civil service pension
because he is a British and not an Irish national while exempting Irish
nationals from tax in respect of the same income.
28. The Court of Justice in Case
C-184/99 Grzelczyk has declared that—
“Union
citizenship is destined to be the fundamental status of nationals of Member
States, enabling those who find themselves in the same situation to enjoy the
same treatment in law irrespective of their nationality, subject to such
exceptions as are expressly provided for.”
29. However, one can observe
that the situation in which such statements have been made ordinarily concern
the treatment within a Member State of nationals of other Member States. As
the Treaties and the Court indicate, EU citizenship does not replace
nationality generally. Indeed, nationality of a Member State is a fundamental
requirement for EU citizenship. Mr Percival’s complaint is not against the
Republic’s tax system, because the Republic exempts his income. His wife might
complain that she is taxed by the Republic on her UK local authority pension
when the Republic exempts her husband’s UK civil service income. Community
law, however, does not ordinarily assist a Member State’s own nationals in a
complaint that nationals of other Member States are treated more favourably.
30. If Mr Percival’s wife, as an
Irish national, cannot complain to the Irish authorities that she is less
favourably treated in Ireland than her husband as a British national, it is not
immediately clear why Mr Percival can complain that the United Kingdom treats
him, as a British national, less favourably than his wife as an Irish
national. On the other hand, if both can complain that they are discriminated
against relative to the other, the effect of Article 18 of the DTC may be that
neither jurisdiction can tax their pension income.
31. In this respect Mr Percival
does not necessarily claim exemption from UK tax but asks that the UK tax should not be greater than if his civil service pension had been subject to Irish
tax instead, as in the case of his wife or any other Irish national. In
practice for the years in question this may mean that he should pay no UK tax on his civil service pension as a result of his Irish personal tax allowance (see
paragraph 9 above). His Irish tax position, however, was not explored in
evidence before the Tribunal. The assumption was that he would pay no tax in Ireland on the pension but this would require further investigation if we were to conclude
that that was the correct answer.
32. The problem for Mr Percival
here is that competence in respect of direct taxation remains largely a matter
for each Member State. A Member State is not in breach of its Treaty
obligations because it taxes differently and less favourably than some other Member State. Thus in Case C-177/94 Criminal proceedings against Gianfranco Perfili
[1996] ECR I-161 the Court of Justice noted in paragraph 17 of its decision
that—
“¼the Court has consistently held that, in
prohibiting every Member State from applying its law differently on the ground
of nationality, within the field of application of the Treaty, [the relevant
Treaty Articles] are not concerned with any disparities in treatment which may
result, between Member States, from differences existing between the laws of
the various Member States, so long as they affect all persons subject to them
in accordance with objective criteria and without regard to their nationality¼”
33. Thus, the European Treaties
do not require some form of ‘back door’ harmonisation or the application of a ‘lowest
common denominator’ as a result of taxpayers being allowed to compare one
Member State’s taxation choices with those of another Member State. If Mr
Percival had remained resident in the United Kingdom he would only be entitled
to a UK personal allowance (an entitlement that he retains despite his move to
the Republic). The fact that he has moved to the Republic, which offers more
favourable taxation through a higher personal allowance, cannot form the basis
of a complaint by Mr Percival against the United Kingdom.
34. The question is whether the
taxation choices made by a single Member State (in this case the United Kingdom)
are compatible with Community law. The ‘complication’, if there is one, is
that the UK’s choice in this instance has been made in conjunction with another
Member State as part of their agreement under a bilateral Double Taxation
Convention. Thus, if Article 18 of the DTC had left taxing rights with the United Kingdom and had exempted his pension income in the Republic, without more, Mr Percival could
not complain that he pays more UK tax than the Irish tax he would have paid had
the reverse been true.
35. This is not, however, the
basis of Mr Percival’s complaint: his complaint is that the reverse is
true for Irish nationals (including British nationals with dual nationality). He
therefore claims that he is discriminated against by the United Kingdom on grounds of nationality, notwithstanding that he is in an identical position to his
wife, having exercised his Community law right to leave the UK and reside in the Republic of Ireland. If on that basis Article 18(2) of the DTC is in breach
of Community law, the proportionate response might be to limit UK tax to the tax that would have been paid had Mr Percival been taxed on his pension
income on the same basis as his wife on her local authority income. That,
however, is the remedy for the breach and not the breach itself; hence it falls
outside the existing Court of Justice case law that states that the interaction
of Member States’ tax systems does not amount to a breach of Community law.
The question therefore is whether the United Kingdom is in breach of its
European Treaty obligations and Community law by reason of its agreement with
the Republic of Ireland.
36. Ms Ford in HMRC’s Amended
Statement of Case referred us in particular to Case C-336/96 Gilly v
Directeur des services fiscaux du Bas-Rhin [1998] ECR I-02793 as a case
that was relevant to our consideration of this issue. Gilly has many
similarities to the present case. Mrs Gilly was a German national who had
acquired French nationality by marriage. She resided in France but worked as a teacher at a State school in Germany. Under the Franco-German Double
Taxation Convention her salary was taxed in Germany because she was a German
national, and it was also taken into account in France with credit equal to the
French tax on her salary. As a result she paid more tax than if she had been
taxed on her salary solely in France. Under the Franco-German Convention a
teacher with French nationality and not a German national would have paid tax
only France and would therefore have paid less tax than Mrs Gilly.
37. In delivering its decision
the Court of Justice made the following points about the use of the criterion
of nationality in the Franco-German Double Taxation Convention—
26. Although as a
general rule workers are taxed in accordance with Article 13(1) of the
Convention in the State in which the personal activity in respect of which the
income is received is carried out, frontier workers are taxed in their State of
residence, under Article 13(5)(a).
27. However, the
first sentence of Article 14(1) of the Convention provides that taxpayers
receiving public-service remuneration are in principle to be taxed in the
paying State. There is also an exception to the latter rule (hereinafter 'the
paying State rule‘) in the second sentence of Article 14(1), under which
remuneration paid to a person having the nationality of the other State without
being at the same time a national of the first State is taxable in the
taxpayer's State of residence.
28. In addition,
Article 16 of the Convention lays down a special connecting rule applicable to
teachers habitually resident in one of the Contracting States who, in the course
of a short period of residence not exceeding two years in the other Contracting State, receive remuneration for teaching in the latter State. Taxpayers in
that category are taxed in the State of original employment.
29. It is thus
clear that Articles 13(1) and (5)(a), 14(1) and 16 of the Convention lay down
different connecting factors depending on whether the taxpayer is a frontier
worker or not, is a teacher in short-term residence or not, or is employed in
the private or the public sector. Taxpayers in the latter category are in
principle taxed in the paying State unless they have the nationality of the
other Contracting State without being at the same time nationals of the first,
in which case they are taxed in their State of residence.
30. Although the
criterion of nationality appears as such in the second sentence of Article
14(1) for the purpose of allocation of fiscal jurisdiction, such
differentiation cannot be regarded as constituting discrimination prohibited
under Article 48 of the Treaty. It flows, in the absence of any unifying or
harmonising measures adopted in the Community context under, in particular, the
second indent of Article 220 of the Treaty, from the contracting parties'
competence to define the criteria for allocating their powers of taxation as
between themselves, with a view to eliminating double taxation.
31. Nor, in the
allocation of fiscal jurisdiction, is it unreasonable for the Member States to
base their agreements on international practice and the model convention drawn
up by the OECD, Article 19(1)(a) of the 1994 version of which in particular
provides for recourse to the paying State principle. According to the
commentary on that article, that principle is justified by ‘the rules of
international courtesy and mutual respect between sovereign States’ and ‘is
contained in so many of the existing conventions between OECD member countries
that it can be said to be already internationally accepted’.
32. In the
present case, the first sentence of Article 14(1) of the Convention reproduces
the tenor of Article 19(1)(a) of the OECD model convention. It is true that
under the second sentence the paying State principle is abandoned where the
taxpayer has the nationality of the other contracting State without being at
the same time a national of the first State, but the same type of exception,
based at least in part on the criterion of nationality, is found in Article
19(1)(b) of the model convention in cases where the services are rendered in
the other contracting State and the taxpayer is a resident of that State who
(i) is a national of that State; or (ii) did not become a resident of that
State solely for the purpose of rendering the services.
33. In any event,
even if the second sentence of Article 14(1), the legality of which is
challenged by Mrs Gilly, were to be ignored, her tax position would remain
unchanged because the paying State principle would still have to be applied to
her income earned in Germany from teaching in the State education system.
34. Nor is it established
in the present case that the choice of the paying State as the State competent
to tax income earned in the public sector can of itself be to the disadvantage
of the taxpayers concerned. As has been pointed out by the governments of the
Member States which have submitted observations and by the Commission, whether
the tax treatment of the taxpayers concerned is favourable or unfavourable is
determined not, strictly speaking, by the choice of the connecting factor but
by the level of taxation in the competent State, in the absence of any
Community harmonisation of scales of direct taxation.
35. The answer to
the first, second and fourth questions must therefore be that, on a proper
construction, Article 48 of the Treaty does not preclude the application of
provisions such as those in Articles 13(5)(a), 14(1) and 16 of the Convention,
under which the tax regime applicable to frontier workers differs depending on
whether they work in the private sector or the public sector and, where they
work in the public sector, on whether or not they have only the nationality of
the State of the authority employing them, and the regime applicable to
teachers differs depending on whether their residence in the State in which
they are teaching is for a short period or not.
38. This appears to provide substantial
support for HMRC’s contention that Mr Percival’s claim that Article 18(2) of
the DTC represents unlawful discrimination under the EU Treaties is
misconceived. In particular, it endorses (1) the use of the criterion of
nationality to allocate taxing rights between Member States to eliminate double
taxation, even though that produces different outcomes for individuals of
different nationalities, and (2) reliance on the OECD Model Tax Convention and
in particular, on Article 19 of the Model.
39. As regards the first of
these, however, we observe that Mrs Gilly had dual nationality. The resolution
by agreement of two Member States as to which nationality should ‘prevail’ in
such circumstances is an obvious example of the appropriate use of allocative
rights retained by Member States. In Mr Percival’s case the United Kingdom has
created as part of its agreement with Ireland a straight forward distinction
between British and Irish nationals in the way in which it exercises its taxing
rights as the source state.
40. Ms Ford pointed out that
differences in levels of taxation in different Member States are not (as we
have already noted) a valid cause for complaint, citing as more recent
authority Case C-240/10 Cathy Schultz-Delzers and Pascal Schultz,
paragraph 41. This is evident from Gilly where, in effect, Mr Gilly’s
complaint was that she was paying more tax than would have been the case had
France and Germany agreed to allocate the taxing right solely to France.
Having legitimately exercised their freedom to allocate the taxing right to Germany, however, Mrs Gilly could not complain in France that she was paying more tax in Germany.
41. It is plain, therefore, that
Mr Percival would have no complaint as a matter of Community law against the Irish
Republic, for example in claiming that his Irish personal allowances entitled
him to repayment there of the tax charged in the UK. If there is a distinction
between Gilly and Mr Percival’s case it must lie in the answers to two questions:
first, whether the freedom to allocate taxing jurisdiction endorsed by the
Court in that case is limited to cases of dual nationality; and, second,
whether Mrs Gilly would have been more successful in a complaint against
Germany on the basis that Germany was discriminating between German and French
nationals in her position by taxing the former and exempting the latter.
42. Mr Percival relied upon Case
C-279/93 Finanzamt Köln-Alstadt v Roland Schumaker [1995] ECR I-0225 as
the basis for his contention that the State of residence was better able to
assess an individual’s personal circumstances and therefore the appropriate
level of taxation relative to his total income. Schumaker, however, is
not authority for any principle of Community law that individuals should be
taxed on their income only in their state of residence. As we have previously
noted, Mr Percival would have no basis for his claim if there were no exception
in Article 18(2)(b) of the DTC exempting Irish nationals from UK tax on their public service pensions, and all public service pensions suffered tax in the UK.
43. Schumaker is
authority, however, for the general proposition that two persons who are in a
comparable position in a Member State should be subject in that Member State to the same taxation rules. Thus, Mr Schumaker, a Belgian national who derived
all his income in Germany but who was not resident there, was entitled to the
same tax treatment as German nationals and residents. Although resident and
non-resident persons are not ordinarily in a comparable position (and therefore
need not be taxed the same), the fact that Mr Schumaker derived all his income
from employment in Germany meant that he was in a comparable position to a
German national and resident. The Belgian/German Double Tax Convention
allocated the taxing right to Germany and Germany was therefore bound to
exercise its right to tax Mr Schumaker in a manner that was in conformity with
Community law.
44. In the present case the UK and the Republic of Ireland have agreed that the UK should be allocated the taxing right in
respect of Mr Percival’s civil service pension. At the same time, however, the
UK has agreed to forego its right to tax Mrs Percival in respect of her local
authority pension because she is an Irish national. Mr and Mrs Percival are
both resident in the Republic of Ireland but are they in a comparable position
for these purposes so that the taxation of one and the exemption of the other
on grounds of their different nationalities can be said to be impermissible
under Community law?
45. If the matter is viewed
solely from the perspective of the United Kingdom, it is discriminating in
favour of Irish nationals to the potential ‘detriment’ of its nationals, which
is something that Community law does not as yet prohibit. This perspective is
consistent with the basic analysis that the UK has the primary taxing right and
Mrs Percival’s treatment is an exception to the ordinary rule (see paragraph 23
above). It is also clear as a matter of Community law that it does not found
any basis for complaint by a Member State’s own national. The simple reason is
that ‘discrimination’ in favour of nationals of other Member States does not
usually operate to impede or restrict the functioning of the single market but
may be said to encourage the integration of the single market.
46. The situation in which this
usually arises is one in which the national rules of a Member State regulating
its own market discriminate in favour of nationals of other Member States, and
may therefore be said not to discourage their entry into that market. In the
present case, however, the discrimination of which Mr Percival complains
relates to the United Kingdom’s insistence on retaining its taxing rights as
the source state notwithstanding his exercise of his Community law right to go
and reside in another Member State and even though the United Kingdom is
prepared to forego its taxing right in the case of an Irish national (or an
individual with dual Irish/British nationality).
47. The United Kingdom naturally retains its right to tax income that has its source there. The
fact that Mr Percival may become subject to tax on the same income by becoming
resident in another Member State is a facet of the failure of the Member States
to eliminate double taxation within the single market. Thus in Case C-379/92 Criminal
proceedings against Matteo Peralta [1994] ECR I-3453, the Court of Justice
said at paragraph 34—
“In
the absence of Community harmonisation, a Member State may certainly impose,
directly or indirectly, technical rules which are specific to it and which are
not necessarily to be found in the other Member States on maritime transport
undertakings which, like the undertaking employing Mr Peralta, are established
on its territory and which operate vessels flying its flag. But the
difficulties which might arise for those undertakings from that situation do
not affect freedom of establishment within the meaning of ¼ the Treaty. Fundamentally, those
difficulties are no different in nature than those which may originate in
disparities between national laws governing, for example, labour costs, social
security costs or the tax system.” (Emphasis supplied)
48. In the tax field the Court
has confirmed that juridical double taxation that arises when two States tax
the same income is not something that of itself causes either State to be in
breach of its treaty obligations (see e.g. Case C-513/04 Kerckhaert-Morres
[2006] ECR I-10967). The fact that both source and residence states tax the
income in question may well operate to impede the functioning of the single
market and discourage individuals and enterprises from moving or operating
cross-border but it arises from the failure of the Member States to harmonise
their tax systems rather than from the failure of either Member State to comply
with its treaty obligations.
49. In this case the United Kingdom and the Republic of Ireland have resolved this issue through the Republic agreeing to
exempt Mr Percival’s UK civil service pension. We do not think that that their
choice, by allowing the United Kingdom to retain its taxing right over Mr
Percival’s civil service pension while foregoing it over Mrs Percival’s local
authority pension, restricts the exercise by Mr Percival of his Community law
right to reside elsewhere within the Union.
50. In Case C-513/03 Heirs of
M E A van Hilten-van der Heijden v Inspecteur van de
Belastingdienst/Particulieren/Ondernemingen buitenland te Heerlen, [2006]
ECR I-01957 the Netherlands imposed inheritance tax on the value of all assets
transferred on the death of a resident of The Netherlands. An individual who
died within 10 years of ceasing to reside in The Netherlands was deemed to have
been resident there on death. Mrs van Hilten ceased to reside in The
Netherlands in 1988 and died in 1997. The Court of Justice concluded that an
inheritance is a movement of capital protected by the EC Treaty unless the
inheritance is confined to a single Member State. It nevertheless went on to
conclude that the Dutch legislation in question was not in breach of the free
movement of capital where it provided for relief in respect of the taxes levied
in the State to which the deceased had transferred her residence.
51. This was because—
46.
By enacting identical taxation provisions for the estates of nationals who have
transferred their residence abroad and of those who have remained in the Member
State concerned, such legislation cannot discourage the former from making
investments in that Member State from another State nor the latter from doing
so in another Member State from the Member State concerned, and, regardless of
the place where the assets in question are situated, nor can it diminish the
value of the estate of a national who has transferred his residence abroad. The
fact that such legislation covers neither nationals resident abroad for more
than 10 years nor those who have never resided in the Member State concerned is
irrelevant in that regard. Since it applies only to nationals of the Member State concerned, it cannot constitute a restriction on the movement of capital of
nationals of the other Member States.
52. The Court also, however,
reaffirmed the principle it had established in Gilly—
47.
As regards the differences in treatment between residents who are nationals of
the Member State concerned and those who are nationals of other Member States
resulting from national legislation such as that in question in the main
proceedings, it must be observed that such distinctions, for the purposes of
allocating powers of taxation, cannot be regarded as constituting
discrimination prohibited by Article 73b of the Treaty. They flow, in the
absence of any unifying or harmonising measures adopted in the Community
context, from the Member States’ power to define, by treaty or unilaterally,
the criteria for allocating their powers of taxation (see to that effect, as
regards Article 48 of the EC Treaty (now, after amendment, Article 39 EC),
Case C-336/96 Gilly [1998] ECR I-2793, paragraph 30, and, as
regards Article 52 of the EC Treaty (now, after amendment, Article 43 EC)
and Article 58 of the EC Treaty (now Article 48 EC), Case C-307/97 Saint-Gobain
ZN [1999] ECR I-6161, paragraph 57).
48.
Moreover, the Court has already had occasion to decide that, for the purposes
of the allocation of powers of taxation, it is not unreasonable for the Member
States to find inspiration in international practice and, particularly, the
model conventions drawn up by the Organisation for Economic Cooperation and
Development (OECD) (see Gilly, paragraph 31). As the Netherlands Government
observed, the legislation in question in the main proceedings complies with the
commentaries in the Model Double Taxation Convention concerning Inheritances
and Gifts (Report of the Fiscal Affairs Committee of the OECD, 1982)¼
53. Indeed, Case C-403/03 Schempp
[2005] ECR I-6421 illustrates that the exercise of the Community law right to
move cross-border may operate to affect adversely the taxation of a particular
individual in the source State without that necessarily amounting to a breach
by the source State of its treaty obligations. Mr Schempp paid maintenance to
his former spouse following their divorce and was ordinarily entitled to a tax
deduction for his payments provided the payments were taxable in his ex-wife’s
hands. In Germany she was taxable on them but she then moved to Austria where they were exempt and, as a result, he lost his entitlement to deduct the
payments for tax purposes.
54. The Court accepted that
Community law was engaged by Mrs Schempp’s decision to exercise her right to
reside elsewhere within the Union and that this did not depend upon Mr Schempp
exercising his Community law rights. As regards the question whether Germany was in breach of its treaty obligations in denying Mr Schempp a deduction for the payments
following his ex-wife’s move to Austria, the Court concluded as follows—
“32. ¼it is apparent that the unfavourable
treatment of which Mr Schempp complains in fact derives from the circumstances
that the tax system applicable to maintenance payments in his former spouse’s
Member State of residence differs from that applied in his own Member State of
residence.
¼
34.
It is settled case law that Article 12 EC is not concerned with any disparities
in treatment, for persons and undertakings subject to the jurisdiction of the
Community, which may result from divergences existing between the various
Member States, so long as they affect all persons subject to them in accordance
with objective criteria and without regard to their nationality (see, to that
effect, Case C-137/00 Milk Marque and National Farmers’ Union [2003] ECR I-7975, paragraph 124 and the case law cited there).
35.
It follows that, contrary to Mr Schempp’s claims, the payment of maintenance to
a recipient resident in Germany cannot be compared to the payment of
maintenance to a recipient resident in Austria. The recipient is subject in
each of those two cases, as regards taxation of maintenance payments, to a
different tax system.
36.
Consequently, the fact that a taxpayer resident in Germany is not able ¼ to deduct maintenance paid to his former
spouse resident in Austria does not constitute discrimination within the
meaning of Article 12 EC.
¼
39. As to the undisputed fact that, if Mr Schempp's former spouse had
resided in Germany, he would have been entitled to deduct the maintenance paid
to her, even though in such a case the maintenance would not have been taxed
because his former spouse's income in Germany during the period in question was
below the tax thresholds applied by German tax legislation, that cannot call
into question the conclusion in paragraph 36 above. As the Commission of the
European Communities rightly observes, the non-taxation of maintenance payments
on those grounds in Germany cannot be equated to the non-taxation of the
maintenance in Austria on the ground of its non-taxable character in that
Member State, since the fiscal consequences which attach to each of those
situations as regards the taxation of income are different for the taxpayers
concerned.
40. Under Article 18(1) EC, '[e]very citizen of the Union shall have
the right to move and reside freely within the territory of the Member States,
subject to the limitations and conditions laid down in [the] Treaty and by the
measures adopted to give it effect'.
41. As a national of a Member State and hence a citizen of the
Union, Mr Schempp is entitled to rely on that provision.
42. In his observations, Mr Schempp submits that Article 18(1) EC
protects not only the right to move and settle in other Member States but also
the right to choose one's residence. He submits that, since the maintenance
payments are not deductible from taxable income where the recipient resides in
another Member State, the recipient could be subject to a certain pressure not
to leave Germany, thus constituting a restriction on the exercise of the rights
guaranteed by Article 18(1) EC. That pressure could materialise specifically at
the time when the amount of the maintenance is determined, since that
determination takes the tax implications into account.
43. On this point, it is clear that ¼ the national
legislation in question does not in any way obstruct Mr Schempp's right, as a
citizen of the Union, to move and reside in other Member States under Article
18(1) EC.
44. As has been observed, it is true that the transfer of his former
spouse's residence to Austria entailed unfavourable tax consequences for Mr
Schempp in his Member State of residence.
45. However, the Court has already held that the Treaty offers no
guarantee to a citizen of the Union that transferring his activities to a Member State other than that in which he previously resided will be neutral as regards
taxation. Given the disparities in the tax legislation of the Member States,
such a transfer may be to the citizen's advantage in terms of indirect taxation
or not, according to circumstances (see, to that effect, Case C-365/02 Lindfors
[2004] ECR I7183, paragraph 34).
46. The same principle applies a fortiori to a situation such as
that at issue in the main proceedings where the person concerned has not
himself made use of his right of movement, but claims to be the victim of a
difference in treatment following the transfer of his former spouse's residence
to another Member State.
47. In those circumstances, the answer to the questions referred must
be that the first paragraph of Article 12 EC and Article 18(1) EC must be
interpreted as not precluding a taxpayer resident in Germany from being unable,
under national legislation such as that at issue in the main proceedings, to
deduct from his taxable income in that Member State the maintenance paid to his
former spouse resident in another Member State in which the maintenance is not
taxable, where he would be entitled to do so if his former spouse were resident
in Germany.”
55. We think it clear, therefore,
that the UK’s insistence as the source state on taxing Mr Percival’s civil
service pension notwithstanding his choice to move to Ireland cannot be
regarded as a restriction on the exercise of his Community law rights. And,
indeed, it would be extraordinary if that were so in these circumstances
because the United Kingdom has chosen to retain its taxing right in the context
of the DTC under which it has secured for Mr Percival exemption from taxation in
Ireland on the same income. Whether that works in Mr Percival’s favour or not
is, as the Court noted in paragraph 45 of its decision in Schempp,
irrelevant.
56. We also think that that the
fact that the United Kingdom gives up its taxing rights as the source state in
favour of Ireland as the residence state in respect of public pensions paid to
Irish nationals or dual British/Irish nationals cannot be the foundation of any
complaint by Mr Percival. The principle of non-discrimination under Community
law requires that comparable situations must not be treated differently unless
such treatment can be objectively justified. In relation to direct taxes, the
situations of residents and non residents are not, as a rule, comparable (Case
C-279/93 Schumacker, paragraph 31). Furthermore, a resident of one
Member State is not usually comparable to a resident of another Member State
who is entitled to the benefit of a Double Taxation Convention with a third
Member State (Case C-376/03 D v Inspecteur van de
Belastingdienst/Particulieren/Ondernemingen buitenland te Heerlen [2005]
ECR I-05821 paragraph 63).
57. We think that these basic
principles are closely related to the Court’s approach in dealing with the
allocation of taxing rights. Irish and dual British/Irish nationals are not in
a comparable position to Mr Percival as a British national because each is
subject to a different tax system in respect of the income in question. It is
true that that difference in taxation treatment derives from their different
nationalities but they are nevertheless in objectively a different situation
because they are subject to different tax systems: the United Kingdom’s in Mr Percival’s case and the Republic of Ireland’s in Mrs Percival’s case.
58. If the United Kingdom had as
a unilateral measure under its domestic tax system chosen to retain its taxing
rights over certain income of British nationals but to forego equivalent taxing
rights in the case of non-British nationals, without regard to the
comparability of their situation as residents of another Member State, further
consideration might be required as to whether in the particular circumstances such
a rule was compatible with the United Kingdom’s treaty obligations or involved
discrimination. That is not, however, the case here because the rule operates
in the context of a DTC establishing the respective taxing rights of the United
Kingdom and the Republic of Ireland and in doing so secures that Mr and Mrs
Percival are not objectively in a comparable position.
59. We therefore conclude that
Article 18 of the DTC is compatible with the United Kingdom’s obligations under
the European treaties.
The discrimination complaint: Human Rights
60. Mr Percival’s complaint on
human rights grounds is that he is discriminated against contrary to Article 14
of the European Convention on Human Rights read with Article 1 of Protocol 1,
because as a British national resident in Ireland he is treated differently for
tax purposes than an Irish national (or dual British/Irish national) in receipt
of the same UK civil service pension. The discrimination is said to be on the
grounds of national origin, in that he is of sole British nationality, or place
of birth, in that if he had been born in Northern Ireland, he would be entitled
to Irish nationality as a matter of right.
61. Article 14 is relevantly in
the following terms—
“The
enjoyment of the rights and freedoms set forth in this Convention shall be
secured without discrimination on any ground such as ¼ national or social origin ¼ birth or other status.”
62. Article 1 of Protocol 1
provides that—
“Every
natural or legal person is entitled to the peaceful enjoyment of his
possessions. No one shall be deprived of his possessions except in the public
interest and subject to the conditions provided for by law and by the general
principles of international law.
The
preceding provisions shall not, however, in any way impair the right of a State
to enforce such laws as it deems necessary to control the use of property in
accordance with the general interest or to secure payment of taxes or other
contributions or penalties.”
63. HMRC do not dispute that the
right to receive a pension is capable of being a possession for the purposes of
Article 1 of Protocol 1 (R v Secretary of State for Work and Pensions ex
parte Carson and Reynolds [2006] 1 AC 173 per Lord Hoffmann at para 12). They
say, however, that there is a sufficient relevant difference between Mr
Percival as a British national living in Ireland in receipt of a UK civil service pension and Mrs Percival as an Irish national living in Ireland and in receipt of a
British local authority pension to justify the different treatment.
Alternatively, they say that any difference in treatment is reasonable and
proportionate.
64. HMRC justify their conclusion
by reference to Gilly and the fact that the UK and Ireland have agreed a different allocation of taxing rights in respect of Mr and Mrs
Percival by reference to established principles of international law. In this
respect we recognise that there is an important difference between Mr and Mrs
Percival given that they are subject to tax on the income in question in
different countries. Mr Percival might observe that the difference arises from
the choice that has been made by reference to their respective nationalities,
which is the source of his complaint. Nevertheless, the same answer could be
given to this as we gave in relation to the Community law issue.
65. In any event, we do not
believe that we need to analyse this aspect of the matter further from a human
rights perspective because we are satisfied that even if Mr Percival’s complaint
under this head were well founded, he has no remedy. As HMRC point out,
section 3(1) of the Human Rights Act 1998 provides that—
“So
far as it is possible to do so, primary legislation and subordinate legislation
must be read and given effect in a way which is compatible with Convention
rights.”
66. The DTC itself is not
primary or secondary legislation but it is given effect to for tax purposes
through statutory provision (section 788 Income and Corporation Taxes Act 1988)
and is incorporated in secondary legislation pursuant to that statutory
provision. However, we think it impossible to construe or give effect to the DTC
in a manner compatible with Mr Percival’s human rights (assuming for the moment
that there has been some breach of his human rights). The DTC unambiguously
allocates the sole taxing rights in respect of this element of Mr and Mrs
Percival’s pension income to the UK and Ireland respectively. On the basis
that the DTC is compatible with Community law (as we have concluded), the most
that we could do, would be to issue a declaration of incompatibility under
section 4 of the Human Rights Act 1998 but, as HMRC point out, this Tribunal
has not been invested with the power to make such a declaration.
The discrimination complaint: Article 23 of the DTC
67. We pass on to the principal
ground that Mr Percival advanced before us, namely that the non-discrimination
Article of the DTC applies in this case to relieve Mr Percival of more
burdensome UK taxation while he is resident in the Republic of Ireland than the
taxation to which Irish nationals in the same circumstances are subjected. Mr
Percival says that this construction of Article 23(1) has the effect of
requiring that taxation of government pensions to take account of the
individual’s residence and family circumstances in the other state rather than
charging tax solely by reference to the paying state’s tax code. He goes on to
point out that the UK and Irish tax codes were substantially similar when the DTC
was agreed and that the Irish punt was fixed at parity with sterling.
Accordingly, he says, it would initially have been of little moment whether the
taxing rights were allocated to the UK or Ireland. As the tax systems (and
exchange rates) have changed, so it has become a matter of more significance.
68. While we can admire Mr
Percival’s ingenuity in his particular reading of Article 23(1), we do not
consider that it is correct. First, it would be very unusual for a source
state (in this instance the United Kingdom) to agree to qualify the on-going
taxing rights that the treaty has reserved to it (by Article 18 in this case) by
reference to the general terms of the non-discrimination article and based on
the future taxation choices made by the other state. In UBS AG v HMRC
[2007] STC 588 Moss LJ suggested that it was “inconceivable” that having
expressly provided a specific treatment under one article of the treaty, that
treatment would be modified in certain cases by the general terms of the
non-discrimination article. The same would appear to be true in this case.
69. Second, the language of
Article 23(1) in referring to “shall not be subjected ¼ to any taxation” is naturally referring to taxation imposed by
“the other Contracting State”, in this case Ireland. Even if Article 23(1) is
read, as Mr Percival suggests, as “shall not be subjected [while] in the other
Contracting State to any taxation”, this would more naturally refer to the
taxation of the Contracting State within which the foreign national currently is
found or resides than the taxation of the Contracting State of which he is a
national.
70. The same expression “shall
not be subjected in [a Contracting State] to any taxation” is repeated in
Article 23(3), which is the corresponding Article for companies and which provides
that—
“Enterprises
of a Contracting State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other
Contracting State, shall not be subjected in the first mentioned Contracting
State to any taxation or any requirement connected therewith which is other or
more burdensome than the taxation and connected requirements to which other
similar enterprises of that first mentioned State are or may be subjected.”
71. The Article plainly operates
to constrain a State from applying more burdensome taxation to one of its
enterprises because it is owned or controlled by residents of the other Contracting State. In this instance it is clear that “subjected in the first mentioned
State to any taxation” is a reference to taxation imposed by the State in which
the enterprise is formed (i.e. Ireland) and not the other Contracting State (the UK). The fact that Article 23(1) refers to “the other Contracting State” and that
Article 23(3) refers to “the first mentioned Contracting State” reflect that
Article 23(1) starts by referring to a foreign national who comes into the
State in question whereas Article 23(3) starts with a national of the State in
question (being one of its enterprises) that is owned or controlled by foreign
residents. That different starting point does not, however, lend support to the
idea that “subjected to any taxation” is referring to something different in
each case: in both cases, it refers to any taxation of the State in which the
enterprise is formed and in which the foreign national is currently found.
72. The scope of the equivalent provision
to Article 23(3) in the UK/US and UK/Japan Double Taxation Conventions was
considered by the House of Lords in Boake Allen Ltd v HMRC [2007] 1 WLR 1386. That case illustrates that the Article is concerned with the taxation
provisions of the State in which the enterprise in formed. Lord Hoffmann described
in paragraph 5 of his speech the function of the standard non-discrimination
article as, “prohibiting various forms of discrimination by the tax laws of the
one contracting state against nationals or residents of the other”.
73. In referring to the
equivalent provision to Article 23(1) he said (at paragraph 16) that—
“In
relation to article 24(1) of the OECD Model Convention, the commentary says
that the “underlying question” is whether two residents are being treated
differently “solely by reason of having a different nationality”. It does not
repeat this observation in relation to article 24(5), but the principle must be
the same.”
74. Further on at paragraph 22
he also said—
“As
the commentary on the OECD model says, the equality [a treaty] ensures is only
that any enterprise [a company or individual resident in one country] owns in
the other country will not be subject to taxation which discriminates on the
ground of its foreign control.”
75. Lord Hoffmann’s analysis of
the non-discrimination provisions has been subject to recent analysis by the
Court of Appeal in HMRC v FCE Bank plc [2012] EWCA Civ 1290. In that
case the Court of Appeal was able to reach a different conclusion on the
application of the non-discrimination article to the UK group relief provisions
as compared to the House of Lords’ conclusion in Boake Allen regarding
the group ACT provisions. We do not need to explain the analysis in either
case as it is not directly relevant to Mr Percival’s suggested construction of
Article 23(1). Nothing in FCE Bank casts doubt on Lord Hoffmann’s more
general consideration of the function of the non-discrimination article of the
OECD Model Convention. Furthermore at paragraph 38 of his judgment in FCE
Bank Rimer LJ said this—
“The
purpose and effect of article 24(5) are to outlaw the admittedly discriminatory
tax treatment to which (but for the convention) FCE would be subject as the
directly held subsidiary of a US-resident company as compared with the more
favourable tax treatment to which it would be entitled if it were the directly
held subsidiary of a UK-resident company. That shows, in my judgment, that the
only reason for the difference in treatment in the [present case is the fact of
FMC’s US residence.”
76. Ms Ford drew our attention
to the commentary on the OECD Model Convention to which Lord Hoffmann alluded
and its explanation of the discrimination against which the standard article is
directed. Mr Percival produced an article by Professor Dr Michael Lang and
Florian Brugger in (2008) 23 Australian Tax Forum discussing the role of the
commentary in the interpretation of tax treaties. We find it unnecessary to discuss
this material in more detail here because in our view a natural reading of the
language of Article 23(1) in the context of the treaty as a whole indicates
that the Article does not bear the meaning for which Mr Percival contends. The
commentary and the authorities to which we have referred support that
conclusion.
Our conclusion
77. As appears from this
decision, the Community law questions that arise from Mr Percival’s complaint
have appeared to us the issue requiring more substantive consideration. We are
uncertain why Mr Percival decided not to pursue his Community law arguments
before us and to limit his submissions to the non-discrimination provisions of
the DTC. We did not understand him to be abandoning his other arguments and we
would in any event have advised him against that course given that he was
unrepresented and that he did not have the benefit of professional advice to do
so.
78. We have considered whether
in the light of that we should invite further submissions from both parties
before reaching a decision. In the event we have concluded against that course
because we think that the answer to the Community law questions is clear even
if Gilly alone does not in our view provide the complete answer that
HMRC suggested in their Statement of Case.
79. We accordingly dismiss Mr
Percival’s appeal. If in the light of our analysis Mr Percival believes that
his complaint merits further consideration of the issues with the benefit of
more detailed written and oral submissions on the matter, he may seek to take
the matter further by applying for permission to appeal.
80. This document contains full
findings of fact and reasons for the decision. Any party dissatisfied with this
decision has a right to apply for permission to appeal against it pursuant to
Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009. The application must be received by this Tribunal not later than 56
days after this decision is sent to that party. The parties are referred to
“Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)”
which accompanies and forms part of this decision notice.
MALCOLM
GAMMIE CBE QC
TRIBUNAL JUDGE
RELEASE DATE: 18 April 2013
