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Provisions of domestic law can’t be applied to interpret treaty terms: Supreme Court of UK

May 21, 2020[2020] 116 713 (SC-UK)

INTERNATIONAL TAXATION : Where a qualified diver and resident in South Africa, undertook diving engagements in waters of UK Continental Shelf, he would be charged to income tax in UK on his employment income

• F is a qualified diver, resident in the Republic of South Africa. During the 2011/12 and 2012/13 tax years he undertook diving engagements in the waters of the UK Continental Shelf. Treaty provides earnings of self-employed persons to be taxed only where they are resident; in case of F, South Africa. If F was an employee, then he should be taxable only in UK.

Held, that section 15 of the Income Tax (Trading and Other Income) Act 2005 uses term "trade" in its conventional sense and does not, therefore, alter the meaning of "enterprise" in article 7, it being common ground that enterprise is descriptive of a business, and that business includes trade. It takes the usual meaning of terms and erects a fiction which, applying those terms in their usual meaning, leads to a different way of recovering income tax from qualifying divers. Furthermore, section 15 creates this fiction not for the purpose of deciding whether qualifying employed divers are to be taxed in the UK upon their employment income, but for the purpose of adjusting how that income is to be taxed, specifically by allowing a more generous regime for the deduction of expenses. If one asks, as is required, for what purposes and between whom is the fiction created, it is plainly not for the purpose of rendering a qualifying diver immune from tax in the UK, nor adjudicating between the UK and South Africa as the potential recipient of tax. It is for the purpose of adjusting the basis of a continuing UK income tax liability which arises from the receipt of employment income. Therefore, to apply the deeming provision in section 15(2) so as to alter the meaning of terms in the Treaty with the result of rendering a qualifying diver immune from UK taxation would be contrary to its purpose. It would also produce an anomalous result. Section 15, understood in the light of section 6(5) of the Income Tax (Earnings and Pensions) Act 2003, charges income tax on the employment income of an employed diver, but in a particular manner which includes the fiction that the diver is carrying on a trade.

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