Article 35 - United Kingdom's perspective

 

1. Entry into effect - under the Japan-United Kingdom CTA

 

Table 2 - Illustrated examples of the symmetrical application of both Article 35(1)(a) and Article 35(1)(b) with respect to withholding tax and other taxes respectively

 

		United Kingdom	Japan
(1)	Date of deposit of instrument of ratification	29 June 2018	26 Sept 2018
(2)	TA entry-into-force date	1 Oct 2018	1 Jan 2019
(3)	TA Entry into effect (unilateral)	1 Apr 2019	1 July 2019
(4)	CTA Entry into effect (bilateral) – withholding taxes	Article 35(1)(a)	Article 35(1)(a)
(5)	CTA Entry into effect (bilateral) – all other taxes	Article 35(1)(b)	Article 35(1)(b)

 

3.1.1. Legal Texts of Articles 35(1)

 

Article 35(1) is the entry-into-effect date provision. It reads as follows:

 

The Convention (the MLI) shall take effect in each contracting jurisdiction with respect to the covered tax agreement:

(a) with respect to taxes withheld at source on amounts paid or credited to non-residents (withholding tax), where the event giving rise to such taxes occurs on or after the first day of the next calendar year that begins on or after the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement (the CTA); and

(b) with respect to all other taxes levied by that contracting jurisdiction, for taxes levied with respect to taxable periods beginning on or after the expiration of a period of six calendar months (or a shorter period, if all contracting jurisdictions notify the Depositary that they intend to apply such shorter period) from the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the CTA.

 

3.1.2. Article 35(1)(a)

 

For article 35(1)(a), “the first day of the next calendar year that begins on or after the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement (the CTA)” is the first day of January 2019. The synthesized texts for the application in Japan and the United Kingdom of article 35(a) to the Japan-United Kingdom CTA are produced below:

 

For the application in both Japan and the United Kingdom

 

The provision shall have effect in Japan (the United Kingdom) with respect to the CTA, with respect to taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after the first day of January 2019.

 

3.1.3. Article 35(1)(b)

 

For article 35(1)(b), “a period of six calendar months from the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the CTA” runs from 1 Jan 2019 to 30 Jun 2019. (Referred to as “Text-A”) The taxable periods beginning on or after the expiration of Text-A are the periods on and after 1^st July 2019. The synthesized texts for other taxes for application in Japan and the United Kingdom are produced below (shorter period not adopted): -

 

For the application in Japan with respect to other taxes

 

The provision shall have effect in Japan with respect to the CTA (the Convention), with respect to other taxes levied by that contracting jurisdiction, for taxes levied with respect to the taxable periods beginning on or after July 1, 2019.

 

For application in the United Kingdom

 

The provision shall have effect with respect to the CTA (the Convention), with respect to other taxes levied by that contracting jurisdiction, in the United Kingdom, from 1 April 2020 for corporation tax and from 6 April 2020 for income tax and capital gains tax.

 

It is noted that the phrase "with respect to other taxes levied by that contracting jurisdiction" is not in a bilateral CTA. This will be used in the contexts of a multilateral CTA, such as the Nordic Tax Convention that consists of 6 members.

 

3.1.4. Taxable periods

 

The term "taxable period" is not defined in the MLI, nor is it defined in the CTA. Instead, it is defined in the domestic rules of the contracting jurisdiction.

 

The Japanese tax year runs from 1st Jan to 31st Dec for individuals. The taxable period for a corporation is the business year that would not be the same for different corporations. For example, the taxable period for Toyota Motor Corporation is a 12-month period ended on 31st March that is the same as its accounting period, but that for Japan Tobacco Inc. is a 12-month period ended on 31^st December.

 

In the United Kingdom, the taxable period for corporation tax runs from 1^st April to 31^st March in the following year while the taxable period for income tax and capital gain tax runs from 6^th April to 5^th April in the following year.

 

The term "taxable period" in relation to a corporation means an accounting period. [1] The financial year begins from April and ends in the following March. Section 2(1) of the UK Corporation Tax Act 2009 (the CTA 2009) provides that "corporation tax is charged on profits of companies for any financial year for which an Act so provides". Section 8(2) of the CTA 2009 provides that corporation tax is calculated and chargeable, and assessments to corporation tax are made, by reference to accounting periods, as defined in section 9 and section 10 of the CTA 2009.

 

The term "taxable period" in relation to an individual is a tax year. [2] Sections 4(1), 4(2), and 4(3) of the Income Tax Act 2007 provide that "Income tax is charged for a year only if an Act so provides." "A year for which income tax is charged is called a "tax year", which begins on 6 April and ends on the following 5 April." Section 1(1) of the Taxation of Chargeable Gains Act 1992 provides that "capital gains tax is charged for a tax year on chargeable gains accruing in the year to a person on the disposal of assets".

 

3.1.5. Interpretation of "the next year"

 

For withholding tax purposes, the entry-into-effect date for Japan fell on the same date as the latest date of entry into force. In that regard, the OECD Secretariat has specifically dealt with this issue, as set out below: [3]

 

“Where a second of the pair of contracting jurisdictions deposits its instrument of ratification on a day in September 2018, the date of entry into force of the MLI for that contracting jurisdiction pursuant to Article 34 will be 1 Jan 2019. The question raised is whether the inclusion of the word "next" in Article 35(1)(a) means that, in such a case, the MLI has effect for events giving rise to withholding taxes which occur on or after 1 Jan 2019 or on or after 1 Jan 2020. The Secretariat has clarified that the use of the word "on" can only mean that the date from which the MLI have effect can be the same as the latest of the dates of entry into force. The same reasoning applies to the interpretation of the similar formulations used in Article 35(3) ("... 1 Jan of the next year beginning on or after...") and Article 35(5) ("... the first day of the next calendar year that begins on or after...").”

 

3.1.6. Article 35(4)

 

In line with the policy objective of providing early access to MAP for the taxpayer, article 35(4) modifies the entry-into-effect provision of the Japan-United Kingdom CTA with respect to MAP cases which comes under article 16(1). The synthesized texts are set out below:

 

Notwithstanding the provisions of articles 35(1), 35(2), and 35(3), article 16 (Mutual Agreement Procedure) of the MLI shall have effect with respect to the Convention for a case presented to the competent authority of either Contracting State on or after the latest of the dates on which the MLI comes into force for each of the contracting jurisdictions to the covered tax agreement (See row 2, Table 2) January 1, 2019, except for cases that were not eligible to be presented as of that date under the Convention prior to its modification by the MLI, without regard to the taxable period to which the case relates.

 

As the information in Table 1 shows, the entry into effect date under article 35(4) shall also apply to the corresponding provision in the India-United Kingdom CTA. However, the application of article 35(4) to the Sweden-United Kingdom CTA will be subject to modification as Sweden has reserved its right for the entry into effect provision under article 35(4) to be replaced by that given under article 35(7)(a). The entry-into-effect provision under article 35(4) shall also not apply to the Iceland-United Kingdom CTA because Iceland has reserved its right not to apply article 35(4), pursuant to article 35(6).