“any plan, scheme, fund, trust or other arrangement established in a 30 Contracting State which is: (i) generally exempt from income taxation in that State; and (ii) operated principally to administer or provide pension or 35 retirement benefits or to earn income for the benefit of one or more such arrangements”
“Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of 20 its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or 25 (b) leads to a result which is manifestly absurd or unreasonable.”
“The [American] court was greatly influenced in its decision by the fact that the Departments of State and Treasury interpreted 5 art XII of the Canadian Convention as not conferring the exemption claimed and had negotiated other treaties on that basis. As appears from the decision in Fothergill v Monarch Airlines Ltd no such principle is applied by the English courts to the provisions of a convention which 10 had been incorporated into municipal law by primary or secondary legislation.”
“Not having been created or organized in the United States, 5 the trust is not a qualified trust under Code section 401(a) and is not exempt under section 501(a). Based on the information you submitted, however, we have determined that the trust is part of a plan which meets the requirements of section 401(a) in all other respects. It would have 10 qualified for exemption under section 501(a) except for the fact that it was created or organized outside the United States. Therefore, distributions to beneficiaries will be taxable as though made through an exempt trust, as provided in section 402(e)(5). Deductions are allowable as provided in Code section 404(a)(4) for contributions 15 made by the employer, which is a domestic corporation or resident of the United States.”
“[A]part from its immunity, the SRP would generally be subject to US federal income tax on its income and capital gains because it is not an exempt trust under IRC § 501(a). This also is agreed by both experts, 15 and we so find.”
“[103] As the ‘essential quest in the application of treaties’ is ‘the search for the real intention of the contracting parties 5 in using the language employed by them’ (Commerzbank[1990] STC 285 , 63 TC 218), it would, we consider, be strange if we were to conclude that the SRP, which we have found as a fact would not be considered, as a matter of US law, to be ‘established in’ the USA for the purposes 10 of the DTA, was, as a matter of English or UK law, ‘established in’ the USA for those purposes. [104] We accept that our finding of fact as to the position in US law is not determinative of (although it is relevant to) the matter before us 15 and that, pursuant to art 3(2) of the DTA we must attribute to the phrase ‘established in’ a state the meaning which it has (or had at the relevant time(s)) under UK law for the purposes of income tax or, failing such a meaning, the meaning which it has (or had) under general English or UK law. 20 [105] Applying the Commerzbank principles of interpretation, we agree with Mr Yates that we must take account of the exchange of notes of24 July 2001 as the best evidence of the real intention of the contracting parties in using the language employed in the definition in art 3(1)(o) of the DTA. We accept that the list of schemes 25 intended to be included in the definition, as set out in the exchange of notes is not exclusive or exhaustive, but we agree with Mr Yates that the language and structure of the exchange of notes is very persuasive in support of his main proposition, that the contracting parties meant by the phrase ‘established in’ a contracting state the 30 concept of being established under and in conformity with the relevant contracting state's tax legislation relating to pension schemes. [106] This provides a sensible and workable definition in accordance with what we discern as the purpose of the provision, which is to 35 recognise the special categories of pension scheme to which the contracting states have chosen to give exemption from income taxation under their respective domestic laws because they are schemes operated principally to administer or provide pension or retirement benefits, etc. The exemption from income taxation in the 40 USA which the SRP enjoys does not, we are satisfied, arise from its status as a pension scheme, but from the relevantly unconnected privileges and indemnities enjoyed by the World Bank. [107] We entirely accept Mr Schwarz’s point that the SRP is an arrangement set up physically in the USA. Although it would not be 45 a misuse of ordinary language to describe it as ‘established in’ the 13 USA, that is not the meaning which we have concluded should be attributed to the phrase ‘established in’ a contracting state for the purposes of arts 3(1)(o) and 17(1)(b) of the DTA as a matter of UK law. [108] We do not accept that the SRP has a sufficient 5 legal nexus with the USA to support the case that it is ‘established in’ the USA for relevant purposes. This conclusion follows from our finding above that a US court would not have jurisdiction to exercise primary supervision over the administration of the SRP by virtue of the ‘safe 10 harbor’ provisions or otherwise. [109] Comparison of the language of the DTA which we are called upon to construe with the language of another double taxation convention (that between Canada and the UK) would be a very unsure basis to reach a conclusion contrary to the one we have 15 reached by reference to directly related materials (particularly the exchange of notes) and we reject it. [110] We do not accept that the purpose of the exemption under art 17(1)(b) of the DTA is to provide equal treatment for pensioners resident in either contracting state with regard to the taxation of 20 pension income. It is, as we discern it, to give exemption in both contracting states to pension income which the parties to the DTA have chosen to exempt from income taxation under their respective domestic laws because they are schemes operated principally to administer or provide pension or retirement benefits, etc. 25 [111] We accept Mr Yates's submissions on the DTA issue for the reasons he advanced and decide in consequence that the SRP falls outside the definition of ‘pension scheme’ in art 3(1)(o) of the DTA, and that Mr Macklin is not entitled to rely on art 17(1)(b) of the DTA in relation to pension income derived by him from the SRP. We 30 dismiss his appeal on this basis accordingly.”
“The conduct of [HMRC] relating to US evidence on (a) whether the 45 SRP is generally exempt from US income tax and (b) the US income tax treatment of benefits paid to US resident pensioners … was unreasonable because (a) in the event the evidence was not disputed 18 (b) [HMRC] could and should have agreed at any of the stages prior to the exchange of expert reports but did not do so (c) they knew that significant costs would otherwise be incurred.”
“[143] Mr Schwarz applied to us to consider making an order in 15 respect of costs against HMRC on the basis that they had acted unreasonably in defending or conducting the proceedings (r 10(1)(b),Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Rules). It is to be noted that this appeal was allocated as a Complex case under r 23 of the Rules and Mr Macklin had made a 20 timeous written request to the tribunal that the proceedings be excluded from potential liability for costs under r 10(1)(c). [144] The basis on which Mr Schwarz’s application was made was that HMRC had acted unreasonably in requiring extensive expert evidence of US law to be adduced in the appeal. Mr Schwarz 25 submitted that this had been a disproportionate approach, having regard to the relatively modest amounts of tax at issue. [145] We dismiss the application. We have regard to the overriding objective of the Rules, which require us to deal with cases fairly and justly and, in particular, to deal with cases in ways which are 30 proportionate to the importance of the case, the complexity of the issues, the anticipated costs, and the resources of the parties (r 2(1) and (2)(a)). [146] Although relatively modest amounts of tax are at issue in this appeal, we were informed that there were other cases where the same 35 or similar issues were raised. Apart from this, the interpretation of the expression ‘established in’ a contracting state for the purposes of the DTA seems to us to be a point of general importance for HMRC, which they may reasonably require to litigate with the advantage of full expert evidence on US law. We have seen no reason to conclude 40 that HMRC have acted unreasonably in defending or conducting these proceedings.”
“In simple terms, we are unable to agree your proposed facts on US 35 law for no other reason than we simply do not understand how you see US law operating in respect of the pension scheme. This is why Mr Stuart would appreciate a further discussion with you. If he can gain an understanding on this point, he may then be in a position to agree your facts on US law or explain in detail why HMRC can not agree them”; 40 (e) On8 June 2012 , Mr Macklin’s representatives repeated their “invitation to agree” “points of law which, in our view, are incontestable”; 45 (f) At a hearing on26 July 2012 , the FTT gave directions for HMRC to serve expert evidence by 28 September and for the questions put to HMRC’s expert to relate to, among other matters, the points that 20 HMRC had been asked to agree. The directions also referred to HMRC informing Mr Macklin of “the consequences and results of its discussion with the IRS”