Mutual assistance provisions in double tax agreement between United Kingdom and South Africa

In the recent case of Ben Nevis (Holdings) Limited & Metlika Trading Limited v The Commissioners for HMRC (Her Majesty’s Revenue and Customs) [2013] EWCA, the Court of Appeal of England and Wales considered the interpretation of the mutual assistance provisions in the double tax agreement (DTA) between the United Kingdom (UK) and South Africa (SA).

The first appellant, Ben Nevis (Holdings) Limited (Ben Nevis), was a company incorporated in the British Virgin Islands and owned and controlled by South African businessman, David King. The final determination of a tax appeal in South Africa in October 2010 resulted in Ben Nevis being found liable for taxes (for the 1998 to 2000 assessments) to the South African Revenue Service (SARS), amounting to R2.6 billion. SARS was of the opinion that during the subsistence of their investigation of Ben Nevis, assets totalling 7.8 million were transferred to the second appellant, a company also incorporated in the British Virgin Islands. SARS relied on article 25A of the protocol amending the DTA between the UK and SA (in force on 13 October 2011), which made provision for mutual assistance in the collection of taxes, and enlisted the assistance of the HMRC to collect Ben Neviss outstanding tax debt.

HMRC accordingly assisted SARS and intervened in the transfer of assets by Ben Nevis to the second appellant. Ben Nevis subsequently took legal action in the UK, arguing that HMRC could not enforce the South African tax liability because it relates to a period prior to the DTAs coming into force in 2002. The protocol to the DTA contained the mutual assistance provisions under article 25A. Ben Nevis further argued that article 27 of the DTA, which governs the entry into force of the DTA, has the effect of precluding mutual assistance in the collection of tax debts which relate to periods prior to 1 January 2003. Essentially, the argument was against retrospective application of the mutual assistance provisions.

The Court of Appeal held that article 27 of the DTA did not limit the temporal application of the protocol and article 25A. Furthermore, article 25A, read free of article 27, was found to apply to requests for assistance in the enforcement of tax liabilities arising before the protocol came into force. The court noted that article 28 of the Vienna Convention forbids retrospectivity of treaties unless the contrary intention appears from such treaty, but found that this was not a peremptory norm of international law. Ultimately, the intention of the parties would be the deciding factor in the retrospective application.

The parties agreed, as is apparent from article VI of the protocol, that article 25A would apply to all enforcement requests made on or after the date on which the protocol entered into force (13 October 2011). The court went on to state that the application of article 25A in the present instance was not truly retrospective. Furthermore, there was no unfairness in its application which permitted cross-border collection of the tax debts, although the debts related to years of assessment commencing before the 2002 DTA came into force.

Yet a further argument by Ben Nevis was that s173 of the Finance Act 2006, giving effect to arrangements relating to international tax enforcement, did not apply retrospectively to allow for enforcement of the DTA. The court held that the rule forbidding collection of taxes assessed by a foreign tax authority was amended in the Finance Act 2006, to allow for international tax enforcement. The change allowed the collection of foreign taxes arising before the amendment came into force. The previous rule impeding the enforcement had been a matter for the states involved and did not create a legitimate expectation for the taxpayer that it would be retained in the future.

It appears that the united front presented by the HMRC and SARS proved successful in pinning down the taxpayer and it remains to be seen to what extent mutual assistance for enforcement of tax collection will be relied on in future.