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UK-British Virgin Islands Tax Information & Double Taxation Agreement

Published by Sanjay Gautam
Published Date: October 17, 2023

On the 29th of October 2008, the governments of the United Kingdom and the British Virgin Islands (BVI) signed two pivotal agreements, namely, the Tax Information Exchange Agreement and the Double Taxation Agreement. These agreements came into force on the 12th of April 2010.

This article aims to provide an overview of these agreements and to delineate their primary implications.

Background

The UK and the BVI, recognizing the previously established Agreement for the exchange of tax-related information, felt the need to take measures to avoid double taxation on income.

Scope and Application

Article 1: Persons Covered

This agreement, signed between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Virgin Islands, is designed to address the issue of double taxation concerning taxes on income. It primarily focuses on individuals who are residents of either or both contracting parties.

UK-British Virgin Islands-Scope and Application

Article 2: Taxes Covered

The scope of this agreement extends to taxes related to income, primarily addressing the United Kingdom income tax and any taxes that bear substantial similarity to it, which either party might introduce after the agreement's signing.

In the United Kingdom, these taxes may coexist with or replace the income tax. The agreement mandates that the competent authorities of both parties inform each other of significant changes in their respective taxation laws.

Residency for Tax Purposes

Article 3: General Definitions

This article provides crucial definitions for interpreting the agreement:

  • It defines "United Kingdom" to encompass Great Britain and Northern Ireland, including any areas beyond the territorial sea, in accordance with international law.
  • "The Virgin Islands" refers to the territory of the Virgin Islands.
  • "A party" and "the other party" represent either the United Kingdom or the Virgin Islands, depending on the context.
  • "Competent authority" is designated as the Commissioners for Her Majesty’s Revenue and Customs in the United Kingdom and the Financial Secretary in the Virgin Islands, or their respective authorized representatives.
  • The term "tax" broadly encompasses any tax imposed by either party, and "United Kingdom tax" and "Virgin Islands tax" are to be construed accordingly.

It's also noted that any undefined terms within the agreement should be interpreted based on their meanings in the domestic tax laws of the respective party, with the tax laws taking precedence over other laws.

Specific Tax Provisions

Article 4: Resident

This article establishes the definition of a "resident of a party" for tax purposes.

In the United Kingdom, an individual is considered a resident if they are liable to tax there due to their residence, but this definition excludes individuals taxed only on income or capital gains from sources within the United Kingdom.

Specific Tax Provisions

Similarly, in the Virgin Islands, a resident is someone taxed there due to their residence, excluding those taxed solely on income from sources within the Virgin Islands.

In cases where an individual qualifies as a resident of both parties, they will be treated as a resident of the United Kingdom for the purposes of this agreement.

Article 5: Pensions

This article clarifies the tax treatment of pensions and similar remuneration. Essentially, such payments made to a resident of a party should only be taxable in that respective party.

However, there are exceptions, and payments originating in the United Kingdom may also be taxed in the United Kingdom under certain conditions, especially for individuals who have lived outside the United Kingdom for an extended period.

Article 6: Government Service

Government Service

Article 6 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Virgin Islands for the Avoidance of Double Taxation focuses on the taxation of individuals employed in government service.

Section 1: Exemption for Government Remuneration

This section outlines the tax treatment of salaries, wages, and similar forms of compensation for individuals serving in government roles. It distinguishes between the Government of the Virgin Islands and the Government of the United Kingdom.

a) Salaries in the Virgin Islands: Salaries, wages, and related payments made by the Government of the Virgin Islands to an individual for services performed as part of governmental functions are exempt from United Kingdom tax.

However, this exemption applies under two specific conditions:

  • The individual is not a resident of the United Kingdom.
  • If the individual is a resident of the United Kingdom, they must be residing in the United Kingdom solely for the purpose of performing these governmental functions.

b) Salaries in the United Kingdom: Conversely, salaries, wages, and similar compensation paid by the Government of the United Kingdom or by political subdivisions or local authorities within the United Kingdom to an individual for services rendered as part of governmental functions are exempt from Virgin Islands tax.

Again, the exemption applies if:

  • The individual is not a resident of the Virgin Islands.
  • If the individual is a resident of the Virgin Islands, they must be residing in the Virgin Islands solely for the purpose of rendering these governmental services.

Section 2: Exceptions for Business Activities

This section establishes a key exception. It states that the provisions laid out in Article 6 do not apply to salaries, wages, or similar remuneration received for services rendered in connection with any trade or business conducted by either party or any political subdivision or local authority thereof.

In essence, government service-related income is exempt from taxation under this article, provided that the specified residency conditions are met.

 However, this exemption does not extend to income earned in connection with private sector or non-governmental activities.

Article 7: Students

Article 7 addresses the taxation of payments received by students or business apprentices who are temporarily present in one of the contracting parties for educational purposes.

Tax Exemption for Students

Section 1: Tax Exemption for Students

Payments received by a student or business apprentice who, before their visit, was a resident of the other contracting party, and who is temporarily present in the first-mentioned party for full-time education or training at a recognized educational institution, are not subject to taxation in the first-mentioned party.

However, there are specific conditions to qualify for this tax exemption:

  • Payments must arise from sources outside of the first-mentioned party.
  • These payments must be used for the purpose of the student's maintenance, education, or training.

Section 2: Time Limit for Business Apprentices

Importantly, this tax exemption for business apprentices has a time limit. It applies only for a period not exceeding one year from the date the business apprentice first arrives in the first-mentioned party.

Mitigating Double Taxation

Article 8: Elimination of Double Taxation

Article 8 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Virgin Islands for the Avoidance of Double Taxation addresses the critical issue of eliminating double taxation for residents of the contracting parties.

This article outlines the mechanisms and principles by which double taxation is prevented.

Section 1: Tax Credit or Deduction

This section establishes the fundamental principle of double taxation relief. It states that if a resident of one party derives income that, in accordance with the provisions of the Agreement, may be taxed in the other party, the first-mentioned party must allow for the elimination of double taxation.

This relief is typically achieved through either a tax credit or a deduction.

a) Tax Credit or Deduction: The resident, subject to the domestic tax laws of the first-mentioned party, can claim a tax credit or deduction for the income tax paid in the other party. However, there is a limit to this relief.

The credit or deduction granted cannot exceed the portion of the income tax, as calculated before applying the credit or deduction, that is attributable to the income that may be taxed in the other party.

In essence, this provision ensures that individuals or entities are not subject to taxation on the same income in both parties, thus preventing double taxation.

Section 2: Income Attribution

This section deals with the determination of the source of income for the purposes of taxation. It specifies that income owned by a resident of one party, which may be taxed in the other party in accordance with the Agreement, is deemed to arise from sources in the other party.

In practical terms, this means that when income is subject to taxation in both parties, it is attributed to the country where it originates, thereby allowing the tax authorities of each party to tax it accordingly without causing double taxation.

Ensuring Cooperation and Compliance

Article 9: Mutual Agreement Procedure

Article 9 establishes a mechanism for resolving disputes related to taxation that may arise between the contracting parties or their residents.

Ensuring Cooperation and Compliance

Section 1: Remedies for Taxation Issues

This section addresses situations where an individual believes that the actions of one or both of the parties have led to taxation that does not align with the provisions of the Agreement.

In such cases, the individual can present their case to the competent authority of the party of which they are a resident.

Section 2: Mutual Agreement Resolution

The competent authority must make every effort to resolve the case if it is deemed justified. If it is unable to reach a satisfactory solution on its own, it must engage in mutual agreement discussions with the competent authority of the other party.

The key aspect of this provision is that any agreement reached is binding and enforceable, overriding any time limits or procedural restrictions that may exist in the domestic laws of the parties.

Section 3: Interpretation and Application

This section emphasizes that the competent authorities of the parties should collaborate to resolve any difficulties or doubts arising from the interpretation or application of the Agreement.

This collaboration ensures that the Agreement's provisions are consistently and fairly applied.

Section 4: Direct Communication

The competent authorities of the parties are allowed to communicate directly with each other for the purpose of reaching agreements under this Article. This direct communication streamlines the process of resolving taxation issues efficiently and effectively.

Article 10: Exchange of Information

Article 10 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Virgin Islands for the Avoidance of Double Taxation focuses on the exchange of information between the competent authorities of the contracting parties.

Exchange of Information

This exchange is crucial for the effective implementation of the Agreement and ensuring that the taxation provisions are applied correctly.

Section 1: Exchange of Relevant Information

This section outlines the obligation of the competent authorities of both parties to exchange information that is "foreseeably relevant" for carrying out the provisions of the Agreement.

This exchange of information helps in preventing tax evasion, ensuring accurate tax assessment, and enforcing tax laws effectively.

Section 2: Confidentiality and Use of Information

This section emphasizes the confidentiality of the exchanged information. Any information received by one of the parties under paragraph 1 should be treated with the same level of secrecy as information obtained under their domestic laws.

It should only be disclosed to specific persons or authorities who are directly involved in tax assessment, collection, enforcement, prosecution, appeal determination, or oversight related to the taxes covered by the Agreement. This includes courts and administrative bodies.

However, the clause also allows for the disclosure of such information in public court proceedings or judicial decisions, provided it is necessary for the resolution of tax-related matters. This ensures transparency and accountability in the tax system.

Section 3: Limitations on Obligations

This section sets forth specific limitations on the obligations imposed by paragraphs 1 and 2:

Administrative Measures

The Agreement should not compel a party to undertake administrative measures that are inconsistent with its domestic laws and administrative practices. This protects each party's sovereignty and autonomy in tax matters.

Supply of Information

The Agreement should not require a party to provide information that is not obtainable under its laws or through its normal administrative procedures. This respects the legal framework and practical capabilities of each party.

Protection of Secrets

Parties are not obligated to supply information that would disclose trade secrets, business practices, industrial processes, commercial activities, or professional secrets, or information that is contrary to public policy. This provision safeguards sensitive and proprietary information.

Example, 

Imagine a scenario where a UK-based multinational corporation is suspected of shifting profits to the Virgin Islands to avoid paying taxes in the United Kingdom.

The tax authorities in the UK believe that relevant information about the corporation's offshore transactions and subsidiaries in the Virgin Islands is vital for their investigation.

Article 10, Section 1: In this case, the competent authorities of the United Kingdom can request information from the Virgin Islands tax authorities regarding the corporation's financial activities in the Virgin Islands.

This information exchange is crucial to ascertain whether the corporation is complying with tax laws in both jurisdictions.

Article 10, Section 2: The exchanged information, which includes financial records, transaction details, and corporate structures, must be treated as confidential. It can only be disclosed to specific individuals within the tax authorities or relevant courts and administrative bodies who are directly involved in assessing and enforcing taxes.

 Any public disclosure of this information can only occur in court proceedings where it is necessary for tax enforcement.

Final Provisions

Article 11: Entry into Force

Article 11 outlines the procedures for the Agreement's entry into force and its effective date.

Each party is required to notify the other party when it has completed the necessary legal procedures for the Agreement to become effective. The Agreement comes into force on the later of these notifications.

legal procedures for the Agreement

The effective dates of the Agreement are as follows:

a) In the United Kingdom, it becomes effective for any year of assessment beginning on or after the 6th of April following the Agreement's entry into force.

b) In the Virgin Islands, it becomes effective on or after the 1st of January following the Agreement's entry into force.

This provision ensures that the Agreement's tax provisions are applied consistently and uniformly in both jurisdictions.

Article 12: Termination

Article 12 addresses the termination of the Agreement.

Either party's government can terminate the Agreement by providing notice to the other party on or before the 30th of June in any calendar year. In such an event, the Agreement ceases to have effect as follows:

  • In the United Kingdom, it no longer applies for any year of assessment beginning on or after the 6th of April following the date of notice.
  • In the Virgin Islands, it no longer applies for any year of assessment beginning on or after the 1st of January following the date of notice.

Even after termination, the parties remain bound by the provisions of Article 10 regarding the exchange of information.

This ensures that any information obtained under the Agreement continues to be confidential and may still be used for tax enforcement purposes.

Conclusion

The Tax Information Exchange Agreement and the Double Taxation Agreement between the UK and the BVI is a significant step in fostering a transparent and cooperative fiscal relationship between the two territories.

This not only streamlines the tax obligations for residents but also encourages trade and investment, given the clarity on tax liabilities.

As international fiscal landscapes evolve, such agreements will continue to play a vital role in navigating the complex realm of global taxation.

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Sanjay Gautam
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