ATXP6 UK
Syllabus A1. Income tax A1b. The Scope of Income Tax

A1biv/vi. OECD Model and Double Taxation Relief

Syllabus A1biv/vi)

Determine the income tax treatment of overseas income
and
Understand the relevance of the OECD model double tax treaty to given situations
and
Calculate and advise on the double taxation relief available to individuals

What is double taxation relief?

Under UK tax law an individual who is resident in the UK must pay UK income tax on his worldwide income.

In the case of income arising in another country, that income may also be taxed in the foreign country, and will be taxed in the UK, if the individual is UK resident.

The rules that apply to the taxing of overseas income are set out in the Organisation for Economic Co-operation and Development Model (OECD).

This model states that if there is no double taxation treaty between 2 countries, then double taxation relief is available. (There will never be a treaty in your exam, you will always have to calculate DTR)

Therefore, in order to avoid being taxed on the same income two times, double taxation relief (DTR) is available, usually as a tax credit against the UK income tax liability.

The DTR tax credit is the lower of: 
(i) UK tax on overseas source 
(ii) Overseas tax suffered.

Where there is more than one source of overseas income, DTR on each source must be considered separately.

Illustration

John owns a home in Barbados and rents it out for £30,000 p.a.

He is UK resident and has employment income of £60,000.

The income tax rate in Barbados is 45%.

How much double tax relief will be available to John?

  • Solution

    He is a higher rate tax payer.

    Therefore, he will pay 40% UK IT, however, in Barbados, the tax rate is 45% - which is higher than the UK.

    Therefore, DTR: £30,000 * 40% = £12,000.

Illustration

Jeremy is resident and domiciled in the UK and has the following income. 

Salary from UK employment (gross) £98,000 
Bank interest received £3,000 
Dividend income received £7,000 
Barbados bank interest £1,100 (gross) (42% I.T. in Barbados)
India rent £600 (gross) (15% I.T. in India)

You should assume that no double tax treaty exists between the UK, Barbados and India. 

What is the income tax liability after considering all available reliefs?

  • Solution

    Income tax computation
    Employment income £98,000 
    Dividend income £7,000 
    Indian rent £600 
    Barbados bank interest £1,100 
    Bank interest £3,000 

    Net income £109,700 
    Less: Personal allowance £11,850- £4,850 [½ (£109,700 – £100,000)] (£7,000)
 

    
Taxable income £102,700

    Analysis of income: 

    Non-savings income £91,600 (£98,000 + £600 - £7,000) 
    
Savings income £4,100 

    Dividend £7,000
    
Taxable income £102,700

  • Income tax:

    Non-savings income 
    £34,500 × 20% = £6,900
    
£57,100 × 40% = £22,840

    Savings income: 
    £500 × 0% =£Nil 
    £3,600 x 40% =£1,440

    Dividend income: 
    £2,000 x 0% =£Nil 

    £5,000 x 32.5% =£1,625
    I.T. Liability £32,805

    DTR Relief for Barbados tax (W1) (£440) 
    Relief for India tax (W2) (£90) 
    Income tax payable: £32,275

  • W1

    UK tax on £1,100 (£1,100 × 40%) 440
    Foreign tax on £1,100 (1,100 × 42%) 462 
    DTR = lower £440

  • W2

    UK tax attributable = £600 × 40% =£240 
    Foreign tax on £600 (600 × 15%) =£90
    DTR = lower £90