© 2024 by Michael Firth KC, Gray's Inn Tax Chambers
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Procedure.Tax
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T7: Foreign enforcement
No rule against recognising foreign tax laws to resolve dispute​
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"[139] The fact that, at the validity trial the Court may have to engage in a detailed examination or even critique of the Danish WHT regime, as I have said, does not convert the claim into an assertion of sovereign power by SKAT or otherwise bring it within Dicey Rule 3. This is simply an example of the recognition by the Court of the relevant foreign laws in order to resolve the dispute before the Court.​" (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Rule against direct or indirect enforcement of a claim for tax which is due but unpaid
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"[126] The critical starting point for the purposes of Ground 1 of this appeal is to focus on the scope of Dicey Rule 3. What it renders inadmissible (whether under the narrower revenue rule or the wider sovereign powers rule) is an action, that is a claim, to enforce directly or indirectly a foreign revenue, penal or other public law. In its narrower form, the revenue rule, what it prohibits is enforcement of a direct or indirect claim for tax which is due but unpaid, as is clear from the speeches of the House of Lords in Government of India and from the passages from the speech of Lord Mackay in Williams & Humbert which I cited at [41]-[42] above..." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Depends on the substance of the claim
"[127] It is also clear from a number of authorities that, in determining whether a claim is inadmissible by virtue of Dicey Rule 3, the Court must examine the substance of the claim to see whether it is really a claim to recover foreign revenue." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Essential feature is an unsatisfied claim to tax
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"[128]...Furthermore, because there is no unsatisfied claim to tax, the "essential feature" of the revenue rule as Lord Mackay described it in Williams & Humbert is absent. There is no qualification in his judgment of that essential feature where the claimant is the sovereign foreign state itself, as suggested by Ms Macdonald QC. Rather he expresses the limitation on the revenue rule in quite categorical terms. Accordingly, there being no unsatisfied claim to tax in the present case, the revenue rule does not apply, even though SKAT may be an emanation of the Danish state." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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- Reason for rule: assertion of sovereign authority not admissible​
"[139] In this context, Mr Beal QC relied upon what the Court of Appeals for the Second Circuit identified in Nabisco (as referred to at [96]-[97] above) as one of the concerns the revenue rule was designed to address: "policy complications may follow when one nation's courts analyze the validity of another nation's tax laws." However, having considered the preliminary issues annexed to the judge's July 2020 CMC Order, the issues for determination at the validity trial are not concerned with the validity of the WHT Act or the regime as such. In any event: (i) the revenue rule does not apply here because there is no claim to outstanding tax for the reasons I have given and (ii) at least in this jurisdiction, the preferred rationale for the revenue rule, even if it did apply, is that an assertion of sovereign authority by a foreign state within the territory of our Courts is not admissible here; see the citation from the speech of Lord Goff in Re State of Norway's Application at [32] above. The fact that, at the validity trial the Court may have to engage in a detailed examination or even critique of the Danish WHT regime, as I have said, does not convert the claim into an assertion of sovereign power by SKAT or otherwise bring it within Dicey Rule 3. This is simply an example of the recognition by the Court of the relevant foreign laws in order to resolve the dispute before the Court.​" (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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- Essential feature is an unsatisfied claim to tax
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"[128]...Furthermore, because there is no unsatisfied claim to tax, the "essential feature" of the revenue rule as Lord Mackay described it in Williams & Humbert is absent. There is no qualification in his judgment of that essential feature where the claimant is the sovereign foreign state itself, as suggested by Ms Macdonald QC. Rather he expresses the limitation on the revenue rule in quite categorical terms. Accordingly, there being no unsatisfied claim to tax in the present case, the revenue rule does not apply, even though SKAT may be an emanation of the Danish state.
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[134]...However the fraud here was not fraud by the taxpayer in evading tax. There was no tax due and those who committed the fraud were never taxpayers. Contrary to the alleged fraud defendants' submissions, there never was a taxpayer/tax authority relationship between the Solo etc Applicants and SKAT, nor was one created by the Solo etc Applicants and the alleged fraud defendants having abused the withholding tax and refund system to defraud SKAT. As Judge Kaplan pithily put it in his Memorandum Opinion in the SKAT Litigation in New York referred to at [44] and [45] above: "the only reason the money was lost is because the defendants in effect allegedly stole it, and the only reason it supposedly concerns tax revenue is because the defendants' alleged victim was the Danish tax authority."" (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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The fact that the tax has been evaded fraudulently does not take the case outside the rule
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"[134]...They are all cases which were fairly and squarely within the revenue rule because they were claims to recover unpaid tax and the fact that there had been fraud in evading tax did not take the case outside the revenue rule...
[135]...This is also the answer to the alleged fraud defendants' reliance on the article by Lord Collins in the Law Quarterly Review. What Lord Collins was focusing on was fraud by a taxpayer in evading tax which is due and he was making the point quite rightly (and as Lord Pannick QC accepted) that, in that scenario, the fraud does not take the case outside the revenue rule..." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Fraudulently attempting to characterise oneself as a taxpayer to secure a refund does not engage the rule
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"[136] That attempt to characterise themselves as taxpayers cannot possibly bind SKAT as the victim of their fraud and the alleged fraud defendants cannot seek to take advantage of their own wrongdoing to bring themselves within Dicey Rule 3." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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- Rule does not apply to recover repayment of 'tax' that were never due
"[127]...The basis of the claim is that, by fraudulent misrepresentations, the alleged fraud defendants induced SKAT to believe that the Solo etc Applicants had been shareholders who had received dividends and were thus liable to pay income tax which was withheld at 27%, but who were entitled to receive a refund. However, no tax was ever in fact due from the Solo etc Applicants. Whatever tax was due on the dividends of the relevant Danish companies was paid by legitimate shareholders. It follows that, although SKAT was induced by the fraud to believe that what it was refunding to the Solo etc Applicants was that portion of withholding tax which was not due because of the operation of a DTA, in reality the "refunds" were not of tax at all, but were abstraction of SKAT's funds in the same way as if the alleged fraud defendants had broken into the safe in SKAT's office and stolen the money.
[128] In my judgment, this claim against the SKAT defendants is not a claim to unpaid tax or a claim to recover tax at all. It is a claim to recover monies which had been abstracted from SKAT's general funds by fraud. The alleged fraud defendants' submission that the claim to the refund is still a claim to tax is simply wrong as a matter of analysis and the judge fell into error in accepting that submission..." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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- Not affected by the fact that the claim will involve a detailed examination of foreign tax system to assess whether claims to repayment were valid
"[138] Much was sought to be made by the alleged fraud defendants of the fact that, at any validity trial, there would be a detailed examination of the Danish WHT regime and possible criticism of it and of SKAT's systems and control. However, that does not somehow convert the claim into one to enforce that tax regime. It would be no more than recognition of the relevant Danish tax laws and the regime they put in place as part of the determination by the Court as to whether the alleged fraud was committed. Recognition of foreign revenue laws is permissible. As Lord Keith put it in Government of India in his approval of Peter Buchanan Ltd v McVey: "there are circumstances in which the courts will have regard to the revenue laws of another country." Another example of a case where the English Courts have recognised a foreign law, outside the revenue context, is the decision of this Court in Iran. (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Wider rule against claims involving the exercise or assertion of a sovereign right​
"[126]...In its wider form, the sovereign powers rule, it focuses on whether the claim is one which involves the exercise or assertion of a sovereign right, as stated in the passage in [50] of the decision of this Court in Mbasogo:"The critical question is whether in bringing a claim, a claimant is doing an act which is of a sovereign character or which is done by virtue of sovereign authority; and whether the claim involves the exercise or assertion of a sovereign right. If so, then the court will not determine or enforce the claim."" (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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- Wider rule does not apply to recovery of money obtained by fraud
"[129] The argument by the alleged fraud defendants that the claim is precluded by the wider sovereign powers rule within Dicey Rule 3 is equally misconceived. In bringing a claim to recover the monies of which it was defrauded, SKAT is not doing an act of a sovereign character or enforcing a sovereign right, nor is it seeking to vindicate a sovereign power. Rather it is making a claim as the victim of fraud for the restitution of monies of which it has been defrauded, in the same way as if it were a private citizen.
[130]...I very much doubt whether payments induced by fraudulent misrepresentation can properly be described as sovereign acts, since, as Lord Pannick QC submitted, the effect of the fraud is to render those payments a nullity or invalid, but even if they could be described as sovereign acts, it simply does not follow that the claim to recover the monies is somehow a sovereign act or the vindication of a sovereign power. On the contrary, in revoking the refunds and seeking to recover the monies, SKAT is not seeking to vindicate those acts even if they were sovereign, but to invalidate them. The alleged fraud defendants' submissions confuse the circumstances in which the fraud was perpetrated with the claim to recover the monies." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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- Pursuing a right that could equally belong to individual is not a sovereign act
"[131] Although there is no English authority directly on point which decides that a claim such as the present one is not a sovereign act or the vindication of a sovereign act, that was clearly the view of Dr Mann in the articles which were expressly approved by this Court in Mbasogo. Thus, in his 1954 article quoted at [42] of the judgment in Mbasogo, Dr Mann said:
"Where the foreign state pursues a right that by its nature could equally well belong to an individual, no question of a prerogative claim arises and the state's access to the courts is unrestricted. Thus a state whose property is in the defendant's possession can recover it by an action in detinue. A state which has a contractual claim against the defendant is at liberty to recover the money due to it. If a state's ship has been damaged in a collision, an action for damages undoubtedly lies."" (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Not limited to claims of rights in real or personal property, includes reparations for one aggrieved
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"[133] ... claims by a state which will be categorised as ones which could just as well be brought by a private citizen and thus outside Dicey Rule 3, are not limited to "patrimonial" claims, that is claims in respect of rights in real or personal property. This is clear from the examples which Dr Mann gives. It is also clear from the New York state cases to which Lord Pannick QC referred the Court. As the Court said in Nordrhein-Westfalen v Rosenthal, the case where the German federal state sought repayment of monies wrongfully demanded by the defendant under the Nazi indemnification laws: "The object of the action is not 'vindication of the public justice' but 'reparation to one aggrieved'". In my judgment, that description of the object of the action is an entirely apt one in the present case." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Claims by liquidators​
"[17] The judge went on to consider the decision of the Court of Appeal in QRS v Frandsen [1999] 1 WLR 2169 where the defendant had asset-stripped the company and the liquidator was suing him for breaches of his duties to the company, in substance to recover on behalf of a foreign sovereign tax authority taxes due from and unpaid by the company. The defendant applied to strike out the claims as bound to fail because they were precluded by Dicey Rule 3. The judge at first instance struck out the claims and that decision was upheld by the Court of Appeal which confirmed that Dicey Rule 3 applied, although as Andrew Baker J noted the contrary was barely argued. The substantial argument was that the proceedings were a "civil and commercial matter" not a "revenue, customs or administrative matter" within Article 1(1) and that it was incompatible with the then Brussels Convention to apply Dicey Rule 3 to dismiss a claim." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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"These facts are in all material respects indistinguishable from those in Peter Buchanan Limited and Macharg v McVey [1954] IR 89 (also in [1955] AC 516), the leading authority on this aspect of indirect enforcement, an Irish decision approved by the House of Lords in Government of India v Taylor [1955] AC 491 - where Lord Keith of Avonholm described Kingsmill Moore J’s judgment as “admirable” and containing “an able and exhaustive examination of the authorities” - and again in In re State of Norway’s application (Nos 1 & 2) [1990] AC 723. The facts in Buchanan can conveniently be taken from Lord Keith’s summary of the case in Government of India v Taylor at page 510:
"The plaintiff company was a company registered in Scotland which had been put into liquidation by the revenue authorities in Scotland under a compulsory winding-up order in respect of a very large claim for excess profits tax and income tax. The liquidator was really a nominee of the revenue. ... The defendant having realised the whole assets of the company in his capacity as a director and having satisfied substantially the whole of the company’s indebtedness, other than that due to the revenue, by a variety of devices had the balance transferred to himself to his credit with an Irish bank and decamped to Ireland. The action was in form an action to recover this balance from the defendant at the instance of the company directed by the liquidator. ... The judge held that the transaction was a dishonest transaction designed to defeat the claim of the revenue in Scotland as a creditor ... On the other hand, he held that although the action was in form an action by the company to recover these assets it was in substance an attempt to enforce indirectly a claim to tax by the revenue authorities of another State. He accordingly dismissed the action."
There can be no distinction between the defendant’s sale of the company’s assets and his pocketing of the proceeds in Buchanan and the respondent’s sale of the companies’ assets and use of the proceeds to fund their purchase of his own shares in the present case. It can, therefore, equally be said of the appellants’ claim here as was said of the liquidator’s claim in Buchanan,
"that the whole object of the suit is to collect tax for a foreign revenue, and ... this will be the sole result of a decision in favour of the plaintiff." (QRS v Frandsen [1999] EWCA Civ 1463, Simon Brown LJ)
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Public policy exceptions to the rule
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"[146] Given the firm conclusion I have reached that Ground 1 should succeed because the claim against the alleged fraud defendants is not inadmissible by virtue of Dicey Rule 3, it is not necessary to reach any conclusion on SKAT's alternative case that, if the wider sovereign powers rule were otherwise applicable, the public policy exception to that rule should apply here. All that it is necessary to say is that, contrary to the argument on behalf of the alleged fraud defendants that Dicey Rule 3 is always absolute, it seems to me that the view expressed obiter by this Court in Iran that there is a public policy exception to the wider sovereign powers rule, is correct..." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Possibly in cases of major international fraud
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"[146] Whilst not deciding the point, I can see much force in Lord Pannick QC's submission that the exception should apply here in a case of a major international fraud." (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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International agreements can override the rule
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"[6] For centuries, courts in this jurisdiction have refused to entertain claims for the enforcement of revenue or other public laws of a foreign State (See, for example, Government of India v Taylor [1955] AC 491). The editors of Dicey, Morris & Collins, The Conflict of Laws (15th Ed.) state that this reflects a well-established and almost universal principle that the courts of one country will not enforce the penal and revenue laws of another country. The principle is, however, subject to contrary agreement by treaty and in recent years very substantial inroads have been made into the principle by international agreements. In 1988 the Council of Europe and OECD adopted a Joint Convention on Mutual Administrative Assistance in Tax Matters which included provision for assistance in recovery of taxes. Furthermore, since 2003 the OECD Model Conventions on Double Taxation have included provisions for mutual assistance in the collection of taxes." (Ben Nevis (Holdings) Limited v. HMRC [2013] EWCA Civ 578, Lloyd Jones LJ)
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International agreement may permit collection of pre-existing tax liabilities
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"[53] To my mind there is no unfairness in Article 25A permitting the enforcement of pre-existing tax liabilities. Prior to the amendment of the 2002 Convention and its implementation in this jurisdiction the Revenue Rule prohibited the enforcement of South African tax liabilities in the United Kingdom. However, that Rule was always liable to be abrogated by treaty and the taxpayer could have no legitimate expectation that the Rule would not be abrogated in the future." (Ben Nevis (Holdings) Limited v. HMRC [2013] EWCA Civ 578, Lloyd Jones LJ)
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OECD Article 27​
"1. The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistance is not restricted by Articles 1 and 2. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this Article.
2. The term "revenue claim" as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.
3. When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of collection by the competent authority of the other Contracting State. That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.
4. When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of taking measures of conservancy by the competent authority of the other Contracting State. That other State shall take measures of conservancy in respect of that revenue claim in accordance with the provisions of its laws as if the revenue claim were a revenue claim of that other State even if, at the time when such measures are applied, the revenue claim is not enforceable in the first-mentioned State or is owed by a person who has a right to prevent its collection.
5. Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be subject to the time limits or accorded any priority applicable to a revenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority applicable to that revenue claim under the laws of the other Contracting State.
6. Proceedings with respect to the existence, validity or the amount of a revenue claim of a Contracting State shall not be brought before the courts or administrative bodies of the other Contracting State.
7. Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4 and before the other Contracting State has collected and remitted the relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be
a) in the case of a request under paragraph 3, a revenue claim of the first-mentioned State that is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, or
b) in the case of a request under paragraph 4, a revenue claim of the first-mentioned State in respect of which that State may, under its laws, take measures of conservancy with a view to ensure its collection
the competent authority of the first-mentioned State shall promptly notify the competent authority of the other State of that fact and, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request.
8. In no case shall the provisions of this Article be construed so as to impose on a Contracting State the obligation: a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; b) to carry out measures which would be contrary to public policy (ordre public); c) to provide assistance if the other Contracting State has not pursued all reasonable measures of collection or conservancy, as the case may be, available under its laws or administrative practice; d) to provide assistance in those cases where the administrative burden for that State is clearly disproportionate to the benefit to be derived by the other Contracting State." (Model Treaty, Article 27 - introduced in January 2003)
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- UK position​
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"[2.78] Assistance in Collection (AIC) agreements which allow tax authorities in other countries to collect debts on HMRC’s behalf are in place with a large number of jurisdictions around the world. An AIC article can be requested by the UK as part of double taxation agreements and almost always is requested with new agreements and with revisions to existing ones (although that is subject to negotiation and agreement with the other party). The various arrangements in place through multi-national bodies mean that coverage is extensive. The government is considering ways to make these AIC arrangements more widely known to act as a deterrent for those taxpayers who leave the country while owing tax to HMRC through focused communications and including, possibly, through HMRC officers located abroad.
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Multilateral Convention on Mutual Administrative Assistance in Tax Matters
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List of participants
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List of reservations
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Terms
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EU Directive on mutual assistance for the recovery of tax​
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"1. Council Directive 2010/24/EU (128) shall apply until 5 years after the end of the transition period between the Member States and the United Kingdom in respect of claims relating to amounts that became due before the end of the transition period, claims relating to transactions that took place before the end of the transition period but where the amounts became due after that period, and claims relating to transactions covered by Article 51(1) of this Agreement or movements of excise goods covered by Article 52 of this Agreement.
2. By way of derogation from Article 8, the United Kingdom shall have access, to the extent strictly necessary to exercise its rights and comply with obligations under this Article, to the networks, information systems and databases listed in Annex IV. The United Kingdom shall reimburse the Union for the actual costs incurred by the Union as a consequence of facilitating that access. The Union shall communicate to the United Kingdom the amount of those costs by 31 March of each year until the end of the period referred to in Annex IV. In the event that the communicated amount of the actual costs incurred considerably diverges from the best estimates amount that was communicated by the Union to the United Kingdom before the signature of this Agreement, the United Kingdom shall pay without delay to the Union the best estimates amount and the Joint Committee shall determine the manner in which the difference between the actual costs incurred and the best estimates amount is to be addressed." (EU/UK Withdrawal Agreement, Article 100)
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Double tax treaty mutual assistance does not necessarily apply to claims to recover refunds of tax​
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"[142] Furthermore, I agree with Lord Pannick QC that there is nothing in the US-Denmark DTA which entitles SKAT to recover the overpayments induced by fraud. Judge Kaplan dealt with the US-Denmark DTA in his Memorandum Opinion in the SKAT Litigation in New York saying that the DTA was irrelevant because SKAT's claims did not seek to collect tax owed by the defendants and covered by the DTA. " (Skatteforvaltningen v Solo Capital Partners [2022] EWCA Civ 234, Sir Julian Flaux)
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Trustees may not be permitted to pay unenforceable foreign tax debts
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"On that footing, we find it difficult to envisage any circumstances in which the trustee can be said to be acting bona fide if the trustee satisfies any claims which, on the authority of Government of India v Taylor [1955] AC 491, they are not obligated by law to satisfy. Nevertheless, we would not go so far as to say that no such circumstances could ever arise which would permit the trust company to claim an indemnity." (Bank of Nova Scotia Trust Company (Caribbean) Limited v. Helene Tremblay 1 ITELR 673)
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