Using Capital Transfer Tax Treaty Relief, 16 Liverpool L.Rev. 133 (1994)

16 Liverpool Law Review 133 (1994)
USING CAPITAL TRANSFER TAX TREATY RELIEF: THE INTERACTION OF TREATY AND DOMESTIC LAW
Derek Devgun
I    Background and Overview
In the context of transferor-based capital transfer taxes, double taxation occurs when two countries assert jurisdiction to tax a prop erty transfer made by the same transferor, typically in one or more of the following situations. First, if country A (for example the US) taxes transfers made by its citizens, whereas country B (for example the UK) taxes transfers made by its domiciliaries, then a citizen of country A who happens to be domiciled in country B will be taxed by both countries on worldwide transfers of his property. Second, even if country A and country B only tax transfers made by their respective domiciiaries, there might still be a double charge to tax if the two countries define "domicile" differently or if their courts draw differing inferences from the facts as to a particular taxpayer's domicile. Finally, most countries wield their taxing power generously, taxing transfers of domestic property regardless of the domicile and/ or citizenship of the transferor as well as worldwide transfers made by their own domiciliaries and/or citizens. If just one country takes such a broad view of its jurisdiction to tax, double taxation is likely to occur.
    Effective relief from such double taxation is often provided by way of double taxation conventions (DTCs): bilateral agreements that allocate taxing rights between countries and provide tax credits and other relief. However, whether such relief is actually available in a given situation is an assessment that must be made squarely in the context of the domestic law of the two countries concerned, because in practice international law will have effect within domestic legal systems only to the extent that the relevant domestic law so permits. For example, in the UK a treaty has effect only by way of imple-
*    Associate Attorney, Faegre & Benson, 2200 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402-3091, USA; J.D. with High Distinction, University of Iowa College of Law (1993); LL.B. with Honours, University of Birmingham Faculty of Law (1990).
[*134] menting Parliamentary legislation; in the US even a self- executing treaty can be overridden by federal Congressional legislation.' While this state of affairs is inevitable where treaties are involved, the resulting uncertainty can be particularly unsettling for a taxpayer who seeks to rely on a DTC, since DTCs have the effect of creating rights for individuals rather than merely governing relations between countries like many international agreements.
    Thus a taxpayer seeking to use DTC relief must be aware of the interaction between relevant domestic law and the DTC. This article examines this interaction in the specific context of the capital transfer taxes imposed by the UK and the US and the E)TC signed by the two countries in 19782 (US/UK DTC); the discussion herein takes the form of a practical, step-by-step guide to using relief under the US/ UK DTC. Footnote references will also be made to the OECD Model Convention3 where relevant. The article concludes with lists of countries with which the UK and the US have capital transfer tax DTCs. All though the illustrative focus of the article is therefore somewhat narrow, the broad principles discussed below apply with necessary modifications to other taxes and to DTCs in general.
    A basic knowledge of the capital transfer taxes imposed by the UK and the US is helpful to understanding the issues raised herein, therefore an Appendix to this article briefly overviews these taxes for the benefit of readers who lack familiarity with either or both tax systems. For purposes of this introduction, however, it suffices to state that the UK taxes both gifts and deathtime transfers by way of inheritance tax (IHT) , and the US imposes gift tax (GT), estate tax (ET) and generation-skipping transfer tax (GSTT) on gifts, deathtime transfers and generation-skipping transfers respectively.5 Note that all of these
1    See F. Jacobs & S. Roberts, eds., The Effect of Treaties in Domestic Law,     Sweet & Maxwell, 1987,123-139 (UK) & 141-169 (US). 2    Taxes on Estates of Deceased Persons and on Gifts: Convention Between the     United States of America and the United Kingdom of Great Britain and     Northern Ireland, S.I. No. 1979/1454,30 U.S.T. 7223 (signed 1978). 3    Model Double Taxation Convention on Estates and Inheritances and on Gifts,     OECD, 1982. 4    See Inheritance Tax Act 1984, as amended (IHTA) (formerly Capital     Transfer Tax Act 1984). 5    See Internal Revenue Code of 1986, as amended (IRC), ss200l et seq. The     IRC is codified at Title 26 of the US Code.
[*135] taxes are transferor-based (i.e., based on the circumstances of the transferor); the illustrative discussion below is tailored accordingly.
II. Using DTC Relief in the Domestic Law Context
    The following discussion breaks down the process of using DTC relief into four multi-part steps, and at each stage highlights the major domestic law issues that might arise.
1. Is Resort to a DTC Necessary?
    Since in some situations double taxation can be mitigated by reference to domestic tax law, a preliminary concern will be to determine whether resort to a DTC is even necessary to solve the supposed problem at hand. Two sub-issues arise: (a) is double taxation in fact occurring; and (b) does unilateral relief obviate, partly or wholly, the need to resort to a DTC?
A. Is Double Taxation Occurring?
Instances of double taxation are usually relatively easy to spot. A quick scan of relevant UK and US law6 reveals several situations where capital transfer taxes overlap (before any reliefs, unilateral or bilateral, are applied): (i) a US citizen or domiciliary who is also domiciled in the UK is subject to tax in both countries on worldwide transfers of property; (ii) a US citizen or domiciliary is subject to tax in both countries on transfers of UK property; and (iii) a UK domiciliary is subject to tax in both countries on transfers of US property.
    The common law of both the UK and the US recognises that a person can have only one place of domicile, 7 and therefore it might seem incongruous for both countries to tax the same transferor as their own domiciliary (as in situation (i) in the preceding paragraph). However, such assertions of double domicile are actually quite likely because the two countries define "domicile" differently for tax purposes. Achieving US domicile under US tax law requires a person to live
6 See Appendix, infra.
7 L. Collins, Dicey & Morris on the Conflict of Laws, Stevens, 11th ed., 1987, 116; Bank One, Texas, NA. v. Mont le , 964 F.2d 48 (1st Cir. 1992).
[*136] here with no definite present intention of leaving; 8 similarly, a person becomes UK domiciled under UK law by living there with the intention of staying there permanently or indefinitely.9 Overlap problems are caused largely by UK statutory rules, which (for example) deem a person to be domiciled in the UK for IHT purposes for three years after UK domicile otherwise ceases to exist. 10
    Even in situations where the two countries appear to define "domicile" in identical terms, problems will arise if courts in the two countries draw differing inferences as to the taxpayer's domicile from the same set of facts. This type of tug-of-war occurred dramatically between two states in the US in the Vorrance cases. In 1932 a Pennsylvania court held that John T. Dorrance had died domiciled in Pennsylvania and therefore required his estate to pay Pennsylvania inheritance tax. Just two years later a New Jersey court found that Mr. Dorrance had in fact never abandoned his New Jersey domicile, so his estate would be liable to pay New Jersey inheritance tax. 12 To add insult to injury, the New Jersey court even refused to allow a deduction for the Pennsylvania inheritance tax already paid; it concluded that Pennsylvania lacked jurisdiction to tax and therefore that the tax levied there was "illegal and erroneous" and (more importantly) non-deductible. 13 More than forty years later, the US Supreme Court apparently concluded that the US Constitution conferred upon it no jurisdiction to decide which of two or more states asserting domicile in these circumstances should prevail.14
    The foregoing discussion, though based in part on conflicts arising under US domestic law, illustrates clearly the difficulties that may arise even where two tax systems appear to be operating in some degree of harmony. If anything, the problems are exacerbated where sovereign nations are involved, since each will guard jealously its
8    Treasury Regulations, s.20.0-1(b)(1) (estate tax) & s.25.2501-1(b) (gift tax). 9    Collins, supra n.7 at128, 10    IHTA, s.267(1). 11    In re Dorrance 's Estate, 163 A. 303 (Pa. 1932), certiorari denied 288 U.S. 617 (1933). 12    In re Dorrance 's Estate, 170 A. 601 (Prer. Ct. NJ 1934). 13    In re Dorrance 's Estate, 172 A. 503 (Prer. Ct. NJ 1934), affirmed in Dorrance v. Martin, 184 A. 743 (Ct. App. NJ 1936), certiorari denied 298 U.S. 679 (1936). 14    California v. Texas, 437 U.S. 601 (1978).
[*137] jurisdiction to impose tax. In that event, resort to tax relief of some kind will be essential to breaking the deadlock.
B. Is Unilateral Relief Available Under Domestic Law?
    UK law provides unilateral relief from IHT if foreign tax is charged on a disposition which is also subject to IHT and if that foreign tax is similar in character to IHT or charged on or by reference to death or inter vivos gifts. 15 The amount of relief available depends on the situs of the property involved.16 However, unilateral and DTC relief are offered as alternatives: whichever provides the greater relief will govern. 17 Therefore although reference must be made to both to determine which is more generous, actual resort to DTC rules may not ultimately be necessary to obtain the maximum relief possible.
    In the US, a unilateral foreign death tax credit forms an integral part of the calculation of ET payable by US citizens and domiciliaries ;18 however, such persons may still need to resort to DTC relief because the credit is not very generous. It applies only if the foreign death tax is paid on transfers of property situated in that foreign country, it does not apply to foreign tax paid on lifetime transfers, and it is subject to other statutory limitations. 19 Any applicable DTC may provide supplemental relief (and not alternative relief, as in the UK).
2. Is Resort to a DTC Possible?
    If double taxation cannot be eliminated by recourse to domestic law, the next step is to ascertain whether relief under a DTC is available. The capital transfer tax DTC networks of both the UK and the US are much less extensive than their respective networks of income and capital gains tax DTCs, though if there is a DTC, it may prove very helpful in resolving double taxation problems. The reader is referred to section III of this article, in which are listed the countries
15 IHTA,s.159(1). 16 IHTA, s.159(2)-(4). 17 IHTA, s159(7). 18 IRC, s,2014. The credit is denied to non-domiciliary non-US citizens: IRC s.2102(a). 19 IRC, s2014(a), (b).
[*138] with which the UK and the US have capital transfer tax DTCs. Assuming that there is a DTC in force, two further issues arise: (a) does it apply to the taxes in question; and (b) to whom does it afford relief?
A. Does the DTC Apply to the Taxes in Question?
    This involves examining the terms of the DTC and will usually not pose a major interpretative problem. For example, the US/UK DTC applies to federal ET, GT and GSTT in the US, and to capital transfer tax in the UK.2° Although the UK replaced capital transfer tax with IHT in 1986, the DTC also applies "to any identical or substantially similar taxes [imposed] in addition to, or in place of, the existing taxes ",21 As IHT was superimposed on the existing capital transfer tax regime, the DTC clearly covers IHT "in place of" capital transfer tax.
    More problematic is the situation where a country completely revamps a tax that is the subject of a DTC, as for example reforms in Canada in 1972 that replaced the federal estate duty with a capital gains tax on death.22 Such a fundamental change in the nature of the tax not resulting in the imposition of a "substantially similar" tax would probably require re-negotiation of any affected DTCs. In this context, mention should also be made of estate duty DTCs made by the UK before the introduction of capital transfer tax in 1975 if still in effect, such DTCs will remain in force notwithstanding the repeal of the enabling legislation, until "revoked" by Order in Council.23
    Whether a DTC applies to locally-imposed (as opposed to nationally- imposed) capital transfer taxes may be an issue where DTCs are concluded with countries with federal or similar structures of government, if multiple levels of government have independent power to levy taxes. In the US, for example, many states have some form of death and/or gift tax, but the US/UK DTC by its terms applies only to federal taxes.24 The federal ET regime provides relief for state
20 US/UK DTC, Arts.2(l) & 3(1)(f). 21 US/UK DTC, Arts.2(2); see also OECD Model convention, Art,2(4). 22 See V. Krishna, The Fundamentals of Canadian Income Tax, Carswell, 1989, 426-428. 23 IHTA, s.158(6). 24 US/UK DTC, Arts.2(1)(a) & 3(l)(f)(i).
[*139] death tax payable, by way of a limited credit against any such federal ET payable ;25 note however that this may in fact make the taxpayer worse off for DTC purposes as it reduces the amount of federal ET payable (thus diminishing the tax mitigated by the DTC) but the state death tax remains payable in full.
B. To Whom Does the DTC Afford Relief?
    The US/UK DTC applies to "any person who is within the scope of a tax" covered by the DTC26 i.e., those taxes described immediately above. Reference must therefore be made to domestic law to identify the transferor in respect of whom the taxable transfer occurs (i.e., the donor, the deceased, etc.). Note that this is not necessarily the same person actually liable to pay the tax; UK and US law in various situations place liability on the donor or estate, the donee or recipient, the executor and certain trustees and beneficiaries. 27
    Like other DTCs, the US/UK DTC does not in any way affect the fiscal privileges of diplomatic or consular officials.28 Such persons enjoy greater relief under diplomatic arid other conventions than is afforded by the DTC.
3. In What Ways Does the DTC Afford Relief?
    Although not strictly a question of domestic law, it is important to examine the terms of the DTC to ascertain the exact scope and nature of any relief thereunder. No DTC will fully reconcile different tax systems and eliminate double taxation altogether this would be too much to expect given the wide variety of tax structures in different countries. Rather, a typical DTC will (a) allocate the right to tax different types of property in some way, and (b) detail how the non- taxing country must provide relief against any remaining double taxation. (Also of importance here is the question of how a domestic court might interpret the terms of the DTC; this is explored briefly under Step 4, below.)
25 IRC, s.2011. 26 US/UKDTC,Art.1. 27 IHTA, ss.199-205; IRC, ss.2502(c), 2002, 2603(b). 28 US/UK DTC, Art.13(1); see also OECD Model Convention, Art.13,
[*140] A. How Are Taxing Rights Allocated By the DTC?
    The terms of the DTC will allocate taxing rights by setting out rules to determine which country has primary jurisdiction to impose tax. For example, the US/UK DTC provides the following series of rules.
    If the transfer of immovable or real property is involved, the country of situs has primary taxing rights.29 However (with some exceptions) reference must be made to the domestic law of situs to determine whether the property is in fact "immovable".39
    Transfers of business property (other than immovable property) of a permanent establishment of an enterprise may be taxed primarily by the country in which the permanent establishment is situated.31 "Permanent establishment" is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on; the meaning of the term is further elaborated and limited in the DTC itself.32 In addition, the transfer of assets (other than immovable property) pertaining to a fixed base used for the performance of independent personal services may be taxed by the country in which the fixed base is situated. 33
    The right to tax transfers of all other property is allocated accord ing to the transferor's domicile and nationality at the time of the transfer. "Domicile" is defined first by reference to the domestic law of each country, but then a series of "tie-breaking" rules comes into play to ensure as far as possible that an individual does not have multiple domiciles for purposes of the DTC.34 "Nationality" is defined exclusively by reference to domestic law.35 The country of domicile is then given primary taxing rights, unless the transferor is a national of the other country36 this latter reservation allows the US to tax transfers by its nationals who are overseas. If the individual is domiciled in neither country but is a national of only one, then the
28 US/UK DTC, Art.6(1); see also OECD Model Convention, Art.5(l). 29 US/UK DTC, Art.6(2); see also OECD Model Convention, Art.5(2). 30 US/UK DTC, Art.7(l); see also OECD Model Convention, Art.6(1). 31 US/UK DTC, Art.7(2); see also OECD Model Convention, Art.6(2)-(5). 32 US/UK DTC, Art.7(3); see also OECD Model Convention, Art.6(6). 34 US/ UK DTC, Art.4; see also OECD Model Convention, Art.4. 35 US/UK DTC, Art.3(1)(e). 36 US/UK DTC, Art.5(1); see also OECD Model Convention, Art.7.
[*141] country of nationality has primary taxing rights. 37 These rules do not apply to certain property held in trust or under a settlement.38 Furthermore, if the law of the country with primary taxing rights imposes a tax but this tax is not actually paid in a particular instance, then the other country may tax transfers of property in that other country.39
B. How Must the Non-Taxing Country Give Relief?4'0
    Deductions in calculating the amount of the transfer on which tax is imposed must be allowed in accordance with the law in force in the country imposing the tax.41 In addition, the US/UK DTC makes the UK marital exemption and the US marital deduction available to domiciliaries and/or nationals of the other country in circumstances in which they might not otherwise be available.42 Thus for example a transferor who is a UK national or domiciliary can use the US marital deduction provided that property subject to tax in the US is transferred to a spouse who is a US citizen.43 Furthermore, the DTC provides that the estate of a UK national or domiciliary (who is not also a US national or domiciliary) may not be taxed more heavily in the US than if the deceased had died domiciled in the US.
    Where both countries tax a particular property transfer, reciprocal DTC rules mandate that one country award a credit for the other's tax as follows:
(i)    the country of domicile or nationality may tax transfers of property worldwide, but must award a credit for tax paid in the other country cm transfers of immovable property or business property located in that other country; 4-1 (ii)    the country of nationality may tax transfers of property worldwide,
37 US/UK DTC, Art.5(2). 38 US/UK DTC, Art.5(3)-(4). 39 US/UK DTC, Art,5(5). 40 See also OECD Model Convention, Arts.9A & 9B, under which exemption and credit methods are offered as alternatives, 41 US/UK DTC, Art.8(1). 42 US/UK DTC, Art.8(2)-(4). 43 US/UK DTC, Art.8(2). 44 US/UK DTC, Art.8(5). 45 US/UK DTC, Art.9(1)(a), 9(2)(a).
[*142] but must award a credit for tax paid to the other country on the basis of domicile in that other country.
There is also provision for a credit where the same event gives rise to tax in both countries on property held in trust or under a settlement; in that situation, the foregoing rules do not apply. ''
    Other miscellaneous relief is given by way of a general prohibition on discrimination against nationals of the other country, with a proviso that permits the US to impose higher taxes on non-resident non- citizens. 48 Aggrieved taxpayers are in addition given the right to present alleged contraventions of the DTC to the "competent authorities" of either country, irrespective of other remedies provided under domestic law; if the dispute remains unresolved, a "mutual agreement procedure" is triggered, 49
4. How Effective Is the DTC Under Domestic Law?
    In the UK and the US, rules of international law (including DTCs) have domestic law effect only to the extent permitted by domestic law. In other words a DTC may provide relief from double taxation, but if domestic law denies the DTC full effect, the relief may, be diminished or even lost altogether. The assessment of effectiveness has two prongs; (a) the status of the DTC in the domestic legal system (enabling legislation, entrenchment and "treaty override"); and (b) the construction of the DTC by domestic courts (interpretation of the terms of the DTC).
A. What Status Does the DTC Enjoy Under Domestic Law?
    In the UK, DTCs which afford relief from IHT or which prescribe situs rules relating to the application of the tax are to have effect "notwithstanding anything in [the IHTA] ...", provided that an Order in Council declares that a DTC has been made and that it is "expedient" that the DTC should have effect.5° By itself this provides very little entrenchment and can be compared unfavourably in this
46 US/UK DTC, Art.9(1)(b), 9(2)(b). 47 US/UK DTC, Art.9(3). 48 US/UK DTC, Art.1O; see also OECD Model Convention, ArtJO. 49 US/UK DTC, Art. 11; see also OECD Model Convention, Art.11.
50 IHTA, s,158(1).
[*143] regard with its counterpart in the Income and Corporation Taxes Act 1988 (ICTA). IC-TA provides that DTCs relating to income tax, capital gains tax and corporation tax shall have effect "notwithstanding anything in any enactment..." once an Order in Council declares that a DTC has been made. 51
    The substantive difference between the two provisions relates to the degree of protection that each affords on its face against subsequent implied legislative derogation from the terms of a pre-existing DTC. There is no doubt that Parliament could expressly derogate from international law; if any DTC and subsequent UK legislation were clearly in conflict, the subsequent legislation would prevail. 52 However, the point is that the IHT DTC enabling provision, limited as it is to protecting against contrary provisions in the IHTA, will not by itself protect against later implied derogation-53 Its income tax counterpart might on the other hand prevent such implied derogation, as it purports to protect against any contrary domestic legislation, past or future. 54
    The US has shown a greater propensity than the UK for legislating in derogation from its DTC obligations, and has in effect provided for such "treaty override" in its taxing legislation. The basic rule is that neither a DTC nor federal US law shall have preferential status over the other, for purposes of determining the relationship between the two. 55 Before this rule was amended in 1988, no provision of the IRC could be applied in contravention of any DTC commitment of the US in effect on the date of the original enactment of the IRC (i.e., 1954).56 The 1988 amendment was intended to restore the application of the
51 ICTA, s788(3), 52 This follows from the doctrine of Parliamentary Supremacy. 53 In practice, problems are avoided if the more recent legislation amends the actual terms of the IHTA itself or if it provides that the amendments are to be construed as one with the principal Act; see, e.g., Finance Act 1986, s,114(5). 54 For a similar (though not identical) entrenchment provision, see the European Communities Act 1972, s.2(4). See also Factortanie Ltd. v. Secretary of State for Transport [199111 A.C. 605, and H,W.R. Wade, "What Has Happened to the Sovereignty of Parliament?", Law Quarterly Review 107 (1991), 1-4, for analyses of the effect of section 2(4). 55 IRC, s.7852(d)(1) (as amended in 1988). 56 IRC, s.7852(d) (prior to amendment in 1988).
[*144] common law rules described in the next two paragraphs. 57
    The general rule under US federal law is that when a self-executing treaty and a statute are in conflict, the one which was approved or enacted later in time will prevail. This works in both directions - to the extent of any inconsistency, a later statute abrogates an earlier treaty and a later treaty abrogates an earlier statute.58 The reason for this is that under the US Constitution's federal "supremacy clause' federal statutes (enacted by Congress) and treaties (made by the Executive and ratified by the Senate) are treated as co-equals.59 Of course, whether there is in fact an inconsistency will depend on the US court's interpretation of both the statute and the treaty.6°
    Strict operation of this "last-in-time" rule is tempered, however, by judicial doctrine; namely, a presumption against finding implied repeal or derogation. There is no doubt that the US (like the UK) could legislate in express derogation from a DTC; indeed Congress has done so with increasing frequency in recent years.61 But US courts strongly disfavour statutory implied repeal,62 and the same disfavour extends forcefully to implied derogation between statutes and treaties. "When [a treaty and a statute] relate to the same subject, the courts will always endeavour to construe them so as to give effect to both, if that can be done without violating the language of either However, "[a] treaty will not be deemed to have been abrogated by a later statute unless such purpose on the part of Congress has been clearly expressed."64 Compare this with the UK, where courts will attempt to construe a statute to accord with a UK treaty obligation if the statute is "reasonably capable" of bearing a
57 See Senate Report (Finance Committee) No. 100-445, 3 Aug. 1988, 318. 58 Whitney v. United States, 124 U.S. 190 (1888); Cook v. United States, 288 U.S. 102 (1933). See also Restatement of the Law (Third) of the Foreign Relations Law of the United States, American Law Institute, 1986, s.115(1), (2). 59 US Constitution, Art.VI, cl.2; Whitney, 124 U.S. at 194. 60 United States v. Lee Yen Tai, 185 U.S. 213 (1902). 61 See, e.g., Technical and Miscellaneous Revenue Act of 1988, Pub. Law No. 100-647, s.1012(aa)(2) (certain provisions of the Tax Reform Act of 1986 are to apply notwithstanding any treaty obligations of the US). 62 Traynor v. Tnrnage, 485 U.S. 535 (1988). 63 Whitney, 124 U.S. at 194. 64 Cook, 288 U.S. at 120.
[*145] meaning consistent with the obligation,65 but will not "distort" the meaning of the statute to save the treaty even if Parliament did not "clearly express" an intention to abrogate the treaty.
    One other point should be made about the use of a DTC in the US. A taxpayer claiming that a DTC overrules or modifies US tax law must disclose this position on a tax return or otherwise as required by the Internal Revenue Service. 67 Failure to do so will not prejudice applicability of the DTC, but does carry a monetary penalty. 68
B. How Will Domestic Courts Interpret the DTC?
    Judicial authority in both the UK and the US suggests that a domestic court, when interpreting a DTC, will be influenced heavily by the same judicial jurisprudence that prevails in each country regarding the interpretation of domestic legislation. 69 In view of the ongoing debate within the legal communities in both countries about the "correct" way in which to interpret legislation, this subject is not dealt with further herein, and the reader should refer to literature in both countries on the subjects of treaty and statutory interpretation.70
Postscript: Exchange of Information
    Even a DTC term that is intended to benefit the governments concerned, the exchange-of-information provision, may be subject to domestic law requirements. Among the main incentives for a government to enter into a DTC is the fight against fiscal evasion; to this end the US/UK DTC provides for exchange of information between the two governments to the extent "necessary for the carrying out of the
65 Garland v. British Rail Engineering Ltd. [198312 A.C. 751, 771. 66 Duke v. G.E.C. Reliance Ltd. [1988] 2 W.L.R. 359, 371. 67 IRC, s.6114(a). 68 IRC, s.6712(a). 69 See IRC v. Commerzbank [1990] S.T.C, 285 (UK); Lewenhaupt v. Commissioner, 20 T.C. 151 (1953) (US). 70 For example, on treaty interpretation see Jacobs & Roberts, eds., supra n.1 at 137-139 (UK) & 164-168 (US). On statutory interpretation see J. Bell & G. Engle, Cross: Statutory Interpretation, Butterworths, 2nd ed., 1987 (UK); N Singer, Statutes and Statutory Construction, Clark Boardman Callaghan, 5th ed., 1992 (US).
[*146] provisions of [the DTCJ or for the prevention of fraud or the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of [the DTC]" •71 UK law permits the inclusion of such provisions in IHT DTCs, but requires in addition that the Order in Council giving effect to such a DTC specifically mention that the DTC makes provision for this purpose. 72
HI. Capital Transfer Tax DTCs
    The UK has DTCs relating to estate duty, capital transfer tax and/or inheritance tax with the following countries: France, India, Ireland, Italy, the Netherlands, Pakistan, South Africa, Sweden, Switzerland and the US?3
    The US has DTCs relating to estate tax, gift tax and/or generationskipping transfer tax with the following countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Sweden, Switzerland and the UK. 74
71 US/UK DTC, Art12; see also OECD Model Convention, Art.12. 72 IHTA, s.158(1A), 73 See S,I. No. 1963/1319 (France, signed 1963); SI. No. 1956/998 (India, signed 1956); S.l. No. 1978/1107 (Ireland, signed 1977); SI. No. 1968/304 (Italy, signed 1966); SI. No. 1980/706 (Netherlands, signed 1979); S.I. No. 1957/1522 (Pakistan, signed 1957); S.I. No. 1979/576 (South Africa, signed 1978); SI. Nos. 1981/840 & 1989/986 (Sweden, signed 1980); S.I. No. 1957/426 (Switzerland, signed 1957); S.I. No. 1979/1454 (US, signed 1978). 74 See 4 U.S.T. 2264 & 5 U.S.T. 92 (Australia, signed 1953); 8 U.S.T. 1699 (Austria, signed 1982); 13 U.S.T. 382 (Canada, signed 1961) (in respect of persons deceased prior to 1 Jan. 1985); T.I.A.S. No. 11089 (Denmark, signed 1983); 3 U,S.T. 4464 (Finland, signed 1952); 32 U.S.T. 1935 (France, signed 1978); TI.A,S. No. 11082 (Germany, signed 1980); 5 U.S.T. 12, 5 U.S.T. 1543 & 18 US.T. 2853 (Greece, signed 1950, 1954 & 1964); 2 U.S.T. 2303 (Ireland, signed 1949); 7 U.S.T. 2977 (Italy, signed 1955); 6 U.S.T. 113 (Japan, signed 1954); 22 U.S.T. 247 (Netherlands, signed 1969); 2 U.S.T. 2353 (Norway, signed 1949); 3 U.S.T. 3792 (South Africa, signed 1947 & 1950); T.I.A.S. No. 10826 (Sweden, signed 1983); 2 U.S.T. 1751 (Switzerland, signed 1951); 30 U.S.T. 7223 (UK, signed 1978).
[*147] Appendix: Capital Transfer Taxes
1. United Kingdom
    In the UK, a single capital transfer tax-the inheritance tax (IHT)-is charged on the value transferred by all non-exempt transfers of value made by individual.75 For these purposes, a transfer of value is a disposition as a result of which the value of the transferor's estate is less than it would be but for the disposition, and the value transferred is the amount by which the value of the estate falls. 76 On death, a person is treated as having made a transfer of value of his entire estate immediately before death.77 Deathtime transfers are charged at the full rate; lifetime transfers are charged at one-half this rate.78 The charge at death takes account of lifetime charges to IHT.79
    The territorial scope of the charge to IHT is limited by the definition of a person's estate as the aggregate of all the property to which he is beneficially entitled, except for certain "excluded pe8° "Excluded property" includes property situated outside the UK that is beneficially owned by an individual domiciled outside the UK; 81 the effect of this is to restrict the scope of IHT to transfers of (i) property owned by UK domiciiaries, wherever such property is situated, and (ii) property situated in the UK, wherever the owner is domiciled. For these purposes, common law rules defining "domicile" apply, but there are also situations in which a person is deemed by statute to be domiciled in the UK.82
    "Exempt transfers" (which are not subject to IHT) include interspousal transfers, an annual exemption, de minimis small gifts and gifts to charities. 83 A major innovation introduced in 1986 was the
75 IHTA, ss.1-2. 76 IHTA, s.3(1). 77 IHTA, s.4(1). 78 IHTA, s7(2). Under the current rate schedule, cumulative chargeable transfers of up to £150,000 are in the nil-rate band, and those in excess of this amount are taxed at 40%: IHTA, sch.1. 79 IHTA, s.7(1). 80 IHTA, s.5(1). 81 IHTA, s.6(1). 82 IHTA, s.267. 83 IHTA, ss.18-29A.
[*148] "potentially exempt transfer" (PET). Most lifetime transfers made to another individual or into certain trusts qualify as PETs; 84 PETs are not taxed when made and are treated as fully exempt if the transferor survives the gift for seven years. 85 Whether a lifetime gift is a PET or immediately chargeable, however, it will be taxed at the full deathtime rate if the transferor dies within three years of the gift; for deaths between three and seven years after the gift, tapered relief from the additional deathtime rates is available. 86
    Other relief from IHT is provided for transfers of certain business property, agricultural property and certain woodlands, and for certain transfers made within seven years of death. 87
2. United States
    In the US, the federal government imposes three capital transfer taxes. These are the gift tax (GT), the estate tax (El) arid the generation-skipping transfer tax (GSTT). Many states also levy some form of death tax, but these are not discussed further herein as they are not covered by the US/UK DTC,
    Federal GT is imposed at graduated rates (of between 18% and 55%) on the transfer of property by gift by any individual, resident or non- resident. 88 Such "taxable gifts" include all gifts other than certain exclusions and certain other deductible items (such as inter-spousal transfers to a U.S. citizen spouse and gifts to charities).89 The territorial scope of the charge is limited by taxing gifts by non- resident noncitizens only to the extent that such gifts involve transfers of tangible property that is situated in the US. 90 "Residence" for these purposes is defined in Treasury Regulations as meaning "domicile"; i.e., living somewhere with no definite present intention of leaving. 91
A lifetime
84 IHTA, s.3A(1). 85 IHTA, s.3A(4)-(5). 86 II-{TA, s.7(4). 87 IHTA, ss.103-114, ss.115-1248, ss.125-130 & ss.131-140. 88 IRC, s.2501(a)(1). 89 IRC, s.2503 (exclusions), ss.2522-2523 (deductions). 90 IRC, ss.2501(a)(2), 2511. 91 Treasury Regulations, s.25.2501-1(b).
[*149] "unified credit" of $192,800 is available against any CT payable.92 Federal ET is imposed, at the same graduated rates as for CT, on the taxable estate of any individual who dies a citizen or resident of the US. 93 "Resident" is defined for these purposes in the same terms as for CT.94 "Taxable estate" is defined as a person's gross estate less certain deductions. 95 Broadly, the gross estate consists of the value of all of the person's property at death, though this definition is elaborated and limited in the IRC.96 Deductions include items such as expenses of administration, transfers to charity and transfers to a U.S. citizen surviving spouse (the so-called "marital deduction").97 The amount of ET payable takes lifetime transfers into account. 98 Certain credits may be applied against any ET payable: an amount equal to so much of the unified credit that has not been used up for lifetime gifts, a limited credit for state death taxes, credits for certain sums of CT paid and for certain prior transfers, and a limited credit for death taxes paid to a foreign country for transfers of property in that country.99
    Federal ET is imposed under a slightly modified regime on the taxable estate of a non-resident non-citizen. 100 First, the gross estate includes only such of the deceased's property as is located in the US, and the IRC and corresponding Treasury Regulations contain rules for determining the situs of certain types of property,101 Second, the unified credit is limited to $13,000 unless a DTC requires that a greater unified credit be given. 102 Finally, the unilateral foreign death tax credit is not available to non-residents. 103
A detailed description of federal GSTT is beyond the scope of this
92 IRC, s.2505. 93 IRC, s2001(a). 94 Treasury Regulations, s.20.0-1(b)(1). 95 IRC, s.2051. 96 IRC, ss.2031-2046. 97 IRC, ss.2053-2056A. 98 IRC, s2001(b). 99 IRC, ss.2010-2016. 100 IRC, s.2101(a). 101 JRC, ss.2103-2106; Treasury Regulations ss.20.2104-1, 20.2105-1. 102 IRC, s.2102(c). 103 IRC, s.2102(a).
[*150] article, but essentially the tax is imposed at a flat rate of 55% on certain "generation-skipping" transfers of property to grandchildren and more remote generations, which transfers would otherwise escape taxation.104 To offset this liability, a transferor has a GSTT exemption of $1 million, which may be allocated between donees as permitted by rules in the IRC.105 A partial credit is allowed for certain amounts paid in state GSTL106
104 IRC, ss.2601 et seq. 105 IRC, ss.2631-2632. 106 IRC, s.2604.
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