Double Taxation

trf197

I am trying to get my head around the following situation regarding a double taxation convention between HMRC and Ethiopia (http://www.hmrc.gov.uk/taxtreaties/news/ethiopia-uk-dt.htm).

1. A person is dual resident in UK and Ethiopia. I think from reading the convention that under the tie-breaker rules this person counts as a UK resident for the DTA, due to having access to a permanent home in the UK but not in Ethiopia.

2. HMRC Helpsheet 302 (page 2) suggests that if the tie-breaker decides they are UK resident for the DTA that all worldwide income, including that payed in Ethiopia, is taxed in the UK, though they may be able to claim some tax relief in Ethiopia.

3. The confusion comes in Article 15 of the double tax convention that states "Subject to the provisions of Articles 16, 18, and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be
taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State."

My question is, how would income earned in Ethiopia be taxed by somebody who is a UK resident for the purpose of the DTA.

Caveat: I have little understanding of tax law at all really so please keep any responses as straightforward as possible, thanks!

morgani

The key part which you have not mentioned is the persons domicile (normally where they were born).
If you are uk domiciled then uk tax law states that you are taxed on your worldwide income.

Double tax relief will be available which is normally the lower of the 2 taxes (uk and Ethiopia) on the income from that country.

trf197

Thanks, Morgani, although that's not what helpsheet 203 states . It very clearly says that the tie breakers are used to decide on whether you are taxed as in the UK or not (and nationality is the last of the tie-breakers on and DTA it seems). Not that it matters in this case since by either measure the person I am looking into this for counts as a UK resident for tax.

So does this mean that the person should pay tax in the UK on earnings from Ethiopia (through a self assessment declaration, I presume) and then try to claim some sort of tax relief in Ethiopia if the income tax charged is lower there? That seems to be fairly tricky to organise at the Ethiopia end - to say the least!

morgani

Dta's often just agree limits to the tax charged to simplify the process between countries. Uk law states all worldwide income is taxed on British nationals.

The dta already agrees the tax they suffer in Ethiopia as a uk resident. They do a tax return and complete the foreign income pages. They will get tax relief in the uk so that they do not pay tax on the income twice.