Fowler case: Interpreting double tax treaties

Out-Law Legal Update | 25 Jul 2017 | 11:28 am | 2 min. read

LEGAL UPDATE: The case of HMRC v M F Fowler [2017] UKUT 219 (TCC) concerns a South African resident diver who undertook diving engagements in the UK Continental Shelf waters. The decision sets out some important principles about the approach to interpretation of tax treaties, which are likely to be of wider application.

A recent UK Upper Tribunal tax case considered the interpretation of the UK/South Africa double tax treaty. It concerned Mr Fowler, who was resident for tax purposes in South Africa but worked as a diver in the UK continental shelf sector of the North Sea.  The tribunal had to interpret the double tax treaty to determine whether Mr Fowler was subject to UK tax on the income from his diving activities.

Section 15 of the Income Tax (Trading and Other Income) Act 2005 applies to divers and diving supervisors operating in the continental shelf and treats the performance of the duties of the employment “for income tax purposes” as the carrying on of a trade in the UK.  Mr Fowler argued that this meant that even if he was an employee, the business profits article of the double tax treaty, and not the employment article, would apply to him. If his argument succeeded, the income would not be subject to UK tax as the business profits article only taxes income from a UK permanent establishment, which Mr Fowler did not have.

In the Upper Tribunal the judge said that the correct approach to interpreting a term in the double tax treaty is first to see whether the term is defined in the treaty, and if so to apply that definition.

If the term is not defined, the judge said the general rule of interpretation in the treaty needs to be considered. In this case the treaty provided that when one of the contracting states was applying the treaty, any undefined term "shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which this Convention applies...".

In considering the relevant UK law, the judge said it is tax law which is important, and not any other laws of the UK (for example, employment law). He said it is necessary to consider UK tax law as it stands at the time of the relevant tax assessment, and not at the time the tax treaty was signed. 

If UK tax law cannot not be used because "the context otherwise requires", the judge said the rules of the Vienna Convention on the Law of Treaties 1969 should be applied. This provides: "A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."

Applying this methodology to Mr Fowler's situation, the judge said that as the term 'employment' is not defined in the treaty, it was necessary to turn to UK tax law to decide the meaning of 'employment'. The judge said that the relevant term of the treaty is the status of 'employment' and not the fruits which arose from exercising that employment. So he said that the fact that certain fruits of a diving employment are deemed, under UK law, to be taxed as profits of a trade is irrelevant in deciding whether or not an 'employment' exists. The effect of the judge's decision is that if the tax tribunal decides, when it considers the issue in the future, that Mr Fowler was an employee, then the employment article of the double tax treaty will apply. This would mean that Mr Fowler would be subject to UK tax on his diving activities.

The principles set out in this case should be of wider application in applying double tax treaties. For further details, see this article by Heather Self, which was published in Tax Journal

Heather Self is a corporate tax expert at Pinsent Masons, the law firm behind This update is based on an article which was published in Tax Journal on 7 July.