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.