Read our news and analysis in the run-up to Budget 2014, as well as our views on all the Budget announcements.
We’ll help you navigate the global tax landscape
The business and tax landscapes have changed dramatically, and the pace and complexity of change continues to increase. We can help you navigate this shifting landscape. Governments are tempering the need for revenue with increased competition for labor and capital. Tax authorities are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. Companies are balancing competing priorities, ensuring they maintain compliance while adding value. We can assist you with these critical issues in today's tax environment, including:
- Midweek Tax News
A weekly update on tax matters to 11 March 2014
Midweek Tax News provides you with a succinct overview of the key tax developments that have occurred each week, to allow you to stay up-to-date on tax issues that may have an impact on your business. If you would like to discuss an article in more detail, please do speak to the relevant contact listed at the end of this issue or to your usual EY contact.
Budget 2014: Tax Focus web seminar
By way of reminder, our web seminar at 2:00 pm on 20 March 2014 will consider the measures announced in the Budget and their likely implications.
Our speakers will include Andrew Goodwin from the ITEM Club, the EY sponsored independent economic forecasting group, who will provide some additional economic analysis of the Budget announcements.
To register for this webcast please use this link.
Corporation tax treatment of VAT refunds and associated interest
On 11 March, the Court of Appeal released its judgment in the appeal brought by Shop Direct Group (SDG) to challenge the assessment to corporation tax of a repayment of VAT, together with an amount of interest thereon. The original First-tier Tribunal judgment had considered a series of repayments but only one repayment (and the interest on it) was considered before the Court of Appeal. HMRC assessed SDG to corporation tax in relation to the VAT repayment on the basis that the repayment was a post-cessation receipt under section 103(1) ICTA 1988 and so chargeable under Schedule D Case VI. It was assessed to corporation tax on the interest element on the basis that it represented a profit arising from a loan relationship. The Court noted that the appeal had been complicated by the fact that payments and repayments of VAT had been made by and to representative members of VAT groups, rather than by or to the trading companies concerned, and the identity of the relevant representative members, and the constitution of the relevant VAT groups, had changed over time.
Giving the main judgment, Lord Justice Briggs concluded that SDG was assessable to corporation tax on both the repayment of VAT and the interest element for reasons which did not require an in-depth analysis of the role of the VAT group representative member or how SDG became entitled to the receipts. The Judge found that section 103(1) imposes a charge to tax upon any recipient of a post-cessation receipt, regardless whether that recipient is the original trader, save only to the extent that the scope of section 103(1) was limited by specific provisions, none of which were relevant here. The repayment of VAT was, when received by SDG, a sum which arose from the carrying on of the discontinued trades of those companies which had made the VAT overpayments. The receipt of the sum by SDG did not lose that character merely because of a process of intra-group decision-making about the specific company to which it should be paid.
In relation to the interest element, the Court found that the right to the VAT repayment was a money debt and it was accepted that the interest element was payable on that money debt. The Court also found that at the time of payment of the interest element, SDG stood, or had stood, in the position of a creditor as respects that money debt. Consequently, the interest element represented a profit arising from a loan relationship.
Supreme Court judgment in the Secret Hotels2 VAT case
On 5 March 2014, the Supreme Court delivered its judgment in the taxpayer's appeal from the Court of Appeal in the case of Secret Hotels2 Ltd (formerly Med Hotels Ltd). This case concerns whether the taxpayer acted as a principal in the sale of foreign hotel accommodation to holidaymakers and was, therefore, obliged to pay UK VAT on its margin under the tour operators' margin scheme (TOMS) (HMRC's position), or whether it acted as a disclosed agent for the hotels, in which case no UK VAT was due (the taxpayer's position).
The Supreme Court has unanimously allowed the taxpayer's appeal and restored the decision of the Upper Tribunal that the taxpayer acted as a disclosed agent for the hotels. Accordingly, no UK VAT was due under the TOMS. Our tax alert provides more detailed comments on the judgment. Affected taxpayers may wish to consider the implications of this judgment for their business.
Construction Industry Training Board (CITB) levy: Update on HMRC policy
On 7 March 2014, HMRC published an update on the practice of the CITB levy being passed on by a contractor to its subcontractors. This revises the note issued by HMRC on 29 January 2014 and follows representations from parties, including EY and construction industry bodies, expressing some concerns about the announcement.
The update largely returns the position to that understood and operated before January 2014. HRMC confirms that the construction industry scheme (CIS) applies only to payments made under construction contracts. Where contractually agreed deductions such as insurance charges, amounts equal to the CITB levy or any other training costs are deducted before payment then the CIS only operates in respect of the amount paid after any deduction for materials and VAT.
HMRC confirms that where the parties have contractually agreed to an amount equating to the CITB levy being passed on to the subcontractor, the subcontractor's supply for VAT purposes is reduced by the equivalent amount of the CITB levy deduction.
Upper Tribunal rejects application of section 171A TCGA 1992 on repayment of debt
In the case of DMWSHNZ Limited, the Upper Tribunal has dismissed the taxpayer's appeal, holding that section 171A TCGA 1992 did not apply to a gain crystallising on the repayment of a loan note into which it was held over, on the basis that there was no disposal to another person, and that section 171A could not be construed purposively to apply in such a situation.
Section 171A TCGA 1992, as it stood at the time, applied where two companies were members of a group of companies and one disposed of an asset to a person outside the group. The election meant that the asset was deemed to have been transferred to another group company under the ‘no gain/no loss’ provisions in section 171 TCGA 1992 immediately before the disposal to the third party, and this second group company was deemed to make the third party disposal. If the second group company had capital losses these could be set off against the chargeable gain. Section 171A was subsequently amended in 2009 so that it applied to all chargeable gains or losses, which could be transferred by election between group companies.
The taxpayer's first contention was that the repayment of the debt constituted a disposal to a person outside the group (ie, the third party issuer of the notes). The Upper Tribunal rejected this but disagreed with the reasoning of the First-tier Tribunal, finding that the loan note was the relevant asset to consider, rather than the underlying debt itself. The Upper Tribunal held that the loan note could not have any existence after the debt is repaid and so nothing was transferred to the issuer of the loan notes.
The taxpayer also argued that section 171(2)(a) (which prevents the satisfaction of a debt from being a disposal to which section 171 could apply) implies that, absent section 171(2)(a), a satisfaction of debt would be regarded as the disposal of the debt from one person to another. The Tribunal held, however, that such an inference could not be drawn, and that the provision in section 171(2)(a) existed simply for the avoidance of doubt.
The taxpayer's final argument was that section 171A, construed purposively, should apply in this situation. In this regard the Upper Tribunal dismissed the taxpayer's appeal for similar reasons to the First-tier Tribunal. It held that section 171A was a clearly worded provision and that the materials produced at the time it was originally enacted did not indicate that it was intended to apply to all disposals. Furthermore, it considered the changes to section 171A in 2009 were intended to expand rather than clarify its previous scope.
Other UK developments
Salaried members of UK limited liability partnerships (UK LLPs)
HMRC issued revised draft legislation on 7 March in respect of the rules for salaried members of UK LLPs. This follows the publication of a revised technical note and guidance on the rules on 21 February. The rules are intended to ensure that UK LLP members who are, in effect, providing services on terms similar to employment are treated as ‘employees’ for tax purposes. The new provisions will treat an individual member of a UK LLP as an ‘employee’ if three conditions are all met. The test is applied ‘looking forward’ on the basis of the facts known at that time. The legislation will not be final until the Finance Bill 2014 receives Royal Assent. However, UK LLPs with salaried members will be required to operate PAYE in respect of those members from the date the legislation comes into force (6 April 2014) and as such the draft legislation and guidance is particularly important for UK LLPs to consider.
Including real estate investment trusts (REITs) as institutional investors
Following consultation, measures have been introduced by secondary legislation (rather than in Finance Bill 2014) with effect from 1 April 2014, which will allow tax-advantaged REITs to invest in other REITs without breaching the non-close company rule. This will be done by including UK REITs and their foreign equivalents within the definition of ‘institutional investors’. The aim is to facilitate joint ventures and co-investment opportunities. This is a change that we have been calling for over the last few years and one which we strongly supported in our consultation response.
Loans to participators: Further HMRC consultation
In 2013 HMRC ran a consultation on a potential reform of the loans to participators rules to which EY and others responded. Following the results of this consultation, HMRC decided not to proceed with a fundamental reform of the rules or to change their operational structure. However, HMRC stated that it would continue to engage with ‘interested parties’ to consider more detailed suggestions and concerns put forward during the consultation, with the potential for smaller adjustments to the regime within the existing framework.
In this regard, HMRC is now seeking comments on an informal basis in relation to specific issues arising under the current rules when loans are made to persons other than individual participators of close companies, for example loans to partnerships (including LLPs), charities or employee benefit trusts.
The consultation asks for comments to be submitted by 18 April 2014, following which HMRC intends to hold one or more meetings with stakeholders to discuss the issues in more detail.
EY National VAT Workshops: 2014 programme
We have now released details of our VAT workshop training programme running across our UK office network during 2014. The VAT workshop programme has been developed as a direct response to requests for practical training. The topics covered include basic VAT, international VAT, property VAT and partial exemption. We are also offering VAT workshops aimed specifically at local authorities. Further details on these VAT workshops, as well as information on bespoke training sessions, can be found in our National VAT Workshops 2014 brochure.
Capital Requirements Directive IV (CRD IV) country-by-country reporting (CBCR)
The CRD IV CBCR framework is now a reality for regulated financial institutions in the UK. This unique and brand new reporting regime, part of the European Union's CRD IV framework, was formally transposed into UK legislation in December 2013 and the first reporting deadline is only a matter of months away.
The backdrop to CRD IV CBCR is the sharp focus recently on the taxes paid by multinational companies and a desire from stakeholders for increased tax transparency. In this context, CBCR is seen by many as a significant milestone in achieving a greater level of financial and tax transparency for banks and investment firms. Financial institutions must now turn their attention to understanding the implications of CBCR for their organisation, the policy choices they will need to consider and how they will comply with the regulations. Our tax alert has further details.
Branch capital attribution: New rules on regulatory capital instruments
The Taxation of Regulatory Capital Securities Regulations 2013, which governs the tax treatment of additional tier 1 (AT1) and tier 2 regulatory capital instruments, came into force on 1 January 2014 to coincide with the UK's implementation of CRD IV.
Under the new regulations, AT1 capital is deductible for UK tax purposes. However, CRD IV only applies to EU regulated banks and the regulations do not explicitly deal with the UK branches of inbound banks. HMRC has looked to clarify the treatment of branches in a technical note published in December 2013.
The new regulations provide an opportunity for European and non-European banks with UK branches to revisit their branch capital methodology to determine whether they can justify additional deductions on the basis that AT1 is fully deductible. Our tax alert has further details.
European VAT exemption for the management of defined contribution pension schemes
The Court of Justice of the European Union is due to deliver its judgment in the Danish case of ATP Pension Service A/S on 13 March 2014. This case concerns whether the VAT exemption for the management of special investment funds extends to defined contribution pension schemes. Significantly, the Advocate General answered this question in the affirmative. The outcome of this judgment will be of keen interest to affected pension funds and fund managers.
Russia identifies steps to improve competitiveness of the Russian tax system
After several years of discussions between the state authorities and the business community, in February, the Russian Government finally approved a roadmap for developing tax administration in Russia over the next six years. The document contains a fixed deadline for each initiative and the responsible bodies for each item. Overall the roadmap is aimed at improving the competitiveness of the Russian tax system and the country's investment climate as a whole.
The roadmap is divided into several sections. One of the most important initiatives involves considering the possibility of introducing advance tax clarifications ie, tax rulings, which would allow taxpayers to avoid disputes and tax litigation if they have followed the clarification obtained prior to a transaction. Our international tax alert has more details.
US President releases Budget and tax proposals
President Obama has released a $3.9 trillion Budget for FY2015 that includes new international tax revenue-raising proposals. Some of the new proposals appear to reflect initiatives that are in line with the tax policy work being undertaken by a number of countries as part of the OECD base erosion and profit shifting project. Our international tax alert provides details regarding the Budget proposals.
Base erosion and profit shifting (BEPS) regional consultations
The OECD has held two regional consultations for Asia-Pacific and Latin American-Caribbean regions. Some of the common key messages related to the importance of political support for reforms and concerns that tax policy measures must be capable of practical implementation, given constraints on capacity and access to information. The outcomes of these regional consultations will be discussed at the meetings of the Global Forum on Transfer Pricing and the Task Force on Tax and Development on 26-28 March 2014.
International Monetary Fund (IMF) to consider and report on base erosion and profit shifting
The IMF is seeking input from interested parties on economic ‘spillovers’ in international taxation, that is, the impact that one country's choices in this area may have on other countries.
The IMF expects its analysis to focus on:
• The impact of bilateral double taxation treaties on low-income countries
• The impact of the trend to shift from worldwide (residence-based) taxation towards a territorial (source-based) system among many industrial countries
• Issues arising from the distortion in the treatment of debt and equity for tax purposes
• Increasing use of methods of income splitting within multinational enterprises that differ from the classic ‘arm's length’ method based upon comparable transactions
Interested parties are asked to submit comments by 31 March 2014.
Other international tax alerts
Please see a selection of our international tax alerts in respect of the following developments. Additional articles are available in our Global tax alert library.
Italy: The Italian Government has repealed part of the recently introduced tax provisions concerning certain digital economy activities generally referred to as the “Web Tax” rules.
Taiwan: Retroactive amendments have been made to exempt from withholding tax royalties paid on qualified patent rights registered outside Taiwan.
Hong Kong: The 2014-15 Budget proposals include no change to main tax rates.
Hong Kong: The Inland Revenue Department announces that taxpayers can continue to adopt a mark-to-market basis for 2013-14 profits tax returns.
Netherlands: The Dutch Lower Court finds the lack of an arm's length return in a captive reinsurance case.
South Africa: We provide a summary of the significant domestic company tax and cross-border tax announcements in the 2014 budget.
Please speak to your usual EY contact, or email us at firstname.lastname@example.org, if you would like to receive a copy of our regular indirect tax newsletter, or information about our other publications.
If you would like to discuss any of the articles in this week's edition of Midweek Tax News, please contact the individuals listed below, Claire Hooper (+ 44 20 7951 2486), or your usual EY contact.
Budget 2014: Tax Focus web seminar
+ 44 20 7951 2301
Corporation tax treatment of VAT refunds and associated interest
+44 20 7951 0568
Supreme Court judgment in the Secret Hotels2 VAT case
+ 44 20 7951 1662
Construction Industry Training Board levy: Update on HMRC policy
+ 44 121 535 2943
Upper Tribunal rejects application of section 171A TCGA 1992 on repayment of debt
+ 44 20 7951 7076
For other queries or comments please email email@example.com.
- Operating in a shifting tax landscape
The global tax landscape continues to change in a dramatic fashion, with near-constant news hitting the headlines regarding shifting tax policy, increasing levels of enforcement and the growing potential of reputational risk.
Multinational companies now have to balance more competing priorities than ever before, ensuring they protect their business by monitoring and responding to changes in policy, legislation and tax enforcement, while at the same time ensuring they not only maintain the highest levels of compliance but also add value from the tax function.
Governments work to secure each tax dollar they're due
From a policy perspective, all governments want their country to be viewed as an attractive place to do business, to attract jobs and capital in an increasingly competitive globalized arena.
At the same time, they want to increase the amount of revenue they bring in. Governments are treading a fine line, constantly assessing how to secure the tax revenues they see as rightly theirs, while at the same time being in direct competition with other nations, making sure they do not scare off mobile capital.
Tax administrations for their part are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. They are working to ensure that their resources are being applied to the right issues and taxpayers. They share more leading practices and taxpayer information with their foreign counterparts, to help them collect every dollar due.
Disputes are on the rise
The result has been more frequent, complex and higher value disputes between taxpayers and taxing authorities — a trend that is only increasing as countries collaborate together and as emerging markets gain in stature and influence, taking a more sophisticated approach to taxation. Penalties are becoming more stringent and the threat of reputational risk has risen significantly in recent months.
We can help you to navigate a route through this complex landscape.
We can help you monitor and react to quickly-changing tax policy and assess the economic and fiscal impact.
Where tax policies might create an impediment to your business that is unintended by policy makers, we can help you to collaborate – either solely, or as part of a broader grouping of companies who share a common objective – with government to:
- Explain the impediment
- Develop alternative policy choices which are logical and well thought out
- Model the potential outcomes
- Deliver an alternative choice to the government in a form with which policy makers can comfortably work
We also help you address your global tax controversy, enforcement and disclosure needs.
We focus on pre-filing controversy management to help you properly and consistently file your returns and prepare the relevant back-up documentation.
Where a controversy has already occurred, our professionals leverage the network's collective knowledge of how tax authorities operate, and increasingly work together, to help resolve difficult or sensitive tax disputes. To ensure that continuous performance improvements are instigated after a controversy, we work with EY's other tax professionals to ensure that similar events are less likely to occur.
Below you can access our views and analysis of some of the substantial policy and enforcement trends and issues at play today.
- Seizing the opportunity in Global Compliance and Reporting
Global Compliance and Reporting (GCR) is at a tipping point. Many companies distribute responsibility for GCR processes throughout their organization creating a patchwork. The results are suboptimal. Our recent survey shows a need for a new approach.
Due to the combination of evolving business models, transforming finance functions and an increasingly complex regulatory landscape. There are new opportunities to better optimize efficiency, control and value, to help mitigate risk and improve performance.
What is Global Compliance and Reporting?
GCR comprises the key elements of a company's finance and tax processes that prepare statutory financial and tax filings as required in countries around the world. These duties include:
- Statutory accounting and reporting
- Tax accounting and provisions
- Income tax compliance
- Indirect tax compliance
- Governance and control of the above processes
GCR activities reside in the middle of a broader set of so-called record-to-report (R2R) processes. R2R is the intersection between any company's finance and tax departments and is used to capture, process and store information that is essential to statutory accounting, tax compliance and reporting. Any change to R2R processes, information, finance systems, roles and responsibilities will have a direct impact on GCR processes.
Risk on the rise
GCR risks are on the rise. Local jurisdictions are rewriting regulations, focusing more intently on the collection of tax revenues and sharing more taxpayer information across borders. At the same time, the global financial crisis has driven companies to redesign their finance operating models to remain competitive and to take advantage of opportunities for growth.
Our new report Seizing the opportunity in Global Compliance and Reporting investigates the significant developments taking place as multinational companies determine the best way to meet financial reporting and tax obligations worldwide.
Our case study highlights how we helped leverage an array of external providers
Helping you achieve meet the new GCR demands
Fast changing compliance and reporting requirements are more demanding on tax and finance functions today than ever before. So how do you improve control and quality, manage risk, create efficiency and drive value?
Our market-leading approach combines standard and efficient processes, highly effective tools and an extensive network of local tax and accounting subject matter professionals.
See more on how we can help you meet the demands of today's tax landscape
- Building effective supply chains
As multinational companies seek to reach new markets and compete more effectively in mature markets, they are adapting and differentiating their supply chains. Companies’ operating models need to cater for efficiency and scale in mature markets, while having the flexibility and local ability to support growth in emerging markets. Consequently, driving true shareholder value requires an operating model that combines global and regionally differentiated processes, and integrates these with local striking power and operational excellence.
Leading companies recognize the need for integrating tax in their business planning and decision processes
Whether companies seek to enter new markets or drive efficiencies in mature markets, leading companies understand the complexities of the international tax systems. The impact of both direct taxes and indirect taxes needs to be carefully considered and integrated to drive the effectiveness of the operating model while complying with all applicable local and international tax laws and effectively manage all tax risks. Operating model effectiveness is becoming one of the cornerstones of successful competition and differentiation.
The EY TESCM offering helps ensure you do just that. Our advisory and tax professionals operate as one team to assist our clients with developing and implementing operating model optimization where business needs and requirements are the driver while making sure that tax is an integrated part of the design of the operating model architecture.
- Managing mobile workforce risk
In today's globally integrated, tightly regulated and increasingly competitive business environment, one critical success factor stands out: people. People represent an organization's most significant investment and offer a tremendous opportunity to gain a competitive advantage.
Where the leading companies are focusing their efforts
- Attracting and retaining the right people
- Global talent deployment and mobility
- HR and payroll effectiveness
- Risk, governance and compliance
Managing the risks of mobile employees
While optimizing the competitive advantage of your people has long been a core objective, a more recent set of trends in the tax landscape means that large companies with an internationally mobile workforce are at a higher risk of tax noncompliance and resulting controversy than ever before.
The business and tax landscapes that have changed so much over the last few years continue to shift. The pace of globalization is increasing, and the global financial crisis has acted as a catalyst to both globalization and business transformation, with many emerging markets now seeing faster growth than before the crisis.
Alongside these megatrends, a variety of underlying issues are converging, resulting in a growing set of risks for multinationals who have globally mobile employees. While companies may closely define and execute their formal expatriate assignment policies, business travelers outside the scope of such formal policies are widely accepted to be creating a new set of risks for companies to manage.
Unintended tax compliance obligations
These travelers are increasingly creating unintended tax compliance obligations, and the resulting risks are not just personal. They are increasingly felt at the corporate level, with the corporate tax function often unaware of the extent of the spreading problem. Tax administrations are becoming increasingly aware of the issue, however, and are very effectively using new technology to identify where a tax obligation has arisen. In a rising tax enforcement landscape, this issue has significant potential to grow.
Managing these risks should be a burning platform issue for multinational companies.
A burning platform?
What may start as a relatively simple personal income tax compliance issue can quickly create a ripple effect, with risks such as the creation of a permanent establishment, an employment tax audit or the payment of a significant related penalty all occurring at the corporate level.
At the same time, the pace of legislative change (such as the increasing enforcement of permanent establishment) is actually speeding up. Countries are using this type of legislation to increase overall levels of tax revenue.
As governments continue to look for ways to widen the tax base, they are likely to learn from one another in fora such as the OECD's Forum on Tax Administration, CIAT, CIOT and SGATAR and quickly replicate the processes and technologies used. As they do so, we will likely see penetration of this issue into a broader number of companies of smaller size.
Companies, recognizing the spectrum of reputational, personal and financial risks related to tax, are making strong efforts to be compliant. There is an increasing acceptance that such issues are becoming increasingly urgent from both a reputational and a financial perspective.
How we are helping companies
Our Human Capital network embeds processes and technology that will help companies to identify and manage STBT-related risks before they occur. Where controversy has already arisen, EY's global Tax Controversy network can use our insights into the culture and processes and relationships with each key tax administration to remediate issues. With prior year issues being rapidly unearthed, and with tax administrations focusing on this issue more than ever before, the time to act is now.
Connect with us
Stay connected with us through social media, email alerts or webcasts. Or download our EY Insights app for mobile devices.
The trust an organisation builds with its stakeholders is critical, and tax transparency is a key dimension in building that trust. Find out how we can help.