Hear why BEPS is more than just a tax issue, and learn how it will impact many aspects of your global enterprise.
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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. 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:
Improving large business tax compliance: Engaging with HMRC
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- Midweek Tax News
A weekly update on tax matters to 6 October 2015
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 speak to the relevant contact listed at the end of this issue or to your usual EY contact.
OECD issues ‘final’ reports on BEPS Actions
On 5 October, the OECD issued its final reports on all 15 Actions identified in its two-year long project addressing base erosion and profit shifting (BEPS). Please click here to read our alert which looks at the key BEPS Actions, the likely UK responses to the proposals and its potential impact on a group's tax strategy.
The proposed package of measures includes:
• Agreed minimum standards: harmful tax practices (Action 5), treaty abuse (Action 6), country-by-country reporting (CBCR) (Action 13) and improving dispute resolution (Action 14)
• Recommended common approaches: hybrid mismatches (Action 2) and interest deductibility (Action 4)
• Guidance drawing on best practice: controlled foreign companies (Action 3) and mandatory disclosure (Action 12)
• Reinforced international standards: permanent establishments (Action 7) and transfer pricing (Actions 8-10)
One of the earliest areas for groups to consider what action may be needed is in response to the disclosures recommended under Action 13 and the changes in the OECD transfer pricing guidelines. Action 13 requires not only CBCR of items including the amount of revenue, profit before income tax and tax paid and accrued, but also the preparation of a transfer pricing master file. This master file should give an overview of the group's business and transfer pricing while identifying the key value drivers and the contribution made by each entity in the supply chain. Essentially, the job of the master file is to place the group's transfer pricing policies in context. The first master file produced will be critical as it will highlight any issues or inconsistencies within the group's transfer pricing policies.
The publication of the reports represents the end of the first phase of the work with implementation being the second, equally challenging, phase. These challenges include the implementation of the recommended changes in a consistent and coherent manner, given that some proposals require domestic law changes, and the need to monitor the impact on both double non-taxation and double taxation. The OECD has announced plans for the OECD and G20 countries to work on monitoring the implementation of the BEPS recommendations and to develop a framework for including additional countries in these efforts
We expect the UK to start consultation on some of the proposals within the next week while we also expect there to be pressure over the coming year brought by the European Commission and European Parliament for harmonisation and collective action across the European Union.
We have also prepared a number of specific industry alerts looking at the implications of the OECD reports for the insurance sector (click here), the wealth and asset management industry (click here) and the banking sector (click here).
As a reminder, we will also be hosting a Tax Focus web seminar at 10:00 am on Tuesday, 20 October 2015 when we will consider the implications of all the BEPS Actions for businesses. To register for this web seminar please click here.
The future of the UK patent box
Action 5 of the OECD BEPS Project addresses harmful tax practices. In its report of 5 October, the OECD has recommended that the benefits of all preferential intellectual property (IP) regimes such as the UK patent box should, with effect from 1 July 2016, be determined using the ‘modified nexus’ approach. This limits the benefits of a preferential IP regime by reference to the proportion of qualifying research and development (R&D) expenditure in respect of the IP incurred by the claimant entity.
In order to access the benefits of the preferential regime, it will be necessary to ‘track and trace’ R&D expenditure against the IP asset to which it relates, and so a modified UK patent box regime will bring with it significant challenges in record keeping. Additionally, the fact that the modified regime will be based around income and R&D expenditure on an entity basis means that reorganisations may be necessary in order to make most effective use of the relief. There is limited time in which to carry out such reorganisations and put in place the necessary systems and processes to evidence the claim.
There are a number of detailed questions that are still unresolved in relation to the proposals. In this respect we understand HMRC plans, early next week, to publish a consultation document which is intended to cover a number of areas relevant to a modified UK patent box regime.
Fergus Harradence from HM Treasury will be joining us for a Tax Focus web-seminar at 4:00 pm on 15 October in which we will consider this in more detail. Please click here to register for this seminar.
Please click here to read our alert which discusses the OECD's final recommendations and their implications on the modified UK patent box regime.
Publication of UK country-by-country reporting (CBCR) regulations
On 5 October, HMRC published for technical consultation the draft regulations for the UK implementation of CBCR, together with an explanatory memorandum. The consultation period runs until 16 November.
These regulations follow on from Finance Act 2015 which enabled the implementation of CBCR in the UK through regulations and will give effect to the UK's undertaking to implement CBCR with effect for accounting periods commencing on or after 1 January 2016.
The UK regulations provide for filing where the parent is in the UK and includes provisions for a company to choose to be a Surrogate Parent Entity (a concept put forward by the OECD for an entity to act as the sole substitute for the parent entity, where the parent entity is not required to file the CBCR report). The regulations do not, however, provide that a UK subsidiary of an inbound that does not file anywhere else must file in the UK, as we understand that the UK believes there are legal challenges with this. The UK may still, of course, receive the information if it is filed in another country.
CBCR is one of the Actions on which the OECD has agreed minimum standards. Indeed, we have seen a number of countries already take steps to implement this including Australia, the Netherlands and Spain.
Progress on intra EU information exchange on tax rulings and advance pricing arrangements (APAs)
On 6 October, at the ECOFIN meeting, the Council reached political agreement on a directive requiring Member States to exchange information automatically on advance cross-border tax rulings, as well as APAs. Exchange of rulings will take place every six months. Member States receiving the information will be able to request further information where appropriate.
For rulings issued before 1 January 2017, the following rules apply:
• If advance cross-border rulings and APAs are issued, amended or renewed between 1 January 2012 and 31 December 2013, exchange shall take place on the condition that they are still valid on 1 January 2014.
• If advance cross-border rulings and APAs are issued, amended or renewed between 1 January 2014 and 31 December 2016, such communication shall take place irrespectively of whether they are still valid or not.
• Member States have the option (not an obligation) to exclude from information exchange those advance tax rulings and APAs issued to companies with an annual net turnover of less than €40 million at a group level, if such advance cross-border rulings and APAs were issued, amended or renewed before 1 April 2016. However, this exemption will not apply to companies conducting mainly financial or investment activities.
Following the formal adoption of the directive, Member States will have to transpose the new rules into national law before the end of 2016, meaning that the directive will come into effect on 1 January 2017.
The OECD report under Action 5, issued on 5 October, also contains proposals for the compulsory spontaneous exchange of information on certain rulings with its own categorisation of tax rulings and treatment of past rulings.
HM Treasury publishes ‘non-doms’ consultation document and draft legislation
On 30 September, HM Treasury published a consultation document on proposed changes to the tax treatment of non-UK domiciled individuals. The consultation document includes further details on the proposals previously announced at the summer Budget, together with various questions and some draft legislation. The draft legislation for deemed-UK domicile tests is provided to show how it would operate in the context of the remittance basis and for inheritance tax. Full draft legislation for these reforms will be published in due course.
The consultation document sets out that:
• Deemed domicile will apply once an individual has been resident for 15 out of the last 20 years – ie, from their 16th year of residence.
• Spilt years will count as years of residence for this purpose as will years before an individual becomes 18.
• Six complete years of non-residence will be needed to restart the ‘domicile clock’.
• For those born in the UK who have acquired a domicile of choice outside the UK, there are some concessions, but no plans to exclude those who have acquired a domicile of dependency while minors.
• Deemed domiciled individuals will be taxable on UK income of offshore trusts on the arising basis as now, but may also pay tax on benefits out of the trust, regardless of the income and gains within the trust. There may be changes to the rules for offshore trusts for all non-doms.
• Those who become deemed domiciled in the UK will be able to claim relief for foreign capital losses regardless of whether they have made an election for the losses to be allowable.
• There are plans to amend the spousal election for UK domicile status so that the four years of non-residence currently required for the election to lapse will be increased to six.
The consultation closes on 11 November. The changes are intended to take effect from 6 April 2017.
A separate consultation will be published on the Government's proposal that inheritance tax is charged on all UK residential property, including property held indirectly by non-doms through a structure such as an offshore company or a trust.
A special edition of our non-dom newsletter can be found here. This newsletter provides more detailed analysis on the consultation and the likely future landscape for non-doms.
Other UK developments
Devolution of local taxes
On 5 October, the Chancellor of the Exchequer announced plans to devolve new powers from Whitehall to local areas to promote growth and prosperity.
By 2020 local government will be able to retain 100 per cent of local taxes, including all £26 billion of revenue from business rates, to spend on local government services. In addition, areas with city-wide elected mayors will also be given the power to add a premium to business rates for spending on local infrastructure projects, as long as they win the support of local business (via a majority vote of the business members of the Local Enterprise Partnership). This power will be limited by a cap, likely to be set at 2p on the rate.
The unwinding of the single uniform tax rate is a significant reform of commercial property taxation and represents the reinstatement of business rates as a locally set tax, as it was prior to 1990. We would expect further detail to be released as part of the Autumn Statement announcements on 25 November 2015 and for the changes to undergo the usual 12 week consultation process. In implementing such a change, the Government will need to be cognisant of many of the same concerns that led to the introduction of the uniform business rates in the first place, most significantly for business the complexity and administrative burden of managing multiple business rates and taxing authorities within the system.
Taxation of corporate debt and derivative contracts
The Government has consulted on a package of proposals to modernise the corporation tax rules applicable to the taxation of corporate debt and derivative contracts. As a result of changes being made to primary legislation, certain consequential amendments are now needed to a number of existing regulations and HMRC has published draft regulations to achieve this, together with a draft explanatory memorandum, for a period of technical consultation which closes on 30 October. The regulations affected are:
• Exchange Gains and Losses (Bringing into Account Gains and Losses) Regulations (SI 2002/1970)
• Loan Relationships and Derivative Contracts (Disregard and Bringing into Account Profits and Losses) Regulations (SI 2004/3256)
• Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations (SI 2004/3271)
• Loan Relationships and Derivative Contracts (Exchange Gains and Losses using Fair Value Accounting) Regulations (SI 2005/3422)
The majority of changes are minor adjustments as a result of following the amount of profit or loss in commercial accounts and changes in terminology. There are, however, changes to areas such as foreign branches of UK companies and own credit risk.
Strengthening the incentive to save: a consultation on pensions tax relief
In launching its consultation on pensions tax relief on 8 July, the Government expressed its wish to make sure that the right incentives are in place to encourage saving into pensions. It, therefore, consulted on whether there is a case for reforming pensions tax relief to strengthen incentives to save and offer savers greater simplicity and transparency, or whether it would be best to keep with the current system.
Please get in touch with your usual EY contact if you would like to discuss our reply to the consultation. Our reply considers both a ‘taxed-exempt-exempt’ model for pensions and a flat rate of tax relief for all savers. We also look at the possibilities for a ‘National Pensions Strategy’ including a defined minimum earnings level in retirement – the “living pension” – which could be related to the living wage or national minimum wage in a clearly defined way.
Executive Compensation and Share Schemes Seminars, autumn 2015
Across the UK, we are hosting a series of Executive Compensation and Share Schemes seminars this autumn. To register your interest in attending, please click on the link below:
Key topics will include: 2015 incentives round up, executive compensation review, incentives in the wider workforce, and risk management and compliance. The content will be relevant for those involved in reward delivery, whether as members of remuneration committees, heads of reward, HR directors or share schemes managers, and those fulfilling a company secretarial, tax or treasury function.
EU Joint Transfer Pricing Forum
The EU Joint Transfer Pricing Forum has published its programme of work for 2015-2019. The contents of the programme appear to signal a change of direction, aligned to the European Commission's Action Plan of 17 June 2015. The programme emphasises two clear priorities:
• The reinforcement of the link between taxation and economic activity in the EU
• Targeted and coordinated action to address the limitations of and loopholes in the existing transfer pricing framework.
The European Commission has already begun work to strengthen the current rules based on a common interpretation. This is expected to deliver tools and clear guidelines on how profits should effectively be taxed in the EU.
European Commission launches Capital Markets Union Action Plan
On 30 September, the European Commission published the Capital Markets Union Action Plan setting out 20 key measures to achieve a true single market for capital in Europe by the end of 2019. The 20 measures include:
• A study on tax incentives for venture capital and business angels as part of a measure to support venture capital and equity financing
• Addressing the debt-equity bias, as part of the legislative proposal on a common consolidated corporate tax base
• The removal of cross-border tax barriers. Work here will involve consideration of best practice and a code of conduct for procedures for relief-at-source from withholding taxes and a study on discriminatory tax obstacles to cross-border investment by pension funds and life insurers.
The proposal was discussed at the ECOFIN meeting of 6 October and the Council urged the Commission to proceed with speedy implementation of the plan.
Other global tax alerts
Please see links to a selection of our tax alerts in respect of the following developments. Additional articles are available in our global tax alert library.
Germany: The German Bundestag has approved the Tax Amendment Act 2015 which includes changes regarding the real estate transfer tax basis for taxable events triggered by share deals and certain reorganisations. There is an extension of the group exception rule which avoids a forfeiture of tax loss attributes in change-in-ownership events.
Spain: Revisions to the Spanish General Tax law will enter into force on 12 October 2015. The amendments include the application of penalties under certain general anti-avoidance rules and the extension of the statute of limitations for all taxes.
Denmark: The Danish Minister of Taxation has published an internal audit report on the tax ‘scam’ relating to claims for refund of Danish dividend withholding tax, together with an action plan addressing how to respond to the matter.
US: The IRS has issued final regulations under Section 871(m), which govern withholding on certain notional principal contracts, derivatives and other ‘equity-linked instruments’ with payments that reference (or are deemed to reference) dividends on US equity securities.
Brazil: The Foreign Account Tax Compliance Act agreement, signed on 26 June 2015, has now come into force between Brazil and the US.
The September 2015 issue of TradeWatch, our global customs and international trade quarterly newsletter, is now available. It contains the latest news on customs duties and trade agreements from around the world. In this issue, we report on the World Customs Organization guide to customs valuation and transfer pricing, the World Trade Organisation Information Technology Agreement, and the Eurasian Economic Union and Vietnam free trade agreement.
Please speak to your usual EY contact, or email us at email@example.com, 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.
OECD issues ‘final’ reports on BEPS Actions
+ 44 20 7951 2486
The future of the UK patent box
+ 44 20 7951 4064
Publication of UK country-by-country reporting regulations
+ 44 20 7951 4584
Progress on intra EU information exchange on tax rulings and advance pricing arrangements
++ 44 20 7951 4246
HM Treasury publishes ‘non-doms’ consultation document and draft legislation
+ 44 20 7783 0763
For other queries or comments please email firstname.lastname@example.org.
- 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, with risks on the rise. Many companies distribute responsibility for GCR processes throughout their organization, creating a patchwork. Local jurisdictions are rewriting regulations, focusing more intently on the collection of tax revenues and sharing more taxpayer information across borders.
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 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.
Helping you 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.
- 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. It’s no wonder that leading companies are focusing their efforts on:
- 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.
Fortunately, an increasing number of organizations are currently either planning or embracing a wider process of change for their mobility teams.
Unintended tax compliance obligations
These travelers are increasingly creating unintended tax compliance obligations, and the resulting risks are not just personal. They are 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.
Will your tax risks prompt a tax audit?
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.
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 short-term business traveler-related risks before they occur. Where controversy has already arisen, our 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.
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Summer Budget 2015
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