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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 29 September 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 base erosion and profit shifting (BEPS) reports
As reported last week, we are expecting the publication of the OECD reports on BEPS on Monday, 5 October 2015. We will send a special alert on our initial reactions to the reports shortly thereafter.
We will also be hosting a Tax Focus web seminar at 10:00 am on Tuesday, 20 October 2015 when Claire Hooper, Craig Hillier and Ben Regan will consider the implications of all the BEPS Actions for businesses. The seminar will focus on analysing the new reports and what they mean for businesses; discussing governments' responses; and looking ahead to the next phase of the BEPS project.
To register for this web seminar please click here.
We will also be joined by a representative from HM Treasury in a web seminar on 15 October 2015 when we will look at the UK implementation of Action 5 (countering harmful tax practices) and its impact on patent box claims. Please see below for details.
In addition, we will be running a series of global BEPS web seminars starting on Thursday, 15 October and covering each of the BEPS Actions except Action 11 (data analysis) over the following two months. For more details, please click here.
Tax Focus web seminar on changes to the UK's patent box regime at 4:00 pm on Thursday, 15 October 2015
In early October, HMRC intends to launch a consultation on how the current patent box regime in the UK should be amended to make it compliant with the OECD's recommendations under base erosion and profit shifting Action 5 (countering harmful tax practices) that preferential intellectual property regimes be based on a modified nexus approach. In many cases these changes are likely to lead to a considerable additional compliance burden and a reduction in benefits. The changes will generally be effective from 1 July 2016 (subject to transitional ‘grandfathering’ rules) but action may be required before then. In particular, groups might want to both restructure and put in place plans to manage new compliance obligations.
Examples of the types of issues groups might encounter include:
• The need to track, potentially for each patent, which entity carried out the underlying research and development (R&D). The patent box claim is expected to be restricted if this entity is not the same one that earns the income from the patent.
• The need to split income by patent in some circumstances
• Where a product incorporates patents brought into the regime both on or before 30 June 2016 and after that date, the potential need to apply both the old and the new patent box rules to the income earned from that product
• The potential need to consider how much of the R&D outsourced to group entities outside the UK would be qualifying R&D if it were undertaken in the UK
Join Claire Hooper, Robert Peers and Sarah Churton for a special Tax Focus web seminar at 4:00 pm on Thursday, 15 October 2015 where they will be joined by Fergus Harradence from HM Treasury to discuss the proposals and potential issues, as well as the steps groups might like to take to alleviate them, and the areas open for consultation.
To register for the web seminar, please click here.
Base erosion and profit shifting (BEPS) Action 4 (interest deductions) likely to lead to significant change in UK regime
At a meeting held on 24 September with HM Treasury, EY learned that, as anticipated, Monday's OECD report on BEPS Action 4 will contain a recommendation that countries adopt a fixed ratio rule to restrict relief for interest. Under such a rule, tax deductions for interest will be restricted by reference to a fixed ratio either of earnings before interest, tax, depreciation and amortisation (EBITDA) or of assets. The OECD is set to recommend that countries adopt an interest:EBITDA ratio between 10% and 30%. They are also expected to state that countries may have a group ratio rule in addition, which may, for example, allow interest deductions in each company (if within the EU) or territory (if outside the EU) up to the level of the group's global ratio of interest to EBITDA. This will allow some flexibility to groups which are highly leveraged with third party debt, although such a rule has many practical challenges associated with it. Although it is unclear how many countries will adopt the OECD recommendations, HM Treasury expects that most BEPS participant countries will ultimately do so.
The basis of the UK's current interest deduction regime is the arm's length test supported by a number of anti-avoidance rules. Thus, the introduction of a rule based on fixed or group ratios would be a significant change. The Government is, therefore, planning to launch a consultation on the UK's response to Action 4 in mid-October. The final shape of the UK's future legislative regime on interest deductions will depend on the outcome of that consultation. The timing of any legislative changes is unclear, but HM Treasury's current view is that it is unlikely any reforms will take effect for at least a couple of years in order to give groups a chance to restructure. Changes are not expected to have a retrospective application.
The UK consultation is likely to consider a wide range of questions, including the appropriate level of a fixed ratio rule; how any carry forward or carry back mechanisms should work; definitional issues (for example, the treatment of extraordinary items in EBITDA); the nature of any group ratio rule; how to provide flexibility in the event of merger and acquisition activity, capital investment or market shocks; how to ensure that all of a group's third party debt is relievable; and the scope and extent of grandfathering provisions. A key issue is expected to be what special rules may be needed for certain industry sectors such as financial, infrastructure, oil and gas, and real estate. Other issues for the consultation will include the effect on existing UK rules including the worldwide debt cap and whether new anti-avoidance rules will be necessary, and how any UK legislative changes, including the timing thereof, would affect the UK's competitiveness agenda.
Groups affected by the prospect of legislative changes on interest deductibility, and especially those with highly-leveraged operations in the UK or elsewhere, may wish to pay special attention to the report on BEPS Action 4 and to consider participating in the subsequent UK consultation as this is the time that groups can influence Government policy by showing evidence of the impact of these proposed rules.
HMRC releases guidance on its practice in respect of limited liability companies (LLCs) following the decision in Anson
As we reported in our alert last Friday, HMRC has issued guidance on its practice following the recent decision of the Supreme Court in Anson.
HMRC has concluded that the decision is specific to the facts found in the case. As a result, where US LLCs have been treated as companies within a group, HMRC will continue to treat the US LLCs as companies and, where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLCs as carrying on a trade or business. Furthermore, HMRC proposes to continue its existing approach to determining whether a US LLC should be regarded as issuing share capital. Although not entirely clear from the guidance issued, HMRC has confirmed to us that this will be its position going forward as well as in respect of existing LLCs. Individuals claiming double tax relief and relying on the Anson decision will have their claims considered on a case by case basis.
Groups that contain LLCs may wish to keep the terms of their LLC agreements under review. In particular, if corporate treatment is sought for an LLC, particular care should be taken when drafting the constitutional documents of the LLC to ensure they resemble as closely as possible those of a UK company. Groups may wish to pay special attention to the terms relating to the allocation and entitlement of profit, amongst other clauses, with amendments potentially being made to clarify that profits are not allocated to the members but instead belong to the company until such time as there is a distribution to the members.
For the latest version of our tax alert, please click here.
The Government publishes a discussion paper on travel and subsistence rules
The Government has published a discussion paper that sets out a proposed framework for changes to the current rules on tax relief for travel and subsistence following a consideration of these rules by the Office of Tax Simplification. The paper gives the background to the review, including an overview of the current rules and acknowledgement that these rules are complex and can be difficult for employers to apply on a consistent basis, particularly given the context of changing work patterns and the mobility of many workers. The paper also outlines the case for change, including the issues identified and suggests a potential framework for new rules that tackles these issues.
There would appear to be scope for small, principled changes to restrict some aspects of tax relief for travel and subsistence expenses that will be required to balance more generous simplifications.
The closing date for responses to the paper is 16 December 2015.
Other UK developments
New HMRC bulletin issued on taxation of employment-related securities (ERS)
HMRC has published its latest bulletin providing guidance and updates on the taxation of ERS. This edition of the bulletin looks at the taxation of restricted stock units and other securities options, and also provides an update on the ERS online service.
Despite legislation introduced in Finance Act 2014, HMRC has become aware that the treatment of national insurance contributions in respect of restricted stock units and other securities options can vary depending on how the shares are treated. This continuing uncertainty has been highlighted by EY and we have been in continuing dialogue with HMRC’s share scheme specialists on this matter.
The shadow Chancellor pledges “fairer” taxes in his conference speech
In his speech to the annual Labour Party conference on Monday, the new shadow Chancellor, John McDonnell, said the Labour Party would end tax cuts for the “rich” and address the “scourge of tax evasion and avoidance”. He also promised a “real” living wage if Labour return to office, but gave no indications of its level.
Mr McDonnell said that Labour would ask multinational enterprises “to pay their fair share of taxes” and look at amounts paid to business to support job creation to ensure this is being effectively used. He also pledged to reform tax deductions for repairs to rental properties, although we note the Government announced the abolition of the 10% wear-and-tear allowance in the summer Budget. Mr McDonnell said taxes will “be raised from fairer, more progressive taxation ... lifting the burden from middle and low-income earners paying for a crisis they did not cause.”
Mr McDonnell also said that Labour would review the operation and resourcing of HMRC to ensure it is capable of “addressing tax evasion and avoidance and modernising our tax collection system”. There was no mention in the speech of a financial transaction tax, although the shadow Chancellor has previously said that he supports this and that it would form part of Labour's policy review.
Summary of responses to HMRC consultation on closure notices for tax enquiries
In a consultation launched on 18 December 2014, HMRC suggested changes to the self-assessment enquiry framework in respect of income tax, capital gains tax, corporation tax and, in some circumstances, national insurance contributions. EY was among respondents to the consultation and a summary of responses has now been issued.
Respondents disagreed with the suggestion that HMRC should be able to close one or more aspects of a tax enquiry unilaterally. Instead, it was felt that both parties involved in a tax enquiry should have the ability to approach the Tribunal to seek closure of a particular aspect. Respondents also made a number of suggestions regarding how the process might work in practice, including whether the burden of proof should lie with the party seeking closure and whether the determining factor in closing an aspect of an enquiry should be the ability to quantify the tax. The majority of respondents wanted greater and more explicit safeguards that any new power would be used appropriately by HMRC.
HMRC now intends to put forward a small number of alternative models for reform.
HM Treasury launches consultation on reforming the taxation of business energy efficiency
HM Treasury has published a consultation document on reforming the various business energy efficiency policies and regulations. These include the climate change levy, taxes on other fuels such as heating oil, climate change agreements, enhanced capital allowances and other schemes.
The proposals in the consultation document set out approaches to improving the effectiveness of the policy framework by:
• Simplifying reporting and taxes to reduce administrative burdens
• Targeting cost-effective energy efficiency measures identified in business sectors
• Raising the profile of energy efficiency and carbon reduction with decision makers
• Improving the case for investment in energy efficiency and low carbon alternatives
Responses to the consultation are requested by 9 November 2015.
HMRC announces a delay to the launch of the Alcohol Wholesaler Registration Scheme (AWRS)
The introduction of the AWRS was planned for 1 October 2015 with the aim of tackling alcohol fraud but HMRC has now announced that the launch has been postponed to 1 January 2016 due to technical issues. The AWRS will apply to existing and new wholesalers of alcohol, trading at or after the point at which excise duty has become payable. From 1 January 2016, all alcohol wholesalers must apply online to HMRC to register for the AWRS. HMRC will review all AWRS applications to decide whether businesses are ‘fit and proper’ to be accepted onto the register. Where a business fails the ‘fit and proper’ test, HMRC will remove its right to trade in wholesale alcohol. Under the scheme, from 1 April 2017, all businesses that trade in, or retail, alcohol will need to make sure that any UK wholesalers they buy from are registered with HMRC.
Italy introduces reforms to simplify international tax rules
The Government has published a legislative decree as part of an ongoing reform of the Italian tax system. The decree introduces changes aimed at simplifying tax rules for cross-border business as well as providing certainty and stability of tax rules to attract foreign investments.
Among a host of measures in the decree, some of the key changes are:
• Additional rules have been introduced for dividends received from black list countries, including an exemption being available if the taxpayer is able to demonstrate that the foreign income has been subject to an adequate level of tax.
• For Italian permanent establishments of foreign entities, the decree has redefined the method of attribution of income in line with the OECD approach. For non-Italian permanent establishments, a foreign branch exemption regime has been introduced.
• Controlled foreign company (CFC) rules are only to apply to controlled entities and not qualifying non-controlling participations. Also, it is no longer necessary to obtain a ruling in advance that a CFC exemption applies.
• The scope of advance tax agreements for companies with international operations has been expanded to include agreement of the tax value of assets of businesses migrating in and out of Italy and a new advance tax ruling has been introduced for significant investments.
The new rules come into effect on various dates, with some applying from financial year 2015.
Please see our global tax alert for more details.
EY tax webcast: Are you ready for indirect tax e-audits?
On Wednesday, 14 October 2015, we will be holding a global webcast at 4:00 pm to consider the growing trend of indirect tax e-audits. By harnessing the power of technology, tax and customs administrations are carrying out more e-audits and uncovering more errors, leading to higher assessments and penalties. The webcast will provide businesses with information about these trends, as well as how to anticipate and prepare for e-audits and tips on how to leverage e-audit techniques to better manage indirect tax risks.
To register for the webcast, please click here.
European Commission launches consultation on modernising VAT for cross-border e-commerce
On 25 September 2015, the European Commission issued a press release announcing the launch of a public consultation to help identify ways to simplify VAT payment procedures for cross-border e-commerce transactions in the EU. The consultation seeks the views of businesses and other interested parties on:
• The current VAT rules for business-to-consumer (B2C) cross-border supplies of goods and services
• The implementation of the 2015 changes to the EU VAT place of supply rules for B2C supplies of digital services and the Mini One Stop Shop (MOSS)
• Legislative proposals planned for 2016, aimed at reducing the administrative burden on businesses arising from the different VAT regimes applicable to cross-border sales, for example the extension of the MOSS to cross-border online supplies of goods, a common EU-wide VAT threshold, and the removal of low value consignment relief
The consultation runs until 18 December 2015.
Response to European Commission consultation on tax transparency
The European Commission has published the responses that it has received to its consultation on tax transparency, which it launched in conjunction with its action plan on corporate taxation on 17 June 2015. A summary of the responses will be published in due course.
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.
Spain: The Government has amended the accounting and corporate income tax treatment of the amortisation of goodwill and intangible assets effective from 1 January 2016.
Denmark: The Minister of Taxation has published a draft bill introducing country-by-country reporting.
US: The IRS has issued a notice to amend regulations in order to extend the time that certain FATCA transitional rules will apply.
Brazil: The Government has proposed a number of measures to reduce the forecast deficit for 2016 by reducing tax incentives and increasing withholding tax on capital gains.
New Zealand: The Government has announced that forgiving debt owed by a company to its shareholders or converting that debt to equity will not create taxable income.
Our new microsite on Achieving digital tax confidence looks at the complex issues for taxation systems raised by the digital economy.
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.
OECD base erosion and profit shifting reports
+ 44 20 7951 2486
Tax Focus web seminar on changes to the UK's patent box regime at 4:00 pm on Thursday, 15 October 2015
+ 44 20 7951 4064
Base erosion and profit shifting Action 4 (interest deductions) likely to lead to significant change in UK regime
+ 44 20 7951 1127
HMRC releases guidance on its practice in respect of limited liability companies following the decision in Anson
+ 44 20 7951 0739
The Government publishes a discussion paper on travel and subsistence rules
+ 44 20 7951 0849
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, 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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