Tax Services

The tax profile of multinationals: Ongoing developments

The tax profile of multinationals and whether they pay a ‘fair share’ of UK corporation tax continued to receive media coverage over the Christmas and New Year break with two recent developments particularly worthy of comment.

The Parliamentary Commission on Banking Standards has established a panel to consider issues on tax audit and accounting. That panel issued a call for written evidence on 4 December 2012, such evidence to be provided by 21 December 2012. Oral evidence may be given in January 2013.

The panel asked for responses to 20 initial questions. These questions covered issues such as the effect of having tax relief for debt interest but not for dividends or equity (and the ensuing leverage effects). However, the questions also explored the effectiveness of the Code of Practice on Taxation for Banks and whether there should be a special tax regime for banks.

Whilst the panel is very much focused on the banks, it is another channel in which tax avoidance (and measures to counteract aggressive tax avoidance) can be considered. This adds to channels such as the Public Accounts Committee, the OECD's project on profit shifting and base erosion and the European Commission's action plan of 6 December 2012.

At the same time, sections of the media have questioned whether companies are paying full employment taxes. This is likely to highlight companies with employment benefit trusts (EBTs) whether or not they are in litigation or settlement negotiation with HMRC in respect of any outstanding issues. As covered in Midweek Tax News to 18 December, HMRC has now commenced a central initiative in respect of all legacy EBT cases under enquiry. A standard letter has been, or will shortly be, issued to EBT users in this regard. In the letter, HMRC makes it clear it wishes to engage with all EBT users, to determine if there is enough common ground to enable both sides to agree that EBT matters can be finally settled. The letter, therefore, invites taxpayers to discuss whether or not an agreed settlement can be reached.

There can be significant advantages to agreeing a settlement and taxpayers may wish to discuss the options available to them with their usual Ernst & Young contact.

Further tax avoidance legislation

On 21 December, the Government announced that it will introduce a targeted anti-avoidance rule (TAAR) to the provisions governing the relationship between rules prohibiting and rules allowing deductions from profits of a trade or property business. The TAARs will have effect from 21 December 2012. The action is in response to a scheme which HMRC believes seeks to exploit the rules in relation to a property business to generate artificial loss relief for use by companies to reduce their corporation tax profits. HMRC does not accept that the scheme has the effect intended.

Legislation will be introduced in Finance Bill 2013 to amend the relevant provisions in ITTOIA 2005 and CTA 2009. These currently provide that certain business expenditure incurred by trades and property businesses, that would otherwise be disallowable, can be deducted from business profits. However, the TAAR will apply where a permissive rule would otherwise allow a deduction in calculating the profits of a trade or property business for an amount which arises from tax avoidance arrangements. The effect will be that the rules prohibiting a deduction take precedence over those allowing a deduction.

Tax avoidance arrangements are those to which the person is party and the main purpose, or one of the main purposes, is the obtaining of a tax advantage. The term ‘arrangements’ will be widely defined.

The amendments will apply to amounts which arise directly or indirectly in consequence of, or otherwise in connection with, arrangements which are entered into on or after 21 December 2012, or any transaction forming part of arrangements which is entered into on or after that date, except where the arrangements are, or any such transaction is, pursuant to an unconditional obligation in a contract made before that date.

Settlement opportunity announced

On 19 December 2012, HMRC announced that a settlement opportunity will be offered to participants in the following schemes:

• Schemes that seek to use Generally Accepted Accounting Practice (GAAP) to write off expenditure or the value of assets to create losses either for sole traders, or individuals or companies in partnership

• Schemes seeking to access the film relief legislation for production expenditure

• Schemes seeking to create losses in partnerships through reliefs such as first year allowance, payments made for restrictive covenants, specific capital allowances

There is no current settlement opportunity for participants in the following schemes, but HMRC is still considering its position.

• Film partnership sale and lease back schemes

• Interest relief schemes that result in a claim to interest relief under section 353(1) ICTA 1988 which is used as a deduction against general income

Furthermore the opportunity is not available to participants in:

• Any partnerships which fall within HMRC's criminal investigation policy

• Cases that HMRC considers are not appropriate for this settlement opportunity, such as cases where HMRC has very strong grounds to assert that none of the tax relief claimed is due.

More detail will be given for individual schemes which are included but, broadly speaking, HMRC will restrict relief so that expenditure which is not part of the real economic cost borne by the participants will be excluded when calculating losses or capital allowances.

HMRC aims to contact all those who are eligible for the offer by the end of January 2013. In the case of partnerships, HMRC is willing to settle with individual partners even if the partnership as a whole challenges HMRC's view.

Progress on the introduction of the new ‘employee shareholder’ employment status

The draft Finance Bill clauses contain provisions to exempt from capital gains tax the disposal of shares acquired through the adoption of the new ‘employee shareholder’ employment status for capital gains tax. The exemption will apply to the receipt of up to £50,000 of capital gains tax exempt shares received through the adoption of this new status on or after 6 April 2013.

The shares must be in consideration of an employee shareholder agreement and must be ‘qualifying shares’, effectively employee shareholder shares in the employer company or an associated company. Shares cannot be exempt if the shareholder or a connected person has a material interest (ie greater than 25% of the voting rights) in the company. The value of a share (at any time) is its unrestricted market value, and the existing share pooling and identification rules have also been amended as appropriate.

Whilst we now have greater clarity on the capital gains tax exemption, there remains uncertainty as to how the implications for income tax and national insurance contributions will be dealt with on issue or allotment of shares. There was an indication in the Autumn Statement that the Government is considering making the first £2,000 of shares income tax and national insurance contributions free, but this is not covered in the draft Finance Bill clauses.

Legislation to amend the Employment Rights Act 1996 to create the new employee shareholder status is contained in the Growth and Infrastructure Bill, currently progressing through the House of Lords (clause 27). The section of the Bill dealing with employer shareholder status was discussed in the Committee stage of the House of Commons on 6 December. Subsequent Government amendments were approved on third reading of the Bill in the Commons on 17 December, including the introduction of a power to make regulations governing the buyback of shares from an individual in the event that the individual ceases to be an employee shareholder.

Other UK developments

Implementation of the UK/US inter-governmental agreement on FATCA

As we covered in the last edition of Midweek Tax News on 18 December 2012, HMRC has released draft guidance on the bilateral intergovernmental agreement (US/UK IGA) signed with the US to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA). Draft UK legislation was published on 11 December 2012. The guidance is the first indication as to how the US/UK IGA (or any other IGA) will be administered and is important because the administration of the US/UK IGA is in the hands of HMRC.

The draft guidance consists of three items:

• A statutory instrument consisting of draft regulations under the Finance Act 2013 which contains the US/UK IGA as well as rules on items such as general definitions and penalties

• A set of draft Guidance Notes intended to provide practical guidance to both HMRC staff and financial institutions on issues not addressed in the US/UK IGA

• A Summary of Responses from stakeholders to the questions raised in the consultation document issued by HMRC on 18 September 2012, following the signing of the US/UK IGA

Comments on the draft guidance are requested by 13 February 2013 and more detail on the guidance and its implications is available in our FATCA alert.

High income child benefit charge: deadline looming

From 7 January 2013, the new high income child benefit charge will apply where a taxpayer or their partner receives child benefit and either of them has an income above £50,000 in a tax year.

The person who is receiving the child benefit can notify HMRC before 7 January 2013 that they wish to stop the child benefit payments from that date. In this case there will be no tax charge for this tax year. It is also possible to notify HMRC of a wish to stop payments on or after 7 January 2013 - in which case there will be a tax charge on any entitlement from 7 January 2013 up to the date the payments stop.

A taxpayer who is liable to the new charge can choose to pay it in a lump sum through self assessment, or through their tax code. However, the option to pay through a tax code only comes into place from 6 April 2013. Any charge due in respect of the period 7 January to 5 April 2013 will need to be settled through self-assessment by 31 January 2014.

Further codification of Extra Statutory Concessions (ESCs)

HMRC has released a consultation on legislating to preserve the effect of two ESCs, ESC A4 and ESC A10. Responses are sought by 15 March.

ESC A4 is concerned with the rules in ITEPA for allowing a deduction from earnings from an employment for travel expenses. In particular, it covers part-time directors who act for a modest fee or for no fee but have their expenses of travelling from home to board meetings or for other business purposes reimbursed.

HMRC believes ESC A10, which addresses lump sums paid under overseas pension schemes, is largely obsolete. However, it concedes that some aspects of ESC A10 remain relevant, for example those that apply to certain payments of lump sum relevant benefits that accrued before 6 April 2011. Legislation of the relevant parts of ESC A10 would allow the concession to be withdrawn.

International developments

US: ‘Fiscal cliff’ agreement reached

In the early morning of 1 January 2013, the Senate passed, by 89 votes to 8, an eleventh-hour compromise designed to head off major elements of the group of tax increases and budget cuts known as the ‘fiscal cliff’. These had been set to take effect on 1 January 2013. The Bill, the American Tax Payer Relief Act, was then passed by the House of Representatives, later on 1 January, by 257 votes to 167.

The tax portion of the agreement includes the following elements:

• Income tax rates: Current income tax rates would be extended for families earning $450,000 or less and individuals earning $400,000 or less annually. Taxpayers earning more would be taxed at 39.6%, up from 35%.

• Investment tax rates: The top capital gains and dividend rate would remain at 15% for those below the $450,000/$400,000 income thresholds, and be increased to 20% for those with incomes above those amounts.

• Extenders: Business tax extenders would be extended seamlessly through 2013.

• Bonus depreciation: The 50% bonus depreciation provision would be extended for one year.

• Estate tax: The current $5 mn per-person estate tax exemption would remain (with the $5 mn indexed for inflation); but the rate would be increased to 40% from the current 35%.

• Alternative minimum tax (AMT): The individual AMT would be patched permanently.

• Personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease): The PEP and Pease would be reinstated for families with incomes over $300,000 and individuals with incomes over $250,000.

• Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit would be extended for five years.

In addition to these tax provisions, the agreement will temporarily avert the automatic ‘sequester’ budget cuts for two months (offsetting that expense with a 50/50 combination of revenue increases and spending cuts); temporarily prevent a cut in Medicare payment rates for physicians; extend unemployment insurance benefits through 2013; and include parts of a Farm Bill to the end of the fiscal year, avoiding a steep increase in milk prices. The agreement also blocks a scheduled pay raise for members of Congress.

Spain: Tax changes effective 28 December 2012

The Spanish Parliament has now adopted a number of measures, effective from 28 December 2012, including the following:

• Optional tax step-up in value: Spanish resident companies, Spanish permanent establishments and individual entrepreneurs have the option to step-up the tax value of fixed assets and immovable investments situated in Spain or abroad; fixed assets being leased under financial lease agreements; and concessions which are recorded as intangible assets.

• Severance payments: Payments for the termination of employment relationships, or for the removal of directors from the board, that are in excess of €1 mn, or in excess of the amount that is exempt from taxation, are no longer tax deductible.

• Limitation on depreciation and amortisation expenses for ‘large sized companies’: The new limitation, applicable in 2013 and 2014, applies for ‘large sized companies’ (ie companies with a turnover exceeding €10 mn in the preceding financial year). These entities may only take 70% of the maximum amortisation or depreciation rates for tax.

• Spanish REIT (SOCIMI): The new Spanish REIT (SOCIMI) regime includes, among other benefits, zero corporate income tax on the qualifying SOCIMI income. A special tax (19%) will apply to dividends paid to shareholders holding at least 5% of the share capital of the SOCIMI who are exempt on dividends or taxed at a rate below 10%, under certain conditions.

For more details on these and other changes introduced, please see our Global Tax Alert.

France: Approval of Finance Bills for 2012 and 2013

On 19 December, the French Parliament approved the Third Amended Finance Bill for 2012. The main tax provisions relating to companies include:

• A new tax credit for companies, equal to 4% of 2013 gross wages paid during the calendar year not exceeding 2.5 times the French minimum wage: The tax credit is increased to 6% as from 2014.

• A new regime for latent gains on assets transferred upon the migration of a company's head office or a permanent establishment from France to another EU or EEA State: The gain will still be taxed, but the relevant tax may be paid in five annual instalments. These new rules apply for migrations implemented on or after 14 November 2012.

• A reform of VAT rates from 1 January 2014: The reduced VAT rate is expected to be lowered from the current 5.5% to 5%, the intermediate VAT rate to rise from 7% to 10%, and the standard VAT rate to be increased from 19.6% to 20%.

On 20 December, the French Parliament approved the Finance Bill for 2013. Some of the main provisions for companies in this Bill include:

• A general interest deduction cap based on the amount of the net financial expenses incurred during a fiscal year (FY): Only 85% of the net financial interest incurred in FYs 2012 and 2013 is deductible, and 75% for the expenses incurred in FY 2014 and onwards. In the case of a tax consolidated group, the interest cap applies to the net financial expenses of the tax group (excluding intercompany transactions). The cap does not apply if the net financial expenses incurred by the company or by the tax group during a FY are below €3 mn.

• Changes to the participation exemption regime on capital gains: The taxable portion is increased to 12% and must now be computed on the gross amount of capital gains (rather than the net amount of gains and losses)

• Cap on utilisation of loss carry-forwards reduced to 50% (down from 60%) of the taxable income of the FY exceeding €1 mn: Since the Amended Finance Bill for 2011, the utilisation of losses carried-forward in France has been capped at €1 mn, plus 60% of the taxable income of the FY exceeding €1 mn. The Finance Bill 2013 further reduces the 60% cap to 50% (the €1 mn allowance remains unchanged). Losses can still be carried-forward without time limitation.

• Extension of the additional 5% corporate income tax contribution for two FYs: The Amended Finance Bill for 2011 introduced an additional contribution to corporate income tax for certain companies. The Finance Bill for 2013 extends the application of such additional contribution to corporate income tax for FYs ending on or before 30 December 2015.

For more detail of the changes please see our Global Tax Alert (2012) and Global Tax Alert (2013).

Argentina: New early declaration for payments abroad

The Argentine Federal Tax Authorities issued a general resolution on 20 December 2012, creating a new ‘early declaration for payments abroad’ (DAPE). Under this resolution, Argentine tax residents will be required to file the DAPE through the tax authorities' web site to disclose information on payments to be made abroad in relation to the following:

• Debts for the purchase of goods not imported into the country and sold to third countries

• Interest

• Dividends and profits

• Imports through courier or certain simplified mechanisms

This system will enter into force on 1 February 2013 and will also apply to transactions previously agreed and in respect of any amounts still outstanding as of that date. For more details on the information required on filing, please see our Global Tax Alert.

Japan: Introduction of the Asian Business Location Law

The Asian Business Location Law provides tax incentives for corporations having new research and development or headquarters operations conducted in Japan by global companies. It is effective for years ending on or after 1 November 2012. Our Global Tax Alert provides a summary of the 20% income exclusion for corporate tax purposes and the requirements for claiming the incentive.

Mexico: Tax and other developments

Mexico's budget for 2013 was approved and published on 17 December 2012. The principal tax changes include notification that the previously enacted reduction of the corporate income tax rate from 30% to 29% will not occur in 2013. Instead, the 29% rate will be applicable for 2014. There is no reference to the applicable rate for 2015 and subsequent years (previously expected at 28%).

As provided in previous years, interest paid to registered foreign banks resident in a tax treaty jurisdiction will be subject to a withholding tax rate of 4.9%.

The Income Act also includes provisions for a tax amnesty programme that for tax years 2006 and prior can result in a reduction of 80% of the inflation adjusted tax liability and 100% of the interest and penalties. This amnesty also provides for a waiver of interest and penalties on tax liabilities for 2007 and onward. This amnesty was covered in Midweek Tax News to 20 December 2012.

More details on the budget proposals are available in our Global Tax Alert.

In addition, the recent labour reform, enacted on 30 November 2012, may cause businesses in Mexico to review structures that include a service company. The new rules provide a definition of outsourcing relationships, which can protect a company from being considered the deemed employer of employees of a service company. Not meeting the rules could mean an operating company with no direct employees could be considered an employer and potentially raise the risk that the profits of this entity are subject to the mandatory profit sharing requirements. Please see our Global Tax Alert for more details.

Czech Republic: Approval of stabilisation tax package

On 19 December 2012, the Chamber of Deputies passed the draft Act on a Change to Tax, Insurance and Other Acts. The President has now ratified the draft Bill and as such the legislation is effective from 1 January 2013.

The Government’s stabilisation package includes an increase in the solidarity tax, an increase (to 35%) in the withholding tax rate on income paid to non-residents, an increase in real estate transfer tax and an increase in the VAT rates. More details are available in our Global Tax Alert.