Whether it’s the media, politicians or corporations, everyone is becoming increasingly focused on tax. Don’t miss our eleventh edition, which examines the journey ahead.
Tax Insights (previously T Magazine): future of tax
2014 tax risk and controversy survey highlights
Managing indirect tax in the digital age
FATCA: Are you ready for 1 July?
OECD provides update on the BEPS Action Plan
Tax Policy and Controversy Briefing goes online
Indirect Tax Briefing: eighth edition
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:
- Midweek Tax News
A weekly update on tax matters to 22 July 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.
Finance Act 2014
The Finance Bill 2014 received Royal Assent on 17 July 2014 and is now Finance Act 2014.
Follower notices and accelerated tax payments
New measures came into effect with the granting of Royal Assent to Finance Act 2014 to allow HMRC to demand upfront payment of disputed tax before tax enquiries and disputes have been resolved in cases where HMRC believes any of the following applies: (i) there is a final judicial ruling in another case which would deny the tax treatment adopted; (ii) the tax treatment adopted is disclosable under the Disclosure of Tax Avoidance Schemes (DOTAS) rules; or (iii) the tax treatment adopted is subject to HMRC counteraction under the general anti-abuse rule.
In addition, where in HMRC's opinion a judicial ruling in another tax planning case is determinative of a disputed point in an open enquiry or appeal, the new powers allow HMRC to issue a follower notice encouraging the taxpayer to concede and, where the taxpayer does not concede, to impose a penalty of up to 50% of the tax ultimately found to be due. HMRC guidance on the new provisions was published on 21 July.
As covered in Midweek Tax News to 15 July, HMRC has released a list of DOTAS scheme reference numbers for which it may issue accelerated payment notices. Those who have implemented schemes referenced in that list that are subject to open enquiries or appeals may shortly receive a letter from HMRC seeking payment of the disputed tax. Taxpayers will want to consider the potential impact and whether to seek resolution of open issues and/or prepare for payment demands for disputed tax.
Our tax alert has further details.
Other UK developments
Restricting non-residents right to personal allowances: HM Treasury consultation
HM Treasury has published a consultation document which proposes changes to the personal allowance for non-UK residents. At present, the majority of non-resident individuals who have UK income are entitled to claim a personal allowance, either under domestic legislation or as a result of a non-discrimination clause in a tax treaty. HM Treasury is considering restricting this right to the personal allowance for non-resident individuals. This will be of interest to employers with non-resident secondees, particularly where those secondees have retained a UK residential property and are receiving rental income taxable in the UK
The consultation document sets out the approach to allowances in other countries and proposes the introduction of a test for non-residents based on the percentage of the individual's worldwide income which arises in the UK. The consultation suggests that the value of this percentage in other countries is almost always either 75% or 90% of an individual's worldwide income. Under the proposed test, those non-residents with more than the given percentage (75% or 90%) would ‘pass’ the test and would be eligible for an equivalent of the UK personal allowance. No percentage has been settled upon, although it appears from the wording of the consultation that the Government may favour 90%.
The consultation also considers some of the practical implications of implementing the new test, including consequential changes to PAYE. The deadline for responses is 3 October 2014.
OECD approves the 2014 update to the OECD Model Tax Convention
The OECD Council has approved the contents of the 2014 update to the OECD Model Tax Convention. The update, which was previously approved by the Committee on Fiscal Affairs on 26 June, will be incorporated in a revised version of the Convention to be published in the next few months.
The 2014 update reflects work on the Convention that was carried out between 2010 and the end of 2013. It does not, therefore, include any results from the ongoing work on the Base Erosion and Profit Shifting (BEPS) Action Plan. In particular, it is noted that the update does not include any of the changes put forward in the discussion draft of 19 October 2012 on revised proposals concerning the interpretation and application of Article 5 (permanent establishment). Since it is expected that work on Action 7 of the BEPS Action Plan (prevent the artificial avoidance of PE status) will result in changes to Article 5, the proposed Commentary changes included in that discussion draft will not be finalised until the work on Action 7 has been completed.
The update includes the changes to Article 26 (exchange of information) and its Commentary that were approved by the OECD Council on 17 July 2012. It also includes the final version of a number of changes that were previously released for comments through the following discussion drafts:
• The application of Article 17 (artistes and sportsmen) of the Convention
• Revised proposals concerning the meaning of ‘beneficial owner
• Revised discussion draft on tax treaty issues related to emissions permits and creditss
• Tax treaty treatment of termination payments
• Technical changes to be included in the next update to the Convention
Political guidelines for the next European Commission
On 15 July, Jean-Claude Juncker was elected President of the European Commission in the European Parliament plenary session. Speaking ahead of the vote, he presented his political guidelines for the next European Commission as set out in a document entitled A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change.
On tax, Mr Juncker said that “we need more fairness in our internal market.” While recognising the competence of Member States to design their own tax systems, he commented that the EU should step up its efforts to combat tax evasion and tax fraud, so that all contribute their fair share. To that end he said that he would press ahead with administrative cooperation between tax authorities. Significantly, he said that he would work for the adoption at EU level of a common consolidated corporate tax base and a financial transaction tax.
New employee shareholding vehicle
HM Treasury and HMRC have issued a discussion paper on a proposed new employee shareholding vehicle. This follows the Nuttall review of employee ownership in 2012 and the work carried out by the Office of Tax Simplification (OTS) on employee share schemes.
The OTS has advised the Government that there is a case for providing companies, particularly unquoted companies, with access to a simpler and more cost effective vehicle that would allow them to hold, acquire and dispose of shares. This is primarily for those companies that wish to reduce administrative costs by switching from an existing vehicle or have been discouraged from employee ownership altogether because of the cost and complexity. Should the Government decide to proceed with the implementation of an employee shareholding vehicle then it is the intention that there would be a formal consultation to seek views on the detail.
Unapproved share schemes: Marketable security
HMRC has released a consultation document relating to the recommendation made by the OTS that the Government introduce the concept of the ‘marketable security’ into the tax rules for employment-related securities (ERS). This would change the basis of taxation for ERS, so that, broadly, individuals would be able to choose whether the tax charge on ERS arises at the time they are acquired or, if different, at the time at which they can be sold for cash (when they become ‘marketable’).
National Insurance Contributions Bill 2014
The National Insurance Contributions Bill 2014 was presented to Parliament on 17 July 2014. The Bill contains includes legislation related to:
• Simplifying the collection of national insurance contributions (NICs) paid by the self-employed
• Accelerating the payment of NICs in dispute in avoidance cases
• Applying new information powers and penalties to high-risk promoters of avoidance
• A new targeted anti avoidance rule
The second reading of the Bill is expected on 8 September 2014.
Employee benefit trusts: Rule against perpetuities
The Department of Business, Innovation & Skills (BIS) has published a response to the call for evidence received in relation to the recommendation in the Nuttall review of employee ownership in 2012 that the rule against perpetuities should be abolished for some or all employee benefit trusts. This is the longstanding rule of law that was created to prevent trusts from existing forever, or in perpetuity. While BIS accepts that there are strong views that the rule against perpetuities should not apply to certain employee benefit trusts, there is still insufficient evidence either on the benefits of such a change or how many trusts are likely to be affected. The proposed change will, therefore, not be taken forward.
HMRC has published a draft guidance note outlining the transitional issues associated with the pension changes that came into force on 27 March 2014. The guidance reflects legislative changes which were included in the Finance Act 2014 allowing individuals more time to decide how to access their pension. The changes to the rules are temporary and individuals will need to take their pension tax-free lump sum before 6 April 2015 and the associated pension before 6 October 2015 for these rules to apply. Depending on how individuals want to access their remaining pension savings after taking their tax-free lump sum, they may need to wait until further, new pension flexibility rules take effect from 6 April 2015.
Restrictions on the remittance basis: Dual contracts
HMRC has now published guidance relating to the new remittance basis rules which impact the taxation of overseas employment income for UK resident, non-domiciles working outside and inside the UK, and who claim the remittance basis of taxation. From 6 April 2014, certain income from overseas employments will be taxed on the ‘arising basis’ rather than the ‘remittance basis’, if certain conditions are met. The guidance also confirms that the new rules will only apply to overseas income from a previously agreed remuneration package that is earned on or after 2014-15.
Employment related securities bulletin
The July 2014 edition, Bulletin No 17, provides information and updates on developments concerning employment-related securities including tax-favoured employee share schemes. This bulletin looks at employee share schemes' annual returns and the requirements of real time information and gives an update on HMRC's employment related securities online service which went live in April 2014. HMRC also confirms that the Employee Share Schemes User Manual has been updated to reflect changes to tax advantaged employee share schemes made by Finance Act 2014 and provides a summary of the Report Stage amendments and draft regulations on proposed changes to rules for valuing shares in listed companies.
Stamp Duty Land Tax (SDLT) consultation: Property investment funds
HM Treasury and HMRC have issued a joint consultation seeking views to help the Government assess the case for making changes to the SDLT treatment of the seeding of property authorised investment funds and the wider SDLT treatment of co-ownership authorised contractual schemes. Stakeholders have suggested that relieving SDLT in certain circumstances could encourage more property funds to set up in the UK and facilitate greater collective investment in UK property. This consultation also sets out proposals for how these changes could be implemented, if the decision is taken to introduce them, and seeks views on their potential design.
Small Business, Enterprise and Employment Bill
The Small Business, Enterprise and Employment Bill had its second reading in the House of Commons on 16 July. The Bill takes forward a range of Government commitments which are intended to ensure that the UK continues to be recognised globally as a trusted and fair place to do business and open up new opportunities for small businesses to innovate and compete. The Bill includes measures amending UK company law, focusing on transparency.
These measures include the commitment to introduce a register of individuals who exercise significant control over a company; the removal and prohibition of the use of bearer shares; except in certain circumstances, the prohibition of corporate directors along with measures to deter opaque arrangements involving directors; and make individuals controlling directors more accountable. The prohibition on corporate directors is not extended to limited liability partnerships at this point in time.
The Bill will now move to the Public Bills Committee which proposes to conclude its consideration by 6 November 2014.
Judgment due in the Airtours case: VAT recovery on independent business review costs
The Court of Appeal will deliver its judgment in the taxpayer's appeal from the Upper Tribunal in the case of Airtours Holidays Transport Ltd on Thursday 24 July. This case concerns the recovery of VAT on professional fees relating to an independent financial appraisal of the taxpayer's business. The First-tier Tribunal held that the taxpayer was the recipient of the services and, therefore, was entitled to deduct the VAT incurred on related costs. However, in 2010, the Upper Tribunal reversed this decision, holding that the services were supplied to the financial institutions that had loaned funds to the taxpayer (and not the taxpayer itself), with the result that the taxpayer was not entitled to recover the VAT. This case was subsequently stood over pending the outcome of other litigation.
In recent years, HMRC has adopted a robust line in challenging businesses seeking to recover VAT on transaction costs, particularly acquisition costs. It will be interesting to see if this judgment supports the approach adopted by HMRC. We will bring you details of the judgment in the next edition of Midweek Tax News.
Protocol to UK/Canada double tax treaty signed
A protocol amending the UK/Canada double tax treaty was signed on 21 July 2014 and will come into force when both countries have completed their legislative procedures and exchanged diplomatic notes.
The protocol includes:
• Definitional changes to a “person” under the treaty to include partnerships
• An updated business profits article
• Amendments to the dividends, interest and royalties articles but with no general changes to the reduced rate (dividends received by recognised pension plans may now be exempt)
• Updated mutual agreement procedures (including arbitration), exchange of information article and collection of taxes assistance
Automatic exchange of information
The OECD has published the first edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters. The Standard includes the text of the Model Competent Authority Agreement, the Common Reporting Standard and the Commentaries thereon, as at 15 July 2014, after the approval of the Standard by the Council of the OECD.
The Standard calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that are required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
Financial institutions will need to implement the Standard from 1 January 2016. As of 19 March 2014, forty-four ‘early adopter’ jurisdictions had announced their intention to adopt the Standard with the first exchange of information beginning by the end of September 2017.
Attention must, therefore, now be focused on examining the next steps of tax authorities who will be responsible for both translating the Standard into domestic law and for considering its implementation among financial institutions. Until more details are published at the domestic level, a degree of uncertainly on implementation issues will remain.
Our international tax alert has further details.
Implementation of changes to Australian thin capitalisation and non-portfolio dividend exemption rules
Australia's Treasurer has introduced a Bill into Parliament to implement previously announced changes to the thin capitalisation rules applicable to income years starting on or after 1 July 2014, and re-write the exemption for foreign non-portfolio dividends received by Australian companies, with application from the date of Royal Assent. These changes affect financing and treasury positions for businesses operating internationally and also the structuring of foreign investments held by Australian companies. Our international tax alert has further details.
South African proposed international tax changes
On 17 July, the Draft Taxation Laws Amendment Bill 2014 was released for comment. The Bill contains several amendments which may be relevant to cross-border transactions, including changes to the existing transfer pricing regime, interest deduction limitation rules and controlled foreign company regime. Our international tax alert has further details.
CJEU rules on application of Danish loss recapture rule to permanent establishments
The Court of Justice of the European Union (CJEU) has given its decision in the Danish case, Nordea Bank Denmark. The case concerns the compatibility of what was at the relevant time the Danish rule on the recapture of tax losses of a foreign permanent establishment with the EU and EEA principle of freedom of establishment. The Court ruled that the application of the recapture rule infringed upon the freedom of establishment of the claimant. Our international tax alert provides further details regarding the implications of this decision.
Other international tax alerts
Please see links to a selection of our international tax alerts in respect of the following developments. Additional articles are available in our Global tax alert library.
China: Draft administrative guidance on the general anti-avoidance rules has been released for public comment.
Korea: The National Tax Tribunal has issued a ruling that the term “ownership” of a Korean company in Article 12 of the US/Korea income tax treaty is not limited to direct ownership where an indirect shareholder has the right to dividends, provided that the indirect shareholder satisfies the 10% ownership requirement and is a US resident for treaty purposes
Mexico: The tax authorities have published final regulations on non-residents' capital gains tax and deduction for the remaining balance of allowance for loan losses.
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.
Finance Act 2014
+ 44 20 7951 2486
Follower notices and accelerated tax payments
+ 44 20 7951 8736
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.
Connect with us
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