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Midweek Tax News


A weekly update on tax matters to 26 May 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.

The revised discussion draft on BEPS Action 6 (preventing treaty abuse) follows the original report on Action 6, released in September 2014, which proposed changes to the OECD model tax convention to prevent treaty abuse. That report noted that, at a minimum, treaties should include an express statement of their signatories' common intention to eliminate double taxation without creating opportunities for treaty shopping. They should also include one of:

• A general treaty anti-abuse rule in the form of the principle purpose test (PPT) and a limitations-on-benefits (LOB) rule, or

• A LOB rule supplemented by anti-conduit rules, or

• A PPT only

The first part of the revised discussion draft deals with treaties that will have both a PPT and a LOB rule. It proposes a simplified LOB rule for use in these treaties, which would allow for treaty relief if it could be demonstrated that more than 75% of the beneficial interest in the treaty claimant was directly or indirectly owned by equivalent beneficiaries. Where countries, instead, choose to use a LOB rule supplemented by anti-conduit rules, then it is suggested that the version of the full LOB rule, as set out in the report of September 2014, is used instead of the simplified LOB rule.

The revised discussion draft makes clear that countries can choose just to adopt a PPT and we understand that this is likely to be the position of the UK unless the other contracting party to a treaty (for example, the US) wishes to use a LOB rule.

The second part of the revised discussion draft looks at the issues raised in the discussion draft on Action 6 issued in November 2014. This includes support for the conclusions of the 2010 collective investment vehicle (CIV) report concerning the treaty establishment of CIVs. However, the revised draft notes that the implementation of the Treaty Relief and Compliance Enhancement (TRACE) project is important for the practical application of the 2010 CIV report's conclusions. It also notes that further work is needed on issues related to the treaty entitlement of non-CIV funds, which may extend past the September 2015 final report. Among other issues, there is also additional guidance on the application of the PPT rule, including the provision of examples, and guidance on situations where treaty benefits could still be given where they would otherwise be denied under the LOB rule.

The revised discussion draft also contains new proposals from the US which we report below.

Comments are requested by 17 June 2015.

Our global tax alert on the revised discussion draft on BEPS Action 7 (preventing artificial avoidance of permanent establishment status) is also available.

As we report above and in last week's Midweek Tax News, the OECD has recently released revised discussion drafts on BEPS Action 7 (preventing artificial avoidance of permanent establishment status) and Action 6 (preventing treaty abuse). These revised drafts follow up earlier work by the OECD and narrow down the options and questions that were left outstanding in previous publications.

On 7 May, the UK general election resulted in a Conservative Government with a small majority. Following the Queen's Speech today, the Chancellor of the Exchequer will deliver his second Budget of the year on 8 July and we expect that a new Finance Bill will follow.

Register here to join Claire Hooper, Chris Sanger and Sarah Churton for our next Tax Focus web seminar at 10:00 on 2 June when they will discuss the new discussion drafts on treaty abuse and permanent establishments as well as what we can expect in the upcoming Budget and future Finance Bill.

On 21 May, the Court of Appeal upheld the High Court judgment in the Littlewoods Limited case. This concerned the availability of compound interest on refunds of overpaid VAT, in circumstances where the VAT was paid and collected in breach of EU law. The Court of Appeal found for Littlewoods, ruling that it was entitled to ‘adequate compensation’, which, for Littlewoods, meant compound interest. Given the significance of this judgment and the sums involved, it is highly likely that HMRC will appeal to the Supreme Court.

Businesses with claims under EU law may wish to consider the implications of the judgment further.

Scottish Parliament reports on the implementation of the Smith Commission recommendations

In an interim report, a committee of the Scottish Parliament has concluded that the Smith Commission's recommendations on income tax, VAT, aggregates levy and air passenger duty have been adequately implemented in the draft legislation published by the UK Government. A Scotland Bill is expected to be included in today's Queen's Speech to enact the recommendations for greater devolution of powers included in the report by the Smith Commission in the aftermath of the Scottish independence referendum.

However, the committee raised questions about the administration of income tax including the definition of residence in Scotland, and whether Scotland could set a 0% rate of income tax. It also noted uncertainty over how VAT receipts would be shared and more general concerns about the overall fiscal framework.

First-tier Tribunal decides input tax can be recovered where supplier invoices are inadequate

The First-tier Tribunal has decided a VAT case in favour of the appellant, North & South Groundwork Services Ltd, where HMRC had refused to accept evidence for input tax recovery on the basis that the purchaser of the supplies did not hold valid VAT invoices from sub-contractors. The invoices were rejected as inadequate in terms of the requirements of the VAT Regulations 1995 which require a description sufficient to identify the goods or services supplied and, for each description, the quantity of the goods or the extent of the services supplied.

In finding against HMRC, the Tribunal observed that the appellant had done its best to supplement whatever shortcomings HMRC had identified in the invoices for which input credit was sought by providing details which included a fuller description of the goods and services supplied. The Tribunal found that the invoices concerned were compliant with the regulations and, furthermore, it found that the additional materials and explanations provided by the appellant in respect of the sub-contracted services were such as to require HMRC to exercise its discretion in favour of allowing the input tax claimed.

Whilst businesses seeking input tax recovery should ensure that VAT invoices received from suppliers meet all the necessary requirements, the decision may be useful in circumstances where the supply (and VAT charged) is valid but HMRC contends the evidence is insufficient to allow VAT recovery. In these circumstances it may be possible to furnish further information and remind HMRC that it has some discretion to allow input tax.

New Zealand Budget for 2015 announced

New Zealand's Minister of Finance, Bill English, delivered his Budget on 21 May and unveiled encouraging economic figures.

Before the Budget was announced, details were released of a series of property tax compliance measures. These included establishing a ‘bright line’ test that will tax any capital gains made from the sale of an investment property owned for less than two years; introducing transparency measures particularly aimed at non-resident investors; committing to an extra AUS $29mn of funding for the tax authorities to increase its property tax compliance activities; and introducing a withholding tax for non-residents selling residential property. The tax will apply to the full gain at the taxpayers' marginal income tax rate, most likely 33%.

Please see our global tax alert for more details.

Study on the application and impact of VAT relief for low value consignments

The European Commission has published a study (performed by EY) providing an assessment of the application and impact of the VAT exemption for the importation of small consignments, otherwise known as low value consignment relief (LVCR).

In general, imports of goods in the EU are charged with customs duties and VAT unless they are specifically exempt. LVCR was introduced in the EU in 1983. It allows Member States to relieve imports of goods of a negligible value (not exceeding €22) from VAT and was intended as a method to facilitate cross-border trade by reducing the administrative burden and cost involved for businesses and Member States. In the UK, the LVCR threshold is currently £15.

The growth in the volume of imported consignments in the EU, which appears to be largely driven by the boom in e-commerce, has put pressure on the existing LVCR. More recently there have been recommendations that LVCR should be abolished and the current Mini One Stop Shop regime should be extended to cover cross-border business-to-consumer sales of goods. The study carried out for the Commission presents an overview of the legal framework and procedures in place in each Member State as regards the implementation of LVCR, as well as an economic analysis of the low value consignments market including an estimate of the potential VAT foregone by tax authorities due to this exemption.

US court denies claim for tax credit on withholding tax suffered on UK manufactured dividend

In the case of Lehman Brothers Holdings, a US district court decided that US domestic law applied to deny foreign tax credits on manufactured dividends even though the US domestic law provision applied to dividends rather than manufactured dividends.

A US corporation borrowed shares from the market and lent them on to its UK subsidiary. When the UK subsidiary received dividends on the shares, it paid corresponding manufactured dividends (‘substitute dividend payments’ in US parlance) on to its US parent, who in turn paid manufactured dividends on to the third parties from whom it had borrowed the shares. Under UK law at the time, the UK subsidiary had to deduct withholding tax from the manufactured dividends that it paid. The US parent claimed tax credits for the withholding tax under the UK/US double tax treaty.

A US domestic law provision denies tax credits for withholding tax suffered on dividends which were subject to an obligation to make onward payments of manufactured dividends. The taxpayer argued that this provision should not apply to deny tax credits for withholding tax suffered on the manufactured dividends themselves. However, the court interpreted the term ‘dividend’ in the treaty as it was defined for UK rather than US tax purposes as it felt this upheld a consistent interpretation of the treaty. This meant that the manufactured dividends were subject to the domestic law provision as if they were dividends.

The case highlights limitations to the principle that, unless expressly provided, treaty terms should be interpreted under the domestic law of the jurisdiction applying the treaty.

Please see our global tax alert for more details.

Real estate funds: VAT exemption for fund management services

On 21 May, the Court of Justice of the European Union released the Advocate General's (AG) opinion in the Dutch case of Fiscale Eenheid X NV. The AG opined that funds which invest in real estate can be regarded as a ‘special investment fund’ for the purposes of EU law. As such, the management of these vehicles can qualify for VAT exemption. The AG also found that the meaning of management can cover property and facilities management and it is not limited to investment recommendations and portfolio management only.

Relevant funds, including pension funds and investment trust companies, as well as their managers and providers, may wish to consider the retrospective and prospective impact of this opinion.

US proposes new treaty measures to address base erosion

The US has made a number of suggestions for changes to model tax treaties both independently and in the course of the OECD base erosion and profit shifting (BEPS) project.

As part of the work on BEPS Action 6 (preventing treaty abuse), which is described above, the US proposed two additions to the OECD model tax convention. The first proposal suggests that taxpayers enjoying ‘special tax regimes’ in a contracting state should not benefit from reduced or nil withholding tax under a treaty. For example, where a territory has a special regime for patent royalties, the other territory would retain full taxing rights over patent royalties paid to the first territory. The other US proposal is for treaties to allow for reduced or nil withholding tax rates to be switched off where either territory substantially exempts foreign source income from tax in the future.

Separately, the US Treasury has published proposed revisions to the US model treaty. These include the ‘special tax regime’ rule noted above, as well as proposals to deal with inversions and permanent establishments. The US Treasury has also suggested a ‘derivative benefits’ test that would allow treaty benefits to apply where the owners of an entity excluded by the limitation-on-benefits rule are themselves entitled to treaty benefits.

Please see our global tax alert for more details.

Money laundering directive requires Member States to keep registers of beneficial ownership

The European Parliament has adopted the European Council's text of the proposed Fourth Money Laundering Directive under which Member States must keep central registers of information on the ultimate beneficial owners of corporate and other legal entities. Member States must ensure that corporate and other legal entities incorporated within their territory are required to obtain and hold adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held. The information must be held in a central register in each Member State.

Details stored in the register must be accessible to competent authorities, financial intelligence units and entities such as banks. Where someone outside these categories can show a ‘legitimate interest’, they will be allowed access to limited information. Member States can also maintain a public register if they wish.

The directive will enter into force on the twentieth day following its publication in the Official Journal. Member States will then have two years to implement it.

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.

The Netherlands: The Ministry of Finance has announced it will follow new OECD guidance on the treatment of termination payments subject to tax treaties.

Germany: The Court of Justice of the European Union has upheld a previous rule that provided for exit tax payable over ten years on unrealised gains.

Malaysia: The Ministry of International Trade has released guidance on various tax incentives including those for regional headquarters; operations in less developed areas; and industrial automation.

Thailand: A Royal Decree has been approved to apply a special 10% corporate tax rate to designated special economic zones.

Other publications

Issue 13 of Tax Insights, our magazine for business leaders, concentrates on tax in developing economies with features on the Indonesian middle class and the tax challenges of doing business in emerging markets.

Please speak to your usual EY contact, or email us at, if you would like to receive a copy of our regular indirect tax newsletter, or information about our other publications.

Further information

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 publishes revised discussion draft on base erosion and profit shifting Action 6 (treaty abuse)

Email Claire Hooper

+ 44 20 7951 1608

Tax focus web seminar at 10:00 on Tuesday, 2 June on base erosion and profit shifting and the new UK Government's tax plans

Email Polly Roberts

+ 44 20 7951 4349

Court of Appeal judgment holds that compound interest is available on overpaid VAT

Email Mitchell Moss

+ 44 20 7951 2279

For other queries or comments please email

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