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Midweek Tax News


A weekly update on tax matters to 23 August 2016

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.

On 22 August 2016, the OECD published a discussion draft dealing with branch mismatch structures under Action 2 (Neutralising the Effects of Hybrid Mismatch arrangements) of the BEPS Action Plan.

The discussion draft follows on from the OECD's Action 2 report published in October 2015 which set out recommendations for domestic rules aimed at neutralising tax mismatches arising under hybrid mismatch arrangements.

The discussion draft applies the analysis and recommendations set out in the Action 2 Report to mismatches that can arise through the use of branch structures. The discussion draft identifies five basic types of branch mismatch arrangements:

• Disregarded branch structures where the branch does not give rise to a permanent establishment (PE) or other taxable presence in the branch jurisdiction

• Diverted branch payments where the branch jurisdiction recognises the existence of the branch but the payment made to the branch is treated by the branch jurisdiction as attributable to the head office, while the head office jurisdiction exempts the payment from taxation on the grounds that the payment was made to the branch

• Deemed branch payments where the branch is treated as making a notional payment to the head office that results in a mismatch in tax outcomes under the laws of the head office and branch jurisdictions

• Double deduction branch payments where the same item of expenditure gives rise to a deduction under the laws of both the head office and branch jurisdictions

• Imported branch mismatches where the payee offsets the income from a deductible payment against a deduction arising under a branch mismatch arrangement.

The discussion draft then goes on to set out preliminary recommendations for domestic rules, based on those in the Action 2 Report, which would neutralise the tax outcome of the mismatch arrangements.

As a reminder, the Government has already published a series of amendments to the hybrid rules in Schedule 10 to Finance Bill 2016 to be included at the report stage of the Finance Bill on 5 September 2016. It will be interesting to see if the Government believes that any further amendments are needed in light of the OECD's views.

Comments should be submitted by 19 September 2016 and will be considered at a meeting to be held in October this year.

The Government has published its further consultation on the changes to the taxation of non-doms, along with some draft legislation. The initial headlines are as follows:

• The main proposals to introduce a new deemed domiciled concept are to be introduced unchanged. Individuals with a non-UK domicile of origin will be deemed domiciled in the UK for all taxes once they have been resident here for 15 out of the previous 20 years. Individuals born in the UK with a UK domicile of origin who have acquired a non-UK domicile of choice will be deemed domiciled in the UK whenever resident here.

• However, the original proposal to tax deemed domiciled individuals on the value of benefits paid out of trusts, regardless of the levels of income/capital gains in those trusts has been significantly amended. The new proposals introduce the concept of ‘protected settlements’ and provide differing levels of protections for income and capital gains. In both cases, trusts will only be ‘protected settlements’ where they were established before an individual became deemed domiciled under the new rules and no funds have been added to the settlement once the individual has become deemed domiciled. For capital gains, protection will be lost once benefits are taken out.

• Non-UK property will cease to be ‘excluded property’ to the extent its value reflects an interest in UK residential property and will thus be subject to UK inheritance tax (IHT). Property will be treated as a dwelling where it has been used as a dwelling in the two years before the transfer. Debt can reduce the value of the property only where it directly relates to the property. Debt with related parties will be disregarded. There will be no transitional provisions to allow those with UK properties in offshore structures to unwind those structures.

• Rebasing will apply, with some exceptions, to individually held assets for those becoming deemed domiciled on 6 April 2017. The protection will apply on an asset by asset basis and any deemed gain will not be subject to UK tax even if remitted to the UK. This will not apply to those born in the UK with a UK domicile of origin.

• Those who became non-UK resident before the date of the Summer Budget and sold non-UK assets will still be able to benefit from the remittance basis in respect of those assets on their return – even where they have become deemed domiciled.

• There will be transitional provisions for one year beginning in April 2017 to allow individuals to separate mixed accounts into their constituent parts, thus allowing them to potentially remit clean capital ahead of foreign income and gains. This will not apply to those born in the UK with a UK domicile of origin.

• For those leaving the UK, the ‘tail’ during which they remain deemed domiciled in the UK for IHT will be reduced to four years from the proposed six.

There is a lot of detail in the consultations and associated legislation. We will be publishing more thoughts shortly but, in the meantime, if you have any queries as to how these proposals relate to your individual circumstances, please speak to your usual EY contact.

Last week saw the close of the consultation period on three key consultations on areas which form part of the Government's Business Road Map. An overview of our responses to these consultations is set out below:

• Corporation tax loss relief. While we welcome the proposed widening of scope for the utilisation of brought forward losses, we have a number of concerns in relation to the impact of the proposed 50% restriction, not least as it seems to restrict the use of losses by more than 50% of profits in many circumstances. We have suggested a number of changes to the detailed operation of the rules and argued for a carve-out for capital allowances to mitigate the adverse impact of the 50% restriction on capital intensive businesses. We have also questioned whether, in the light of the challenges groups will be facing following the EU referendum and the need to focus on the growth agenda and continue to demonstrate that the UK is ‘open for business’, the proposed 50% restriction should be taken forward at this stage.

• Substantial shareholdings exemption (SSE). We have expressed our support for a widening in the scope of the SSE which we believe will assist the Government in its efforts to make the UK an attractive and competitive place to do business. Specifically, we have proposed a comprehensive exemption together with a lowering of the substantial shareholding requirement to 5%. Should a comprehensive exemption not be possible then we would support a removal of the trading requirement at investor level, coupled with either an expansion of the investee test to include all businesses, or at a minimum a specific extension to include real estate investment. We have also commented on a number of detailed design modifications to improve the current SSE regime and remove some inconsistencies and inequities.

• Transfer pricing secondary adjustments. In our view, a secondary adjustment rule should not be taken forward at all, but particularly not at the current time. We have pointed out that such a rule inevitably increases the complexity of tax legislation and the risk of double taxation and we do not consider that a secondary adjustment is the best way of achieving the stated objectives. If contrary to our view, the decision is taken to proceed with the proposal at this time, we have put forward our concerns with the method chosen for implementing the secondary adjustment and the implementation issues associated with a rule based around a constructive loan (rather than, as we have recommend a deemed dividend or capital contribution).

Your usual EY contact would be happy to discuss any of the above points, how the consultations fit within the Government's overall tax policy and, in particular, how the proposals might impact your specific circumstances.

Making Tax Digital – what it means for banks, building societies and pension providers

As we covered in last week's Midweek Tax News, on 15 August 2016, HMRC published six consultation documents on specific elements of the Making Tax Digital (MTD) Roadmap published in 2015.

One of those consultations “Making Tax Digital: Transforming the tax system through better use of information” will be of particular interest for banks, building societies and pension providers in their capacity as third party information providers to HMRC in respect of their employees and customers.

The consultation presents an opportunity for businesses to provide input as to what and how customer information should be provided to HMRC and the role businesses may be expected to play in the customer query resolution process. Businesses will also need to give consideration to both the operational and administrative challenges for their organisation, the potential risks to customer relationships and how these may be mitigated.

Our tax services alert looks at the proposals in more detail. We will also be hosting a breakfast briefing on 8 September at 1 More London Place. Please speak to your usual EY contact for further information.

In addition, our global tax alert considers how some of the points raised in the 15 August consultations will feed into, and be reflected in, the proposals for larger and multinational businesses, which are still to be published.

HMRC proposes measures to strengthen tax avoidance sanctions and deterrents

On 17 August, HMRC issued a consultation document putting forward proposals for sanctions for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC. The consultation also considers changes to the way the existing penalty regime works for those whose tax returns are found to be inaccurate as a result of using such arrangements.

The document contains proposals for penalties for the enablers of tax avoidance, defining when ‘reasonable care’ mitigates tax penalties, and defining a relevant defeat. There are also suggestions of ways in which more ‘real-time’ interventions, targeted at particular decision points, could sharpen perceptions of the consequences of offering/entering into tax avoidance arrangements.

Consultation launched on the introduction of the soft drinks industry evy

HMRC and HM Treasury have issued a consultation document on the new soft drinks industry levy, which is due to be introduced from April 2018. The levy was originally announced by the Government at Budget 2016 and is targeted at producers and importers of soft drinks that contain added sugar. The aim of the levy is to encourage companies to reformulate their product mix to reduce added sugar in their products with an ultimate aim of reducing childhood obesity. The consultation sets out proposals concerning how the levy will be designed and implemented.

Affected parties may wish to provide comments on the consultation by the closing date of 13 October 2016. Legislation providing for the introduction of the new soft drinks industry levy will be included in Finance Bill 2017.

OECD BEPS Action 4 discussion draft – update for banks and insurers

On 28 July 2016, the OECD released its public discussion draft on the tax deductibility of interest for banks and insurers. The draft focuses on the extent of risks posed by banking and insurance groups in relation to Action 4, and potential approaches to address any such risks.

The draft makes an important distinction between banks and insurance companies themselves, and other entities in a broader banking or insurance group such as holding companies or special purpose vehicles (SPVs). The draft notes the expectation that, for the majority of countries, a material BEPS risk from excessive leverage in banks and/or insurance companies is unlikely to be an issue. Accordingly the draft sees no need to develop a single common approach at this time.

Nevertheless, there is a suggestion that net interest expense in other entities in a broader banking or insurance group could pose BEPS risks. A particular concern for banking and insurance groups is the suggestion that regulated banking and insurance entities could be excluded from the fixed ratio rule, whilst still applying the rules to non-regulated entities in the group. Insurance and banking groups may now wish to model the impact of this proposal on their own tax position in order to identify the implications and restructuring which may be required. They may also wish to consider responding to the OECD consultation and entering into discussions at this stage with national governments.

Our update considers the draft in more detail and looks at our own worked examples,

HMRC publishes updated statutory residence test guidance

On 22 August 2016, HMRC published updated guidance in relation to the statutory residence test. This version replaces that published in May 2016 and incorporates a number of changes to the examples in the guidance including the provision of further examples on transit days and clarification on dates that can be ignored due to exceptional circumstances.

Public sector mandatory gender pay gap reporting to be introduced

The Government Equalities Office has published a consultation with proposals for extending mandatory gender pay gap reporting to public sector employers. These new requirements will be based on the same approach that will apply to private and voluntary sector organisations. The Government is not proposing to consult on each individual measure again but would be interested to hear about any particular issues which may be relevant for public bodies.

Public bodies covered by the regulations will be expected to capture their first set of data in April 2017 and publis

International developments

US IRS and Treasury's 2016-2017 Priority Guidance Plan published

The 2016-2017 Priority Guidance Plan provides an overview of the issues that the IRS and Treasury intend to address in the 12-month period ending in June 2017. As in prior years, the IRS and Treasury state that they will update and reissue the Plan periodically to reflect additional guidance that they intend to publish, to allow for consideration of comments received from taxpayers and practitioners on additional projects, and to respond to developments arising during the Plan year.

The Plan contains several items of interest to the financial services sector and to other domestic and multinational taxpayers that enter into financial instruments or engage in other Treasury activities. For more details, please see our global tax alert.

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: Tax authorities characterize Brazilian Juros as ‘interest’ for tax treaty purposes, notwithstanding the categorisation as dividends under Spanish domestic tax law.

Norway: New rules on mutual fund taxation introduced with effect as of 1 January 2016.

Saudi Arabia: Expansion of capital market for qualified foreign institutional investors announced.

Pakistan: Presidential order shortens to three years the proposed holding period for which capital gains tax on the disposition of real property is assessed.

Turkey: Transfer pricing provisions amended in light of BEPS developments.

Taiwan: Ministry of Finance announces plan to require foreign e-commerce operators who provide services to Taiwanese individual buyers, to register with Taiwan's tax authority and pay business taxes in Taiwan.

New Zealand: Legislation introduced to enable automatic exchange of financial account information for financial institutions with the first exchange to take place by 30 September 2018.

Other publications

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 our employment, reward and mobility newsletter, as well as 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 discussion draft on branch mismatches released

Email Fiona Thomson

+ 44 20 7951 3913

Further consultation launched on the taxation of non-UK domiciled individuals

Email David Kilshaw

+ 44 20 7951 9586

Representations on corporation tax developments submitted to HMRC

Email Claire Hooper

+ 44 20 7951 2486

For other queries or comments please email

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