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A weekly update on tax matters to 23 March 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

Midweek Tax News is a day early this week because the Finance Bill is expected to be published later today. We will be sending out a special alert on the contents of the Finance Bill tonight in advance of it being expected to pass all its Parliamentary stages tomorrow, Wednesday. It should receive Royal Assent before the end of this week. In the meantime, our full coverage of the 2015 Budget can be found here.

On Thursday, we expect that the Prime Minister, David Cameron, will visit Buckingham Palace to ask Her Majesty the Queen to dissolve Parliament for the general election scheduled for 7 May. The campaign proper begins with the dissolution of Parliament next Monday.

We will continue to keep you up to date on other tax-related matters throughout the election period.

On 19 March 2015, HM Treasury and HMRC jointly published Tackling tax evasion and avoidance. It sets out the action that they have taken over the last few years in relation to tackling tax avoidance and evasion, and proposes further changes.

In relation to tax avoidance, a key proposal in the document is that the Government will be asking professional regulatory bodies to enforce standards around the promotion of aggressive tax planning. However, last week it also rejected the public accounts committee recommendation for a code of conduct for tax advisors.

Other options being considered by HMRC include new rules to increase the downside risk for avoiders and promoters, such as surcharges and penalties; the use of digital tools to bring avoidance notification online; and extending the accelerated payments regime.

In relation to tax evasion, consultations will take place in the following areas:

• A new strict criminal offence to prevent the possibility, in cases of offshore evasion, of pleading ignorance to avoid criminal prosecution

• A proposed increase in financial penalties faced by evaders, including a new penalty linked to the underlying assets kept in offshore bank accounts

• A proposed new offence of corporate failure to prevent tax evasion or the facilitation of tax evasion, and new civil penalties for those who enable evasion

• An extension in HMRC's scope to ‘name and shame’ tax evaders

No information was given in relation to the timescale over which these consultations will take place.

On 19 and 20 March, the OECD held its largest public consultation meeting of the BEPS project so far on the subject of Actions 8 to 10 (transfer pricing). The OECD’s aim is to arrive at consistent and balanced transfer pricing guidance, ensuring that transfer pricing outcomes are in line with value creation.

There were two key areas of focus during the consultation. In respect of risk and recharacterisation, participants considered the proposed revisions to chapter one of the OECD’s transfer pricing guidance. In order to prevent BEPS, the OECD and participating governments are focused on aligning risks with the functions which are capable of controlling, managing and monitoring those risks. There was also plenty of discussion about when transactions should be disregarded altogether. Even though the OECD draft guidance states that the non-recognition of transactions should only occur in exceptional circumstances, industry participants were concerned that the guidance is not explicit enough in determining such circumstances. Better examples, illustrating the boundary of where non-recognition can occur, were requested.

In the discussion on profit splits, the OECD stressed that, at this stage, it is not making any recommendations as to the use of profit splits but is instead looking to understand experiences and views. Participants expressed the view that profit splits should not become the default method where global value chains exist, and should only be applied in those limited cases where it is the most reliable method.

Given that the BEPS project is supposed to be completed by September 2015, participants were keen that a rewrite of the transfer pricing guidance should not be rushed. Instead, the focus for the OECD should, for now, be on preventing BEPS with the rewrite itself to follow later.

We understand that the OECD will issue revised discussion drafts in April following the public consultation process.

As we communicated last Friday, HMRC has responded to the representations that it has received on the draft clauses on DPT released on 10 December 2014.

A key concern expressed was the breadth of the notification requirements. These have been narrowed from the original draft, focusing on situations where the financial benefit of the tax reduction is significant relative to the non-tax benefits of the material provision. Furthermore, there is an opportunity for groups to proactively discharge their DPT notification obligations by providing HMRC with, and ensuring HMRC has examined, sufficient information to enable it to determine whether a DPT assessment notice should be issued.

Despite the narrowing of the notification provisions, it is clear that HMRC continues to intend DPT to have a very wide scope. The scope of the avoided permanent establishments rule has even been expanded to include sales to non-UK customers that relate to UK business activity and to sales of land and property. It has also been put beyond doubt that UK headed-groups that have suffered a UK controlled foreign companies (CFC) charge could still be subject to DPT. Credit should, however, be available where a company has paid a CFC charge.

A final version of the DPT legislation is expected to be included in the Finance Bill published later today. HMRC only released three updated clauses on Friday so it will be necessary to review in detail the changes to the remaining legislation when it is released.

Our alert on the changes to DPT can be found here.

Response to consultation on the oil and gas investment allowance (IA) published

HM Treasury published its response to the recent consultation on the operation of the IA for the UK oil and gas industry on 20 March. This provides further detail on the operation of the IA including:

• The IA will be generated by qualifying expenditure incurred from the effective date of 1 April 2015.

• The Government has reiterated that qualifying expenditure is to be defined as capital expenditure excluding decommissioning expenditure and expenditure qualifying for the cluster allowance or the onshore allowance.

• IA is not spread over a five year period like the current field allowances and brown field allowance but can be activated immediately.

• The Government appears to acknowledge ‘there is a case’ for a form of group relief for activated IA, though the document implies this will not be included in the Finance Bill.

• The Finance Bill legislation will require the transfer of unactivated allowances where licence transfers take place.

• Exploration and appraisal expenditure is to be qualifying expenditure albeit the related IA can only be activated by production from the successful development of the explored resources.

• There is no mention of the interaction of IA and loss carry-back on decommissioning despite that being discussed at some length in the consultation process.

Although the new IA is welcome, the current exclusion of tariff income for activation purposes is disappointing given the consultation discussions.

Upper Tribunal rejects HMRC appeal on exemption from aggregates levy

In the case of Northumbrian Water gravel was needed for reservoir works which was obtained from a pit some 500 metres away from the reservoir. It was not in dispute that the gravel became part of the land by being used in structures which were treated as land. Aggregates levy is charged on aggregate which is the subject of commercial exploitation. However, an exception is available when the aggregate becomes part of the land ‘at the site from which it was won’.

The issue for the First-tier Tribunal was whether the pit and the reservoir structures were all part of a single ‘site’ for the purposes of the relief. The First-tier Tribunal held that ‘site’ in this context bore a wide meaning. Taking into account the size and scale of the construction project undertaken, it considered that the pit and gravel-use locations were on the same single construction site and that the relief should not be restricted to construction at the particular area of ground where the aggregate was extracted. The Upper Tribunal held that the First-tier Tribunal did not err in law in reaching its decision and dismissed the appeal.

Mini one stop shop (MOSS): Return guides and templates

HMRC has published guidance and templates regarding how to submit MOSS returns. Changes to the EU VAT place of supply rules came into force on 1 January 2015. The changes affect business-to-consumer supplies of digital services encompassing telecoms, broadcasting and electronic services (such as ebooks and music downloads). Supplies of digital services to EU consumers are now subject to VAT in the Member State where the consumer belongs, rather than the supplier. The introduction of the MOSS gives affected businesses the option of registering in one Member State from which they can submit VAT returns and pay the VAT due in all Member States. Affected businesses may find our MOSS compliance tool useful in considering any post MOSS implementation issues.

The European Commission has also published its final report on selected national VAT rules under the MOSS which EY helped prepare. This final report is an updated version of the previous report published by the European Commission in October 2014. The updated report takes into account all legislative changes which took place in the EU Member States as at 1 January 2015.

HMRC provides details on registering for its gambling tax service

Organisations with obligations in respect of general betting duty, pool betting duty or remote gaming duty can use HMRC's online gambling tax service. This allows organisations to register, submit their returns and view their account. HMRC has provided details on how to register and keep details in the gambling tax service up to date.

European Commission presents its tax transparency package

On 18 March 2015, the European Commission presented a package of measures to boost tax transparency in the EU.

A key element of this tax transparency package is a proposal to introduce the automatic exchange of tax rulings between Member States. Under the proposal, the Commission will require that, every three months, national tax authorities will have to send a short report to all other Member States on all advance cross-border tax rulings and advance transfer pricing arrangements that they have issued. If, after this initial exchange, a Member State believes that it needs more information on a particular ruling, it can request further details or the full ruling. This requirement will be retrospective such that Member States will have to provide rulings that are still in force going back ten years from the date of the directive.

The Commission has also launched a number of other initiatives:

• Examining the feasibility of new transparency requirements for companies

• Working with Member States to review the tax code of conduct, to make it more effective in ensuring fair and transparent tax competition within the EU

• Repealing the Savings Tax Directive in order to have a streamlined framework for the automatic exchange of financial information

• Quantifying the effect of evasion and avoidance

The next milestone will be an action plan on corporate taxation which will be presented before the summer. This is expected to include a re-launch of the common consolidated corporate tax base and ideas for integrating new OECD/G20 actions to combat base erosion and profit shifting.

Our global tax alert is available here.

EU and Switzerland agree automatic information sharing

The European Commission announced on 19 March 2015 that negotiations have been concluded on a new tax transparency agreement with Switzerland. Under the agreement, Member States will receive, on an annual basis from 2018, the names, addresses, tax identification numbers and dates of birth of their residents with accounts in Switzerland, as well as other financial and account balance information. The agreement was initialled by the Commission and Swiss negotiators on 19 March 2015. It will be signed following authorisation by the European Council on one side and the Swiss Government on the other, both of which are expected to happen before summer 2015.

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.

France: The EU Commission has initiated infringement procedures against France on the 3% dividend tax based on an alleged breach of the Parent-Subsidiary Directive and the freedom of establishment.

New Zealand: Combatting base erosion and profit shifting and international tax-related reforms will be a priority for the new Government.

Austria: The Government has announced tax reform including a more progressive income tax scale and a proposal to increase withholding tax on capital gains and dividends by 2.5% to 27.5%.

Russia: Amendments to the tax code passed by the Duma do not include proposed extensions of thin capitalisation rules to foreign affiliates. The Government has also introduced a draft law on a new tax on the financial results for the oil industry.

US: The Senate's Finance Committee hearing focused on the potential benefits of establishing a US patent box regime.

Turkey: The Government has submitted a new bill to introduce notional interest deductions on equity to the corporate tax code.

Ukraine: Parliament has adopted a legislative package that significantly changes the order and rates of personal income taxation and the payment of the unified social tax.

Other publications

Please speak to your usual EY contact, or email us at eytaxnews@uk.ey.com, 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.

Finance Bill published later today and Parliament dissolved next Monday

Email Claire Hooper

+ 44 20 7951 2486

Government announces further proposals to tackle tax evasion and avoidance

Email Chris Sanger

+ 44 20 7951 0150

OECD public consultation on base erosion and profit shifting Actions 8 to 10 (transfer pricing)

Email Ben Regan

+ 44 20 7951 4584

New clauses on diverted profits tax released

Email Claire Hooper

+ 44 20 7951 2486

For other queries or comments please email eytaxnews@uk.ey.com.

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