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Midweek Tax News

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A weekly update on tax matters to 1 September 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.

We have produced a paper on the implementation of Actions 8 10 and 13 of the OECD base erosion and profit shifting (BEPS) project in close to 100 countries (including all OECD member countries). These actions address transfer pricing and transfer pricing documentation, including country-by-country reporting (CBCR).

Our paper summarises the key findings of our survey of the relevant countries and provides statistics and specific country examples on questions such as:

• Whether changes to the OECD transfer pricing guidelines made under BEPS Actions 8-10 will apply automatically once final or will need local legislative action.

• What legislative actions, tax audit or court activity we have observed with reference to Actions 8-10

• Whether legislative action would be required to implement the new master file / local file / CBCR requirements under BEPS Action 13

It also shows the expected activity, by country, in respect of implementing CBCR and in participating in automatic exchange of reports filed under CBCR.

The paper is of particular interest given that the BEPS project is nearing completion with final reports on the BEPS Actions to be agreed by the Committee of Fiscal Affairs on 20-21 September 2015. We expect that reports will be released on or shortly before the G20 Finance Ministers meeting on 8 October 2015. Although there will still be a number of points of detail to be considered in the remaining part of 2015 and 2016, the focus will turn to individual countries as they decide on whether and how to implement the OECD's recommendations.

To read the paper, please click here. Your usual EY contact would be very happy to discuss the implications with you.

During the last few years, the focus has sharpened on captive insurers with captive arrangements specifically referenced as part of the OECD BEPS project and, in some countries, subject to specific tax treatment such as under the UK's CFC regime.

Certain countries have introduced anti-avoidance legislation in response to BEPS Action 7 and Actions 8-10 with the most notable development being the diverted profits tax (DPT) recently introduced in the UK. The UK DPT takes effect from 1 April 2015 and can potentially affect captive insurers located anywhere in the world whether the affiliated group is headquartered in the UK or overseas. Guidance released by HMRC in respect of DPT contains a specific captive insurance example that illustrates the trend of increasing scrutiny and risk of challenge for these arrangements.

Our tax services alert sets out how recent developments in the global tax environment may impact groups with a captive insurer located anywhere in the world.

Many large groups have a captive insurer within the group and should now be considering a risk review without delay and, in any event, before the end of the first year DPT notification period.

In the case of Associated Newspapers Ltd, the First-tier Tribunal considered the VAT treatment of high-street retailer gift vouchers given away to customers as part of the taxpayer's sales promotion schemes.

This appeal was closely related to an earlier appeal involving the same parties. The earlier appeal was concerned with the taxpayer's liability to account for output tax in respect of its distribution of the vouchers to its customers. In that case, the Tribunal held that the arrangements did not trigger an obligation to account for output tax. HMRC has since appealed that decision to the Upper Tribunal.

The present appeal was concerned with the taxpayer's entitlement to recover input tax on its purchase of the vouchers, both direct from the retailers and from an intermediary supplier of vouchers. The key issues for determination by the Tribunal were whether the taxpayer incurred VAT on its purchases of vouchers direct from the retailers and, if so, whether the taxpayer was entitled to recover that VAT (and the VAT which HMRC accepted it had incurred on purchases of vouchers from the intermediary) as input tax. The Tribunal answered both of these questions in the affirmative and, therefore, allowed the taxpayer's appeal.

The finding that the taxpayer did incur VAT on its purchases of vouchers direct from the retailers appears to be at odds with the Tribunal's earlier decision in the case of Simon Nagle and Julie Kemsley t/a Simon Templar Business Center. Therefore, it might reasonably be expected that HMRC will appeal this decision. Ideally, both appeals involving the taxpayer would then be heard by the Upper Tribunal together. Any taxpayers engaged in business promotion schemes involving gift vouchers may wish to consider the implication of this decision for their business.

September sees the closing date of some of the first consultations announced by the Government in the summer Budget as well as the end of the comment period on a number of regulations published in draft.

Key dates to note include:

• 2 September: Closing date for comments on direct recovery of debts regulations

• 9 September: Comments due on draft regulations covering the tax treatment of new capital instruments

• 18 September: Comments due on definition of “apprentice” for employers national insurance contributions exemption draft regulations

• 18 September: Closing date for consultation on peer to peer lending

• 18 September: Closing date for consultation on the personal savings allowance and the wider reform of tax deducted at source on interest (the options range from retaining the current rules, to the abolition of the need to deduct tax, with several options in between)

• 30 September: Closing date for consultation on IR35

• 30 September: Closing date for consultation on tax treatment of fund managers' performance-related returns

• 30 September: Closing date for consultation on travel expenses of temporary workers

In addition, responses to the European Commission's consultation on further corporate tax transparency are due by 9 September. The stated aim of that consultation is to find out whether requiring companies to disclose more information about the taxes they pay could help tackle tax avoidance and aggressive tax practices in the EU. The Commission's work in this area is due to be concluded at the latest in the first quarter of 2016.

We will be hosting both a breakfast seminar, on 10 September, and a Tax Focus web seminar on 17 September in which we will consider and discuss with HMRC the impact of its proposals aimed at improving large business compliance.

The proposals include, amongst other things, requirements for:

• The publication of a board approved tax strategy (including whether the UK group has a target effective tax rate, what this is, and what measures the business is taking to maintain or reach this target)

• The naming of a board director as ‘responsible for owning and signing off the tax strategy’

• The implementation of a voluntary Tax Code of Practice

We have already circulated a link to the invite to the breakfast briefing (but please click here, if you can now attend). However, to enable as many people as possible to take part, we are now providing details of the subsequent web seminar.

EY tax and corporate governance professionals will be joined by representatives from HMRC to discuss what the proposals will add to the governance framework for UK businesses and whether they appropriately meet the needs of all stakeholders with an interest in tax matters. Additionally, they will review how businesses might respond in terms of their approach to tax governance, global tax risk management and tax reporting.

To register for the web seminar, please follow this link.

HMRC sets out next steps in cross-border group-relief claims

At a meeting on 27 August, HMRC set out its technical analysis as to why the ‘no possibilities’ test for cross-border group relief for pre-2006 periods should be tested at the end of the relevant accounting period and not at the time of claim (as found by the Supreme Court in Marks and Spencer). HMRC's view is based on its analysis of the comments made by the Court of Justice of the European Union (CJEU) in the infraction case of Commission v UK, which held that the European Commission had not proved that the post-2006 UK law on cross-border group relief was contrary to EU law.

HMRC is looking to close open cases in the short term. It will consider litigation in appropriate cases where claims that do not meet its technical analysis are not withdrawn.

First-tier Tribunal considers termination payments and valuation of employment related securities

In the case of Sjumarken, the First-tier Tribunal considered the taxation of payments made under a compromise agreement. The issues in dispute were the correct valuation of employment related securities (ERSs) received by the taxpayer and whether the giving up by him of long-dated options could be said to be negative earnings in light of the decision in Julian Martin.

The Tribunal allowed the taxpayer's appeal in respect of the first matter on the basis that the ERSs were restricted shares and should be valued as such. However, it rejected the taxpayer's claim for any additional deduction for the value of the options as negative earnings.

Measures to promote compliance with minimum wage rules

A package of measures was announced by the Business Secretary on 1 September. The measures include doubling the penalties for non-payment of the national minimum wage and the new national living wage. The calculation of penalties on those who do not comply will rise from 100% of arrears to 200%, although this will be halved if employers pay within 14 days. The overall maximum penalty of £20,000 per worker remains unchanged

A new team in HMRC will be set up to investigate the most serious cases of employers not complying with the minimum wage rules. That team will have the power to use all available sanctions, including penalties, prosecutions and ‘naming and shaming’. A consultation will also be launched in the autumn on the introduction of a new offence of aggravated breach of labour market legislation.

Consultation on land and buildings transaction tax (LBTT) rules for property authorised investment funds

The Scottish Government has consulted on the potential introduction of an exemption from LBTT, for the transfer of properties from authorised unit trusts (AUTs) to open ended investment companies (OEICs) in Scotland, in certain specified circumstances. LBTT is currently chargeable on the transfer of Scottish properties held by AUTs converting to OEICs. However, no stamp duty land tax (SDLT) is payable in the same circumstances on the transfer of properties situated in England, Wales or Northern Ireland. The Scottish Government has published draft regulations which it intends to introduce to Parliament at the start of the next parliamentary session, subject to the outcome of this consultation.

In our response to the consultation, we note that, while we believe that an exemption should be introduced, the Scottish Government should also consider introducing a wider LBTT ‘seeding’ relief for property authorised investment funds and co-ownership authorised contractual schemes, as is currently proposed by the UK Government in respect of SDLT.

EU Council working party to discuss next steps on tax reform

The EU Council's High Level Working Party on Tax Questions will meet on 2 September 2015 to discuss a number of inter-related issues, including minimum effective tax rates, the future of the EU's Code of Conduct on business taxation and the ongoing work of the OECD on BEPS. Prior to the discussions, a presentation will be made by Pascal Saint-Amans of the OECD on the state of play of ongoing work in relation to BEPS.

The High Level Working Party on Tax Questions is composed of high level representatives designated by Member States. As well as monitoring the progress of proposed tax legislation it also monitors the progress of tax issues in non-tax legislation. Accordingly, it will discuss the potential changes to the shareholder rights directive, which if approved, would extend the existing CBCR requirements under the Accounting Directive to all multinational companies. Please see our global alert for more details on that proposal.

Norwegian tax authorities rule Luxembourg holding company not qualified for domestic withholding tax exemption

In Norway, a main condition for outbound dividends to be tax exempt under the Norwegian domestic withholding tax exemption is that the receiving entity is considered ‘genuinely established’. This requirement is to be applied and interpreted in light of the wholly artificial arrangement test developed by the CJEU.

The Norwegian tax authorities have recently issued an advance tax ruling concluding that a Luxembourg holding company, that was contemplating investments in Norway, qualified as a wholly artificial arrangement and accordingly the domestic withholding tax exemption did not apply. Our global alert considers the case and its implications in more detail.

Australian Taxation Office (ATO) announces targeted data matching campaign for temporary residents

The ATO has announced a campaign to collect data from the Department of Immigration and Border Protection for the last three and current financial years to detect non-compliance with Australian taxation obligations by visa holders, sponsors, and migration agents. The ATO seems concerned principally with the filing of tax returns and reporting and payment obligations under pay as you go (PAYG) withholding. Although the ATO is targeting those engaging in fraudulent behaviour this is a timely reminder for employers of the necessity to adopt a coordinated compliance approach with regard to their temporary visa holder population. Our global alert summarises these developments and the likely impact on employers.

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.

Denmark: The Danish tax authorities have announced they will temporarily suspend processing all incoming dividend withholding tax refund claims with immediate effect, while they consider alleged fraudulent claims.

UAE: The Ministry of Finance has provided an update on the possible introduction of value added tax and corporate tax.

Angola: The Ministry of Finance has confirmed that it considers the special contribution on current invisible transactions as being in force from 30 June 2015.

Korea: The recently announced tax reform proposals are aimed at stimulating the domestic economy, strengthening fair taxation and rationalising the tax system. They include a proposal to limit the carry forward of losses.

US: The IRS has held that a cash basis taxpayer may not elect for the accrual method for claiming foreign tax credits on an amended return.

US: The IRS has recharacterised intercompany referral fee income for subpart F purposes and reallocated intercompany referral fee expenses.

Costa Rica: The Government has submitted two bills to Congress; one to restate the Income Tax Law and one to replace the current Sales Tax Law with VAT.

Peru: A temporary exemption from capital gains tax has been proposed in respect of the transfer of shares carried out through the Lima Stock Exchange, provided certain conditions are met.

Peru: Special rules regarding the transfer of real property to real estate investment trusts (REITs) have been enacted for the period 1 January 2016 to 31 December 2019.

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.

Implementation of BEPS Actions 8-10 and 13

Email Ben Regan

+ 44 20 7951 4584

First-tier Tribunal considers VAT implications of sales promotion scheme involving retailer gift vouchers

Email Joanna Crookshank

+ 44 20 7951 1662

Consultation deadlines coming up this month

Email Claire Hooper

+ 44 20 7951 2486

Tax Focus web seminar, 17 September, at 16:00: UK tax transparency and corporate governance measures

Email Sarah Chong

+ 44 20 7783 0859

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

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