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Midweek Tax News


A weekly update on tax matters to 9 September 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.

The OECD has confirmed the launch of the first seven deliverables under the BEPS Action Plan will take place on 16 September 2014. The BEPS Action Plan provides for 15 Actions to be delivered by 2015. We understand that a holistic review process will be built into 2015's work to take into account the relationships and interactions between all of the BEPS Actions and proposals and we also understand that decisions on implementation mechanisms for the seven deliverables provided next week, will be taken in 2015.

This set of agreed measures on the seven Actions will be presented to the G20 Finance Ministers in Cairns on 20-21 September 2014 for political endorsement. As part of the official launch, on 16 September 2014 there will be a press conference hosted by Angel Gurria (OECD Secretary General) and Pascal Saint-Amans (director of the Centre of Tax Policy and Administration) at 1:00 pm (BST) and an OECD hosted webcast at 3:00 pm (BST). This is expected to discuss the details of the first set of deliverables, the involvement of developing countries and the input from stakeholders, as well as the planned next steps.

The Actions on which deliverables will be issued are:

Action 1 (the tax challenges of the digital economy): We expect the report will focus on the options available and the interaction with other BEPS Actions, rather than specific actions.

Action 2 (hybrid mismatch arrangements): We are expecting a focused report along the lines of that previously proposed with further work to be done on a number of issues, including implementation.

Action 5 (harmful tax practices): We expect that this will include consideration of Patent Box regimes and potential options for demonstrating substance.

Action 6 (tax treaty abuse): We expect proposals for changes to the Model Treaty and Commentary, probably with a ‘menu’ approach for countries to choose from, creating a ‘minimum’ treaty standard to counter tax avoidance.

Action 8 (transfer pricing for intangibles): There is a strong interaction between this work and the 2015 work on the Actions related to risk, capital and the associated special measures and we expect this to be reflected in next week's deliverable.

Action 13 (transfer pricing documentation and country-by-country reporting): We expect revised transfer pricing guidelines and a final version of the country-by-country reporting template. Guidance as to how the template will operate and how it will be shared between countries is not expected until January 2015.

Action 15 (developing a multilateral instrument on BEPS): We are expecting some form of feasability review of the available options.

Now is the time to be considering the impact of these developments on your business if you have not already done so. Please speak to your usual EY contact, who will keep you updated with developments and their implications.

2014 Global Tax Risk and Controversy Survey report and webcast

Increased reputational, legislative and enforcement risk are putting additional pressure on tax resources, processes and technology for businesses large and small. Every company has to deal with operational tax risk but few do so with absolute certainty or complete confidence.

In the second report of our 2014 Global Tax Risk and Controversy Survey, which launches on 11 September, we highlight sources of operational risk and describe leading practices companies may want to institute to help achieve regulatory compliance while driving business performance. At 3:00 pm (BST) on Thursday, 11 September, please join our panel of professionals as we discuss key findings and drivers of increased operational risk. In our report we find that:

• Sixty-eight percent of survey respondents say there are insufficient resources to cover tax function activities.

• Sixty-two percent of the largest companies surveyed have either created or refreshed their tax risk policy in the last two years.

• Only twenty-five percent of companies say their internal controls are documented in all jurisdictions, regardless of whether or not it is required by regulators.

• Only nineteen percent of respondents use dedicated software tools to enable and support notice information, data request and tax audit management. The remainder use email, spreadsheets or no technology at all.

To register for the webcast please click here.

Tax Focus web seminar 10:00 am 17 September: Tax governance, enquiries and risk management

As these developments play out at a global level, HMRC is also looking again at its approach to tax governance, tax enquiries and risk assessment. As a reminder, our first Tax Focus web seminar of the new season (which will take place at 10:00 am rather than 1:00 pm as previously) will address key topics in this area including:

• Governance checks: How does HMRC evaluate tax governance and what evidence is needed to support a ‘low risk’ rating?

• Senior Accounting Officer (SAO) certification: Can businesses that fall within the SAO regime now expect to see more scrutiny of the work undertaken to support the SAO certificate?

• HMRC's approach to corporation tax enquiries and risk assessment: How is HMRC approaching corporate tax enquiries and how can they be effectively managed?

• VAT: How is HMRC approaching VAT audits and where are the key areas of focus?

• AYE/NIC: How has the Know Your Customer campaign, which focuses on the full employment tax compliance process, affected businesses and how can they best prepare?

• HMRC settlement initiatives: How can organisations benefit?

• Follower notices and accelerated payments: How has the recent legislation in this area impacted businesses with open issues?

Register now for our next Tax Focus web seminar at 10:00 am (BST) Wednesday, 17 September 2014 to hear Claire Hooper, Jim Wilson, Andrew Hinsley and Charles Brayne discuss the latest developments on these matters.

The Upper Tribunal (UT) has upheld the decision of the First-tier Tribunal (FTT) in the case of The Partners of the Vaccine Research Ltd Partnership & Anor which concerned the availability of loss relief to members of a partnership in respect of expenditure relating to research and development which was intended to qualify for capital allowances.

The arrangement involved individual partners contributing funds of £193mn (a substantial part of which were borrowed from a bank) to the partnership. Of those funds only £14mn was ultimately paid to a vaccine research company which actually carried on research and development. The arrangements were structured such that the partners would receive sufficient income to ensure that their loans would be repaid.

The UT found that the partners were only entitled to sideways loss relief for that part of the expenditure relating to research and development which was ultimately spent on that development (the £14mn) and in relation to interest payable on their loans to the extent that these were used to produce trading income (ie, to the extent of the £14mn).

Perhaps the most interesting aspect of this case is that, rather than following the approach in HMRC v Tower MCashback and identifying which part of that expenditure was ‘real’, the FTT chose to split the partnership's activities between trading and non-trading and grant relief only in respect of the latter. The UT was content to follow this approach.

Whilst the UT agreed with the FTT's conclusion that the location of the Jersey partnership's trade (relevant to whether sideways loss relief was available) was the UK, it did not agree with the FTT's reasoning that the ‘transparency’ of partnerships and location of the individual partners were relevant. The FTT should have focused on where the relevant activity of the partnership was located (ie, in this case, also the UK).

In the case of Philpott & Anor v HMRC the First-tier Tribunal held that the value of an in specie contribution made by an employer to a funded unapproved retirement benefits scheme (FURBS) was taxable on the relevant individuals, despite a claim by them that the contribution was not ‘for or in respect of’ any of them and so could not be taxable under section 386 ITEPA 2003.

The claim related to real estate contributed to the FURBS and then from the FURBS into a limited liability partnership (LLP) set up by the FURBS (among others). Three of the individuals received lump sums shortly thereafter, which were likely to have been funded by additional borrowing in the LLP. The Tribunal considered that, although it was possible in principle for ‘general funding’ contributions to be made to a FURBS, in this case the lump sums in question could not have been determined other than by reference to the in specie contributions. The implication, therefore, was that the in specie contribution was in fact a contribution on their behalf.

The FII GLO litigation has returned to the High Court following the various referrals to the Court of Justice of the European Union. As part of the arguments before the High Court, HMRC sought to amend certain aspects of its defence to the claims brought. In particular, it wished to amend its argument on the application of the ‘standstill’ provision to third country foreign income dividends (FIDs). The standstill provision allows certain legislation, in force as at 31 December 1993, to continue, even though it would otherwise infringe the treaty.

The Court of Appeal has now upheld a decision of the High Court, refusing HMRC permission to amend its defence. The Court of Appeal held that the issue had already been decided in earlier court hearings. Furthermore, any attempt by HMRC to argue that the obligation imposed on a UK company under the FID regime to account for advance corporation tax on dividends paid by it out of dividends received from third countries was a separate restriction, protected by the standstill provisions, from that denying a tax credit to the shareholder receiving the FID, would amount to an abuse of process.

The point was one which could have been taken in previous hearings, but was not. Indeed, the arguments previously run by HMRC were based on the premise that there was one composite FID scheme.

HMRC is not appealing against the Upper Tribunal decision in BUPA Insurance Limited which addressed the meaning of beneficial entitlement in the context of the consortium relief legislation. The decision is now final.

The Upper Tribunal held that contractual obligations to pay earn-out consideration on the acquisition of shares in a target company equal (or nearly equal) to the distributions made on those shares did not deprive it of beneficial entitlement to any distribution made by that company.

The Tribunal also noted that in the Indofoods case the notion of beneficial ownership took an international fiscal meaning which connoted “full privilege to directly benefit” from the interest in question (arising from a chain of lending). The Tribunal found that such a notion was a very different test of beneficial ownership to ownership rights which amount to more than a mere legal shell. Accordingly, the Tribunal found that the UK domestic legal authorities that have construed “beneficial ownership” were undisturbed by Indofoods.

Further detail on the case can be found in Midweek Tax News to 8 July 2014 (click here).

In the case of Bookit Ltd, the First-tier Tribunal considered whether credit and debit card handling fees charged to customers making bookings for cinema tickets were exempt from VAT under EU law.

In 2006, the same taxpayer successfully argued in the Court of Appeal that its card handling fees then being charged were exempt from VAT. In other cases involving very similar issues, the Tribunal has followed the Court of Appeal's decision. However, in the present case, HMRC maintained that subsequent case law of the Court of Justice of the European Union (CJEU) gave rise to a real doubt as to the correctness of the Court of Appeal's decision. As the Tribunal had reservations as to the scope of the exemption under EU law for ‘transactions concerning payments’, it decided that a reference should be made to the CJEU on this issue.

Notwithstanding this, the Tribunal was satisfied that the exclusion from exemption for debt collection did not apply in the present case. The Tribunal also held that the arrangements involving the taxpayer's supplies were not ‘abusive’ for VAT purposes. The Tribunal declined HMRC's invitation to make a reference to the CJEU on these latter two issues.

Any taxpayers providing similar card handling services might expect HMRC to take action to protect its position in the event the CJEU finds that such services do not fall within the exemption.

On 3 September, the CJEU handed down its judgment in the case of GMAC UK plc, a UK referral from the Upper Tribunal. This case concerns whether a taxpayer, who makes two sales of the same goods, is entitled both to rely on the direct effect of a provision of EU law in relation to one transaction and to rely on the provisions of domestic VAT law in relation to the other transaction, where this would lead to an overall VAT result which neither EU law nor domestic law intended. In the circumstances of the present case, the CJEU answered this in the affirmative. Our tax alert provides more detail on the judgment and its implications.

This judgment and the ongoing domestic litigation involving both GMAC UK plc and British Telecommunications plc will be of interest to any businesses which have submitted retrospective (pre-1997) claims for VAT bad debt relief.

Employment taxation: Recent developments

Short term business visitors: Further HMRC updates

In Midweek Tax News to 2 September, we reported that HMRC was expected to shortly issue a revised ‘Appendix 4 agreement’ with regard to the PAYE arrangements for short-term business visitors. We can now confirm this has been published on HMRC's website. Our tax alert considers the impact of the changes to the agreement in detail.

Consultation on the reform of travel and subsistence tax rules

As part of the Government's consultation on the reform of the travel and subsistence tax rules, it is holding a series of meetings to canvas opinions on the general framework of any future consultation. In this regard, we attended a meeting on 2 September with HM Treasury. Please liaise with your usual EY contact to discuss the themes arising from this meeting.

Employee benefits and expenses consultations

On 19 August, we held an event for employers to discuss the HMRC consultations on employee benefits and expenses, and HM Treasury's call for evidence on remuneration practices. A representative from the Treasury was also present and involved in the discussions. Our tax alert contains an overview of the key themes.

2014 Employment Tax training workshops

Our popular Employment Tax training workshops are running this year in October and November. These are aimed at individuals working in HR, finance, tax and payroll, who encounter employment tax issues. These half day sessions will cover areas such as policy, compliance and pay and benefits pitfalls. Please click here to register for a workshop at a location convenient for you.

Employment intermediaries: New reporting requirements

The Finance Act 2014 introduced measures relating to onshore and offshore employment intermediaries designed to prevent the avoidance of income tax and national insurance contributions in situations where intermediaries are used to disguise employees as self-employed.

From 6 April 2014, intermediaries must treat workers as employees when all the qualifying conditions within the recently revised agency legislation are met, and where that worker, provides services in the specified circumstances.

From 6 July 2015, intermediaries will have to report to HMRC details of all workers and their payments where PAYE is not operated. On 4 September 2014, HMRC published guidance as to these reporting requirements. The guidance confirms, inter alia, the following:

• Each tax year will be divided into four reporting periods, and reports are required to be completed within one month of the period end. The first report must be received by HMRC by 5 August 2015 and will cover the three month period from 6 April 2015 to 5 July 2015.

• Each report must include information on the intermediary and the workers in question, details of hours worked and amounts paid, and also details of any payments to other parties for the workers' services.

• Penalties will arise in relation to reports that are late, incomplete or incorrect, and HMRC intends to publish more information on these penalties in due course.

Pension Schemes Bill: Second reading 2 September 2014

The Pension Schemes Bill will implement a range of changes to existing pension legislation as part of its aim to provide wider choice. It will introduce defined ambition pensions which are intended to encourage greater risk sharing between parties and allow savers to have greater certainty about their retirement savings. Together with the provisions in the draft Taxation of Pensions Bill, on which consultation has now closed, the Pension Schemes Bill provides people with greater flexibility over how to access their defined contribution pension savings.

The Pension Schemes Bill has now passed its second reading and will now move to consideration by a Public Bill Committee. The Committee stage is due to conclude by 6 November 2014. Further Government amendments, including those addressing the ‘guidance guarantee’ will be introduced at a later stage.

UK/USSR double tax convention: Tajikistan

On 1 July 2014, a new double tax convention between the UK and Tajikistan was signed and will enter into force when both countries have completed their parliamentary procedures and exchanged diplomatic notes.

Meanwhile, HMRC has published Statement of Practice 14/2014 which supersedes Statement of Practice 4/2001. The earlier Statement made public the UK's understanding, at that time, of the status, in relation to those former Soviet Republics that had been recognised by the UK as independent sovereign states, of the UK/USSR double taxation convention. It confirmed that the UK/USSR convention continued in force for Belarus, Tajikistan and Turkmenistan.

The UK Government has been informed that Tajikistan considers that the UK/USSR convention never had effect in Tajikistan as Tajikistan did not complete the procedures necessary in order for the convention to have effect under its domestic law.

The new Statement of Practice states that the UK will not apply the terms of the UK/USSR convention in the case of residents of Tajikistan: for profits arising on or after 1 April 2014, in the case of corporation tax; and for income and gains arising on or after 6 April 2014, in the case of income tax and capital gains tax. The UK will continue to apply the terms of the UK/USSR convention in the case of residents of Tajikistan in respect of profits, income and gains arising before these dates. In these circumstances, section 25 TIOPA 2010 will not prevent a claim to unilateral relief in respect of Tajik taxes levied on profits, income or gains arising in Tajikistan.

China begins anti-avoidance investigations into service fees and royalty payments

The General Office of China's State Administration of Taxation (SAT) has issued an internal notification requiring tax bureaus at a local provincial level in China to investigate arrangements involving the payment of significant service fees and royalty payments to overseas related parties (in particular those in low tax jurisdictions) in the period from 2004 to 2013. The SAT has asked the tax bureaus to assess the reasonableness of such payments from both a business purpose and commercial substance perspective. Following their assessment of such payments, the tax bureaus are to submit their reports to the SAT by 15 September 2014. An investigation procedure will commence should the report suggest there may have been tax avoidance in any particular case.

Our tax alert provides further details.

VAT treatment of intra-EU B2B supplies of goods: EY/European Commission study

This study is relevant for all companies engaged in the business to business (B2B) cross border supplies of goods in the EU. In order to address the inherent problems of the current B2B intra-EU supplies of goods taxation model, the European Commission has identified five alternative taxation models. As mentioned previously in Midweek Tax News, the European Commission has appointed EY to undertake a study of the VAT and cost implications of those models. The guiding principle of this study is to align the simplicity, cost, and safety of engaging in business activities across EU Member States with doing business domestically.

An essential element of this study is an online survey for businesses across all 28 Member States to complete and provide comments on the current taxation model and the alternative five options. In particular, the European Commission would like to encourage small and medium enterprises (SMEs) to participate in this survey, as it understands that, as a result of the current EU legislation, SMEs have historically been less likely to engage in the B2B cross-border supply of goods.

The survey is open until 12 September 2014, so please take this final opportunity to let us know your views on how new legislation in this area could affect how you do business across the EU and how this is reported in the future.

Please click here to complete the survey.

Canada releases draft legislative proposals following 2014 federal budget

Canada's Department of Finance has released for public comment a package of draft legislative proposals and explanatory notes relating to a number of measures announced in the 2014 federal budget, as well as a number of technical changes to the Income Tax Act and the Income Tax Regulations.

A key development is that the Canadian Government has decided to defer the introduction of any anti-treaty shopping measures, and will instead await further work by the OECD and G20 on their base erosion and profit shifting initiative (for which see the first item in this week's edition of Midweek Tax News).

Our international tax alert has an overview of the changes. Separate alerts are also available covering the international tax measures and the financial services implications of these legislative proposals.

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.

India: The Ministry of Finance released its annual report which provides key statistics for the 2013-14 financial year and highlights the continued focus of the Indian tax authorities on transfer pricing and the taxation of cross-border transactions.

Singapore: The Inland Revenue Authority has released a consultation paper on proposed revised guidance on transfer pricing documentation which includes a requirement to prepare and keep contemporaneous transfer pricing records.

Australia: The Government has now passed a Bill repealing the Minerals Resource Rent Tax, which is levied on iron ore and coal mining profits, although the precise date of repeal is yet to be determined.

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 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.

Base erosion and profit shifting: Forthcoming documents and activity

Email Claire Hooper

+ 44 20 7951 2486

Upcoming webcasts

2014 Tax Risk and Controversy Survey report and webcast

Email Mandy Pachol

+ 44 20 7951 7092

Tax Focus web seminar 10:00 am 17 September: Tax governance, enquiries and risk management

Email Sarah Chong

+ 44 20 7783 0859

Upper Tribunal considers the commercial reality of expenditure

Email Tom Passingham

+ 44 20 7951 2846

First-tier Tribunal rules on taxability of in specie contributions to a FURBS

Email Andrew Drysch

+ 44 20 7951 7076

FII GLO: Application of CJEU referrals

Email Mike Gibson

+ 44 20 7951 0568

Meaning of beneficial ownership

Email Mike Gibson

+ 44 20 7951 0568

VAT liability of credit and debit card handling fees

Email Andrew Bailey

+ 44 20 7951 8565

Reliance on both domestic VAT law and direct effect of EU law

Email Jamie Ratcliffe

+ 44 12 1535 2255

For other queries or comments please email

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