Tax Services

House of Lords Economic Affairs Committee

On 14 May, the House of Lords Economic Affairs Committee held its second evidence session of its new inquiry into corporation tax. It first took evidence from the Heads of tax for BP, GlaxoSmithKline and Reed Elsevier before moving on to hearing from witnesses from the ICAEW, ICAS, ACCA and the CBI.

With the business representatives the Committee sought to ask how easy it is for multinational companies to avoid paying tax on profit generated in the UK, what relationship HMRC has with taxpayers, what policies BP, GSK and Reed Elsevier have to minimise tax and what the companies see as an acceptable effective rate of corporation tax. They also asked the witnesses whether foreign companies are able to gain a competitive advantage over domestic firms when operating in the UK due to the corporate tax regime. Finally they asked the witnesses for their views on additional disclosure of tax information and what changes to the UK tax system the witnesses would like to see in the context of profit allocation.

With the accountancy associations the Committee sought views on the Chancellor's proposal that tax avoiders should be named and shamed, whether the distinction in the tax code between debt and equity is justified and the recent Public Accounts Committee criticism of the close relationship between Government and professional tax advisors.

The witnesses gave thoughtful and open answers to the questions asked of them (in addition to their separate written evidence). It will be interesting to see how the committee responds to the evidence given.

Call for agreement on tax evasion and avoidance

The meeting of the G7 finance ministers on 10 May agreed that there should be collective action against tax evasion and avoidance. Ahead of the ECOFIN meeting on 14 May, the UK Chancellor of the Exchequer has written to European Finance Ministers calling on them to back a new global standard to fight tax evasion and avoidance. The core of this global standard is automatic exchange of tax information between countries, based on a new multilateral agreement encompassing developed and developing countries.

In his letter, the Chancellor welcomes interest by other Member States in joining the pilot for automatic exchange of information between the European G5 (UK, France, Germany, Italy and Spain). The Chancellor sees the next steps as broadening the information sharing pilot to include more countries as a way of building up a global standard, giving support to developing countries so they can meaningfully make use of the standard, and backing OECD work to define the standard in detail.

Beyond this, the UK's G8 agenda also includes strengthening the global tax rules to “ensure they reflect the modern economy” and improving the availability of information on so-called ‘beneficial ownership’. The Chancellor refers to the need to send a strong political signal against behaviour which artificially shifts profits to very low tax jurisdictions. He also highlights the importance of the OECD BEPS project in updating the international tax framework where it is not working.

In the run up to the European Council of 22 May Commissioner Semeta will urge the Council to reach agreement on a number of concrete legislative measures and actions to fight against tax fraud and evasion in the EU and globally. Like George Osborne, he will urge for agreement to amendment of the Savings Directive. He will also look for the adoption of the Commission's Action Plan to fight against tax fraud and evasion and the Recommendations on tax havens and on aggressive tax planning proposed by the Commission on 6 December 2012 (see Midweek Tax News to 7 May for a summary of these).

Outlook for global tax policy

Our latest review of tax policies in 57 countries sees a growth in targeted, selective and nuanced tax policymaking in many countries around the world as opposed to the wider-scale tax reform seen previously. No matter how well-positioned a country may be to effect wide-scale reform, we are seeing near universal commitment to stronger enforcement of existing tax laws, giving rise to more controversy and disputes around the world.

Increasingly, many countries are encouraging activity on cross-border taxation by supranational organizations. The rapid pace of globalization, the rise in connectivity caused by innovations in technology and communications, and the growing importance of intangibles all mean that models differ significantly from those that were the norm when long-standing international tax concepts were developed. With the OECD set to release in July its initial “action plan” for work going forward on its base erosion and profit shifting project, there is little doubt that development in the cross-border taxation landscape will continue to unfold.

By identifying trends and anticipating changes in policy, legislation and enforcement, business can plan for adverse impacts, take proactive steps to adapt to changes and even engage with policymakers to contribute their perspective to the legislative process. Companies today are beginning to take this opportunity to get ahead of the curve on tax changes very seriously.

Click here to read our Outlook for Global Tax Policy in 2013. Our review includes a six-point action plan that may help you manage change in 2013.

Web seminar 6 June: Finance Transformation

Our next web seminar will be held on Thursday, 6 June 2013 and will focus on tax and finance transformation.

The term ‘finance transformation’ can cover a range of actions from the reorganisation of the finance function, through the establishment of onshore or offshore shared service centres, to business process outsourcing or investment in new accounting systems. Such changes can be planned to happen all at once or be scheduled over a number of years. They can all impact the group's tax position and profile.

Finance transformation projects can result in significant savings for the business but if tax is not embedded in any finance transformation project from the outset, then significant costs can be incurred putting it right after the event and opportunities missed. In addition, these projects can provide a great opportunity to strengthen the risk and governance frameworks around tax and to drive a global model with all data and processes in one place and easily accessible.

The seminar will look at how to ensure the benefits of a finance transformation project are maximised, what pitfalls to avoid and how to ensure that tax risk is well managed.

Register now and save the date: Tax Focus - 6 June 2013

New UK guidance and US regulation on tax treatment of repairs

Treatment of an item as a repair or an improvement can significantly change the timing of available tax relief. Revised guidance issued in the UK indicates that HMRC will be increasing its focus on this area while at the same time new regulations issued in the US will require US groups to revisit their repairs analysis.

UK revised guidance

In April 2013, HMRC issued updated draft guidance on the treatment of repairs, both in terms of the definition of repairs for tax purposes and the role of the accounting treatment adopted by the company in determining when relief is given. The revised guidance indicates that HMRC will be focusing on this issue further. The guidance confirms that HMRC expect businesses to consider whether the ‘character of the asset’ has changed.

Whether something has been repaired or improved is a question of fact, and HMRC will give consideration to the nature and extent of the work carried out. When there is a programme of works being carried out over a number of assets, HMRC will consider the projects separately to separate the repairs from the improvements. An example of HMRC's approach (albeit the case was heard before the guidance was issued) is the recent First-tier Tribunal decision in Cairnsmill Caravan Park (see Midweek Tax News to 18 April).

US Tangible Property Regulations

US groups will now have to revisit their repairs analyses in light of the Tangible Property Regulations (TPRs) introduced in 2012 which set out complex rules on what can and cannot be treated as repairs.

US groups have to apply these regulations for all US reporting purposes – including for Earnings and Profits (E&P) purposes on overseas subsidiaries US groups will have to recalculate their E&P for their overseas businesses, including the UK, as though the TPRs have been applied in the local country. The TPRs are effective from 1 January 2012.

The potential impact of the proposed changes will be of particular interest for those businesses with significant capital expenditure programmes and associated programmes of repairs and maintenance. Those businesses may wish to revisit their processes for identifying and analysing repair costs. There may well be synergies in reviewing the group spend for both UK and US regulations simultaneously.

HMRC issues updated guidance on Statutory Residence Test

HMRC has published updated guidance on the Statutory Residence Test to reflect the changes to the legislation between the publication of the draft legislation and the Finance Bill.

The guidance is nearly double the length of the original and now contains some additional detailed examples. In particular, there are new examples showing how to apply the new calculation to determine whether someone is working full-time abroad or in the UK, as well as additional examples around when an individual meets the second automatic UK residence test regarding having a home in the UK. There is also a new flow chart designed to help an individual decide whether they meet this test.

The new guidance contains details of the records which HMRC will expect individuals to keep in order to prove where they have a home, their working hours and the location of that work and their connections to the UK under the sufficient ties test.

There are a number of instances in which the conclusions of the guidance have changed. These are largely in relation to very specific points of detail (for example, whether a home remains a home for the purpose of the SRT when it is dilapidated) and it may therefore be worth revisiting the guidance to review any conclusions reached using the previous guidance.

CJEU judgment: no recovery of VAT on non-compliant purchase invoices

In the case of Petroma Transports SA, the European Court of Justice (CJEU) has ruled that national tax authorities are entitled to refuse input tax where the purchase invoice lacks required information, even when the missing information is obtained after the VAT audit.

The case underlines that incomplete or otherwise non-compliant invoices may create financial risks for customers who have paid the VAT to their suppliers and are seeking input tax recovery or credit from the tax authorities. It also shows that any rectification of non-compliant invoices is time-limited, and that any corrective action post-audit may have no effect.

More information and our recommendations as to the actions businesses should take (whether receiving or issuing invoices) can be found in our Indirect Tax Services alert.

Court of Session considers entitlement to claim bad debt relief in respect of unpaid VAT-only invoices

In the case of Simpson & Marwick, the Court of Session in Scotland has considered the extent to which the taxpayer was entitled to claim bad debt relief in respect of unpaid invoices which showed a VAT-only amount.

The taxpayer, a firm of solicitors, acted in relation to insurance claims. Following guidance issued in 1985 by the British Insurance Association, the taxpayer issued VAT-only invoices to insured policyholders who were registered for VAT and fee notes to the insurers for payment of the balance. This was on the basis that, where the insurance claim related to the policyholder's business, the legal services would be treated as supplied to the policyholder so that it would be able to recover the VAT incurred. In cases of non-payment of the VAT by the policyholder, the taxpayer sought to claim the entire amount as bad debt relief. HMRC contended that entitlement to bad debt relief was limited to the VAT fraction of the outstanding amount, and assessed the taxpayer accordingly.

The Upper Tribunal held that UK and EU VAT law justified treating the unpaid amount written off by the taxpayer as entirely VAT, which was therefore fully refundable as bad debt relief. However, the Court of Session upheld HMRC's assessment (reversing the Upper Tribunal's decision and restoring the First-tier Tribunal's decision), holding that the taxpayer provided a taxable service for which it received partial payment of the consideration. There was no reason why the taxpayer should not be responsible, in the normal way, for the proportionate amount of VAT on the part-consideration which it received.

Any taxpayers who have similarly incurred bad debts in relation to insurance claims may wish to consider the implications of this decision for their business.

Other UK developments

Finance Bill 2013

The Finance Bill 2013 was reintroduced for the 2013-14 session of Parliament on 9 May 2013. Neither the Committee of the whole House of Commons nor the Public Bill Committee made any amendments to the original Bill in the previous session. The government amendments to the share scheme provisions have yet to be debated. The new Bill does contain a number of specific changes to the original provisions on the annual tax on enveloped dwellings.

National Insurance Contributions (NICs) Bill

As announced in the Queen's speech on 8 May, a Bill will be brought forward to

• Introduce the £2,000 Employment Allowance as announced in the 2013 Budget

• Extend the general anti-abuse rule to NICs

• Strengthen legislation to prevent the use of offshore employment payroll companies (intermediaries) to avoid employer NICs. It was previously announced, on 16 March, that HMRC would issue a consultation document on the design and operation of the measure in May with legislation to be included in the 2014 Finance Bill.

• Remove the presumption for self-employment for limited liability partnership members (previously announced in the 2013 Budget as being for Finance Bill 2014).

Government response to Public Accounts Committee (PAC) report on tackling marketed tax avoidance

The Government has now published its response to the PAC report of 19 February 2013 Tax avoidance: tackling marketed avoidance schemes.

The Government agrees that HMRC should assess the effectiveness of the full range of measures available to reduce avoidance, including those used in other countries, and identify the measures it will introduce to reduce the tax lost to avoidance. By 1 April 2014, HMRC will set out how it plans to evaluate its overall anti-avoidance strategy and plans to complete that formal evaluation by 31 March 2015.

The Government agrees with the recommendation that it should consider how to increase transparency by naming and shaming those engaged in the business of tax avoidance and should discourage such activity. It will consult in 2013 on measures to target the hard core of high-risk promoters who persist in selling avoidance schemes that have little or no prospect of success. These proposals will include additional information powers and penalties for non-compliance, as well as possible naming of high-risk promoters. It similarly agrees with the recommendations to look at strengthening DOTAS and tackling uncooperative promoters of schemes.

HMRC guidance on Overseas Workdays Relief (OWR)

On 8 May 2013 the UK tax authorities released updated guidance on the new OWR rules that apply from 6 April 2013. This confirms (amongst other changes) that taxpayers who were resident and ordinarily resident in the UK in 2012/13 but meet the conditions for OWR will qualify for relief from 6 April 2013.

Anyone who might benefit from this rule should take steps to ensure that they meet the relevant conditions. For more detail please see our HR and Tax alert.

Form 42 reporting

Form 42 is the annual return of tax unapproved employee share transactions by reason of employment. Activity under HMRC approved share schemes also has reporting requirements on a similar form. Employers need to collate the relevant data, complete the form and submit it to HMRC on or by 6 July. Accurate and timely completion of this return is increasingly important due to the potential impact on a company's risk rating and the application of the relevant penalty regime.

Our Form 42 alert highlights a number of common pitfalls.

Consultation on changes to VAT zero-rating of exports from the UK

Following the announcement at Budget 2013, HMRC has published a consultation document, together with draft legislation, in relation to the extension of VAT zero-rating to goods supplied to businesses registered for VAT in the UK but established in another country, where those businesses arrange for the goods to be exported outside the EU (more commonly known as ‘indirect exports’). This change, which will be implemented from 1 October 2013, is necessary in order to ensure that UK VAT law complies with EU law.

In the meantime, businesses are entitled to zero-rate affected supplies. Similarly, where affected businesses have treated supplies as standard-rated in the past, they may now be able to apply the zero-rate to those transactions. HMRC has invited claims from any businesses which consider that they have overpaid VAT as a result. Any claims will be subject to the normal rules on capping and evidential requirements. The consultation seeks views on whether the draft legislation achieves the result intended under EU law and what administrative burdens it may give rise to. Comments are invited by 5 July 2013.

Other international developments

US: Senate Subcommittee on “Offshore Profit Shifting and the U.S. Tax Code”

The US Senate Permanent Subcommittee on Investigations has scheduled a hearing for 21 May on "Offshore Profit Shifting and the U.S. Tax Code”. The subcommittee will continue its examination of the structures and methods employed by multinational corporations to shift profits offshore and how such activities are affected by the US tax code.

Netherlands: Supreme Court provides new guidance on shareholder loan doctrine

In a new ruling issued on 3 May 2013, the Dutch Supreme Court has provided further guidance on its shareholder loan doctrine.

The doctrine was originally advanced by the Court in November 2011. Based on that decision, a loan will not be considered to have been provided at arm's length, if a Dutch corporate taxpayer provides a loan to a related party and accepts a credit risk which a third party – not being a shareholder of the aforementioned entity – would not have accepted, not even for a higher interest compensation. As a consequence, any losses incurred by the Dutch corporate taxpayer in relation to such a loan, will be considered non-deductible for Dutch corporate income tax purposes.

In the most recent Supreme Court case, the Court considered the situation in which the creditor not only provides a loan, but concurrently also acquires a share interest in the debtor. The Court held that loan should not be considered to have been provided other than at arm's length, if:

• The taxpayer making the loan was not yet a shareholder of the debtor at the moment directly before the loan was granted;

• The taxpayer became a shareholder in the debtor through the allocation of shares or otherwise became entitled to the profits of the debtor as part of granting the loan; and

• The (joint) owners of the majority of the share capital interest in the debtor did not provide loans to the debtor

If the above conditions are met, a Dutch corporate taxpayer holding risk bearing capital may still incur a deductible loss on the funds provided as a loan. The case shows that the Dutch doctrine on shareholder loans is evolving and care needs to be taken in this area.

More detail is available in our Global Tax Alert.

Switzerland: Federal administration clarifies its position on Principal companies

Since the publication of federal guidelines applicable to Principal companies in 2011, the practice of the Swiss tax authorities towards international structures centralizing functions and risks for regional markets has been regularly evolving. These developments in practice have remained unpublished by the authorities. To address the need for a harmonized practice and understandable requirements, a working group was established with the aim to refine and clarify the rules. Although the resulting conclusions have yet to be communicated officially by the Swiss federal tax administration, it is expected that they will apply starting in June 2013, following approval by the competent authorities.

Once approved, this ‘new’ practice should apply immediately to pending and new tax ruling requests filed with the Swiss tax authorities; rulings previously granted may also be reviewed by Swiss tax authorities.

Our Global Tax Alert summarises the clarifications and developments which may offer opportunities or require immediate actions to ensure compliance with the new rules.

Norway: Proposed further changes to tax system

On 5 May 2013, the Norwegian Government announced further changes to the Norwegian tax system. The Government will formally submit the proposals to the Parliament in the 2014 tax bill this autumn.

The overall aim is to stimulate the mainland economy and to improve the competitiveness of business onshore by among other actions, reducing the corporate tax rate from 28% to 27%. The proposal also introduces an additional depreciation allowance for certain investments and strengthens the tax credit scheme to further stimulate business R&D spending. At the same time, the Government proposes to restrict certain deductions for investments made by oil & gas companies offshore.

These proposed changes in the Norwegian tax regime should however be seen together with the proposed restrictions on related party interest expense deductions published on 11 April 2013. The newly proposed tax reductions will in many cases not offset the additional tax burden levied on group companies with intercompany loans.

The reduction in the corporate tax rate and the increased depreciation allowance will take effect from 1 January 2014 while the tax increase for the oil & gas industry will take effect immediately. For more detail please see our Global Tax Alert.