EY can help you understand the implications of the EU referendum decision on your tax position.
We’ll help you navigate the global tax landscape
The business and tax landscapes have changed dramatically, and the pace and complexity of change continues to increase. Governments are tempering the need for revenue with increased competition for labor and capital. Tax authorities are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. Companies are balancing competing priorities, ensuring they maintain compliance while adding value.
We can assist you with these critical issues in today's tax environment, including:
Improving large business tax compliance:
Building the balance: Cooperative compliance in practice
The administration of our tax regime is a key factor in the attractiveness of the UK as a place to live and do business. Our report outlines the proposed agreement and offers a view on the most effective way to take it forward. Read more 2.1Mb, March 2016
Engaging with HMRC
255K, July 2015
New measures applicable from April or July 2016
494K, December 2015
Corporate Governance Code meets Tax Code of Practice
203K, July 2015
- Midweek Tax News
A weekly update on tax matters to 19 July 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.
New Government prepares the scene for Brexit
As has been widely reported, the Prime Minister, Theresa May, has been appointing the members of her Government, including Philip Hammond as Chancellor of the Exchequer. David Gauke has been promoted to Chief Secretary to the Treasury and his old job of Financial Secretary to the Treasury, with responsibility for HMRC, has been taken by Jane Ellison. To date, we have not heard any indication that taxation policy will change, notwithstanding the suggestion by the former Chancellor, George Osborne, that, following Brexit, he would cut the rate of corporation tax.
The new Chancellor, Mr Hammond, has stated that he will not be presenting an emergency budget, contrary to the comments by Mr Osborne during the referendum campaign. Instead, he will unveil his plans at the Autumn Statement which, in recent years has taken place in late November or early December (with draft Finance Bill clauses published a week or two later). No date for this year's Autumn Statement has been announced, although the Government is required in normal circumstances to give the Office of Budget Responsibility ten weeks' notice so it can provide financial forecasts. This suggests that it cannot take place before Parliament returns from the party conferences recess on 10 October.
Meanwhile, at a court hearing yesterday, 19 July 2016, the Government was challenged on whether it needed to involve Parliament in the decision to activate Article 50 to formally start the process of leaving the EU. Our law alert considers Article 50 and a number of the important legal questions raised by Brexit, including:
• The legal framework under which the UK will withdraw from the EU
• The legal framework which will govern the UK's relationship with the EU after exit
• The task of identifying the impact on UK law once EU law ceases to apply
Upper Tribunal upholds HMRC appeal that loss streaming applies when two trades are combined
In the case of Leekes, the Upper Tribunal has allowed HMRC's appeal against a decision by the First-tier Tribunal. The taxpayer, which runs department stores, purchased a lossmaking company with a similar trade and then hived that trade up to combine it with its own operations.
The trade from the purchased company had given rise to trading losses brought forward and the Tribunal was asked to consider whether these losses could be used against profits from the taxpayer's existing trade, or whether the losses were to be streamed so that they could only be used against profits generated from the trade that was hived up.
The First-tier Tribunal had decided the case hinged on the interpretation of the statute that provided for losses of a trade to be preserved when it was transferred to another company under common ownership. It found the legislation did not specifically require streaming, and that streaming presented practical difficulties and was at variance with commercial reality. The Upper Tribunal disagreed. Allowing HMRC's appeal, the Upper Tribunal found that there was “no real room for doubt” that the legislation did require streaming. It said that the purpose of the legislation was to allow the losses from the lossmaking trade to continue to be used against future profits from that trade. It was not the intention that the losses could be used against profits of a different trade.
The Upper Tribunal also rejected the arguments on commerciality and stated that it is not permissible to disregard the words of statute because of a perceived practical difficulty.
This decision, unless reversed on appeal, restores the position on loss streaming to the long-established practice of HMRC.
New VAT use and enjoyment provisions introduced for insurance repair services
New use and enjoyment legislation has been laid before the House of Commons in relation to the VAT treatment of repair services supplied to insurers located outside the EU. Currently, most repair services are taxed according to the location of the contracting insurer and not the insured. This means that where an insurer is based outside the EU, it does not incur (irrecoverable) VAT on its repair services, unlike domestic insurers. This provides non-EU insurers with a competitive advantage. With effect from 1 October 2016, this will no longer be the case as such services will be subject to UK VAT where their ‘effective use’ is deemed to be in the UK. Typically, this means that services will be taxed in the UK where the insured party is UK-based. The new provisions will not affect repair services which are provided directly to the insured party; only repair services supplied directly to the insurer.
This measure was first announced at Summer Budget 2015 and was followed by an HMRC consultation on a draft version of the legislation during January and February 2016. At Summer Budget 2015, the Government also announced that it would consider a wider review of off-shore based avoidance in VAT-exempt sectors, with a view to introducing additional VAT use and enjoyment measures for services such as advertising in 2017.
Any offshore insurers with UK insured parties may wish to consider the commercial, tax and pricing implications of the change.
Other UK developments
Finance Bill 2016 Royal Assent officially confirmed to be after summer recess
It has been announced that the report stage of Finance Bill 2016, where the amendments agreed in committee are considered by the whole House of Commons and additional amendments can be made, will take place on 5 September 2016. The third reading of the Bill will follow the report stage and, since it is the last occasion it can be amended, is also the date on which the Bill is substantively enacted for UK GAAP and IFRS purposes. It is not yet known whether the Government will look to push for Royal Assent before the party conference season starts on 15 September or whether Royal Asset will be left for the week when Parliament returns on 10 October (Royal Assent needs to take place by 16 October).
A new version of Finance Bill 2016, which includes all the new clauses and amendments agreed at the committee stage, has been released.
EY web seminar on the tax implications of Brexit for the banking sector
At 4:00 pm on Monday, 25 July 2016 we will be holding a web seminar on the tax implications of Brexit for the banking and capital markets industry. We will be discussing:
• the possible implementation and time line for Brexit
• the implications of potential workforce transfers
• the impact on withholding tax, VAT and bank levy
• the effect on financial statements and
• the consequences for the market in foreign exchange, debt and equities
the consequences for the market in foreign exchange, debt and equities
EU anti-tax avoidance directive to enter into force from 8 August 2016
The EU anti-tax avoidance directive has been published in the Official Journal of the European Union and will enter into force 20 days afterwards, being 8 August 2016. The directive was adopted at last week's meeting of ECOFIN.
The directive must be incorporated into domestic law by Member States by 31 December 2018 and apply from 1 January 2019, with a derogation for the following:
• The rule on exit taxation (which taxes assets transferred across borders) must be adopted by 31 December 2019 and apply from 1 January 2020
• The implementation of the interest deductibility restrictions can be delayed until the publication of any OECD minimum standards under BEPS Action 4, but only for Member States with national targeted rules in force on 8 August 2016 equal in effectiveness to the restrictions in the directive, and no later than 1 January 2024
• Estonia also has a derogation from aspects of the exit taxation rule
As the directive is binding on the UK until it leaves the EU, the UK Government will need to consider whether the existing legislation in areas covered by the directive is compatible with it.
European Court decides VAT on branch support costs is recoverable
The Court of Justice of the European Union has issued a decision by way of an order in the Polish case of ESET spol. s r.o.. The case focuses on a business's ability to recover VAT on global and branch support costs. The taxpayer, an entity established in Slovakia, received services from its Polish branch. The branch provided software services which were incorporated into products that were marketed and sold by the Slovakian head office. The branch also made a number of ‘occasional’ supplies in Poland which carried a right to recover VAT on related costs. The branch sought to recover local VAT it incurred in providing its branch-to-branch supplies, recovering VAT in full on the basis that the head office made only taxable supplies. The Polish tax authorities rejected the branch's claim on the basis that its intra-entity flows were disregarded for VAT purposes.
The Court held that a taxable person located in Member State A (e.g. Poland) which makes supplies in another Member State (e.g. Slovakia) should be entitled to recover VAT on related costs in Member State A. This right exists even though those costs only contribute to supplies made in a different Member State. The Court also confirmed that this right exists where those supplies, if carried out locally, would have given rise to VAT recovery.
Given the lack of standard EU practice around branch and global support cost recovery, large financial institutions which operate via complex branch networks may wish to review the impact of the decision. UK businesses in the process of agreeing a new partial exemption special method may also wish to consider whether this case affects ongoing negotiations.
Our tax alert provides further details.
South Africa introduces tax on sugar sweetened beverages
In his February 2016 Budget Speech, the South African Minister of Finance announced a decision to introduce a tax on sugar sweetened beverages with effect from 1 April 2017. On 8 July 2016, the National Treasury of South Africa published a policy paper and proposals on the taxation of sugar sweetened beverages for public comment. Comments are required to be submitted by 22 August 2016.
The introduction of the tax is an attempt to reduce the number of people in South Africa who are obese or overweight by 2020. Earlier this year, the UK also announced the introduction of a new soft drinks industry levy, which is planned for 2018. It will be interesting to see which other countries introduce a similar levy in the coming years.
Our global tax alert summarises the rationale behind the tax, its scope, the proposed method of taxation and administration of the tax.
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.
South Africa: The National Treasury has published draft amendments to the anti-hybrid rules that are likely to affect a wide range of transactions.
Netherlands: The Dutch Supreme Court has requested a ruling from the European Court on granting benefits under the fiscal unity regime in cross border situations, potentially changing the current position.
Portugal: The European Court has found that the denial by Portugal of a deduction for expenses for non-resident financial institutions when calculating their withholding tax liability is unlawful.
Hungary: The new intellectual property (IP) regime, allowing a 50% deduction from qualifying income, applies from 30 June 2016, subject to grandfathering of existing IP until 30 June 2021.
An issue of our publication, The latest on BEPS – 2016 mid-year review, covering the first six months of 2016, is now out. It provides a review of OECD and country specific activities relating to BEPS, with special emphasis on EU developments.
Please speak to your usual EY contact, or email us at firstname.lastname@example.org, 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.
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.
New Government prepares the scene for Brexit
+ 44 20 7951 2486
Upper Tribunal upholds HMRC appeal that loss streaming applies when two trades are combined
+ 44 20 7951 0568
New VAT use and enjoyment provisions introduced for insurance repair services
+ 44 20 7980 9644
For other queries or comments please email email@example.com.
- Operating in a shifting tax landscape
The global tax landscape continues to change in a dramatic fashion, with near-constant news hitting the headlines regarding shifting tax policy, increasing levels of enforcement and the growing potential of reputational risk.
Multinational companies now have to balance more competing priorities than ever before, ensuring they protect their business by monitoring and responding to changes in policy, legislation and tax enforcement, while at the same time ensuring they not only maintain the highest levels of compliance but also add value from the tax function.
Governments work to secure each tax dollar they're due
From a policy perspective, all governments want their country to be viewed as an attractive place to do business, to attract jobs and capital in an increasingly competitive globalized arena.
At the same time, they want to increase the amount of revenue they bring in. Governments are treading a fine line, constantly assessing how to secure the tax revenues they see as rightly theirs, while at the same time being in direct competition with other nations, making sure they do not scare off mobile capital.
Tax administrations for their part are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. They are working to ensure that their resources are being applied to the right issues and taxpayers. They share more leading practices and taxpayer information with their foreign counterparts, to help them collect every dollar due.
Disputes are on the rise
The result has been more frequent, complex and higher value disputes between taxpayers and taxing authorities — a trend that is only increasing as countries collaborate together and as emerging markets gain in stature and influence, taking a more sophisticated approach to taxation. Penalties are becoming more stringent and the threat of reputational risk has risen significantly in recent months.
We can help you to navigate a route through this complex landscape.
We can help you monitor and react to quickly-changing tax policy and assess the economic and fiscal impact.
Where tax policies might create an impediment to your business that is unintended by policy makers, we can help you to collaborate – either solely, or as part of a broader grouping of companies who share a common objective – with government to:
- Explain the impediment
- Develop alternative policy choices which are logical and well thought out
- Model the potential outcomes
- Deliver an alternative choice to the government in a form with which policy makers can comfortably work
We also help you address your global tax controversy, enforcement and disclosure needs.
We focus on pre-filing controversy management to help you properly and consistently file your returns and prepare the relevant back-up documentation.
Where a controversy has already occurred, our professionals leverage the network's collective knowledge of how tax authorities operate, and increasingly work together, to help resolve difficult or sensitive tax disputes. To ensure that continuous performance improvements are instigated after a controversy, we work with EY's other tax professionals to ensure that similar events are less likely to occur.
Below you can access our views and analysis of some of the substantial policy and enforcement trends and issues at play today.
- Seizing the opportunity in Global Compliance and Reporting
Global Compliance and Reporting (GCR) is at a tipping point, with risks on the rise. Many companies distribute responsibility for GCR processes throughout their organization, creating a patchwork. Local jurisdictions are rewriting regulations, focusing more intently on the collection of tax revenues and sharing more taxpayer information across borders.
Due to the combination of evolving business models, transforming finance functions and an increasingly complex regulatory landscape, there are new opportunities to better optimize efficiency, control and value, to help mitigate risk and improve performance.
What is Global Compliance and Reporting?
GCR comprises the key elements of a company's finance and tax processes that prepare statutory financial and tax filings as required in countries around the world. These duties include:
- Statutory accounting and reporting
- Tax accounting and provisions
- Income tax compliance
- Indirect tax compliance
- Governance and control of the above processes
GCR activities reside in the middle of a broader set of record-to-report (R2R) processes. R2R is the intersection between any company's finance and tax departments and is used to capture, process and store information that is essential to statutory accounting, tax compliance and reporting. Any change to R2R processes, information, finance systems, roles and responsibilities will have a direct impact on GCR processes.
Helping you meet the new GCR demands
Fast changing compliance and reporting requirements are more demanding on tax and finance functions today than ever before. So how do you improve control and quality, manage risk, create efficiency and drive value?
Our market-leading approach combines standard and efficient processes, highly effective tools and an extensive network of local tax and accounting subject matter professionals.
- Building effective supply chains
As multinational companies seek to reach new markets and compete more effectively in mature markets, they are adapting and differentiating their supply chains. Companies’ operating models need to cater for efficiency and scale in mature markets, while having the flexibility and local ability to support growth in emerging markets. Consequently, driving true shareholder value requires an operating model that combines global and regionally differentiated processes, and integrates these with local striking power and operational excellence.
Leading companies recognize the need for integrating tax in their business planning and decision processes
Whether companies seek to enter new markets or drive efficiencies in mature markets, leading companies understand the complexities of the international tax systems. The impact of both direct taxes and indirect taxes needs to be carefully considered and integrated to drive the effectiveness of the operating model while complying with all applicable local and international tax laws and effectively manage all tax risks. Operating model effectiveness is becoming one of the cornerstones of successful competition and differentiation.
The EY TESCM offering helps ensure you do just that. Our advisory and tax professionals operate as one team to assist our clients with developing and implementing operating model optimization where business needs and requirements are the driver while making sure that tax is an integrated part of the design of the operating model architecture.
- Managing mobile workforce risk
In today's globally integrated, tightly regulated and increasingly competitive business environment, one critical success factor stands out: people. It’s no wonder that leading companies are focusing their efforts on:
- Attracting and retaining the right people
- Global talent deployment and mobility
- HR and payroll effectiveness
- Risk, governance and compliance
Managing the risks of mobile employees
While optimizing the competitive advantage of your people has long been a core objective, a more recent set of trends in the tax landscape means that large companies with an internationally mobile workforce are at a higher risk of tax noncompliance and resulting controversy than ever before.
Fortunately, an increasing number of organizations are currently either planning or embracing a wider process of change for their mobility teams.
Unintended tax compliance obligations
These travelers are increasingly creating unintended tax compliance obligations, and the resulting risks are not just personal. They are felt at the corporate level, with the corporate tax function often unaware of the extent of the spreading problem. Tax administrations are becoming increasingly aware of the issue, however, and are very effectively using new technology to identify where a tax obligation has arisen. In a rising tax enforcement landscape, this issue has significant potential to grow.
Managing these risks should be a burning platform issue for multinational companies.
Will your tax risks prompt a tax audit?
What may start as a relatively simple personal income tax compliance issue can quickly create a ripple effect, with risks such as the creation of a permanent establishment, an employment tax audit or the payment of a significant related penalty all occurring at the corporate level.
Companies, recognizing the spectrum of reputational, personal and financial risks related to tax, are making strong efforts to be compliant. There is an increasing acceptance that such issues are becoming increasingly urgent from both a reputational and a financial perspective.
How we are helping companies
Our Human Capital network embeds processes and technology that will help companies to identify and manage short-term business traveler-related risks before they occur. Where controversy has already arisen, our global Tax Controversy network can use our insights into the culture and processes and relationships with each key tax administration to remediate issues. With prior year issues being rapidly unearthed, and with tax administrations focusing on this issue more than ever before, the time to act is now.
Find your nearest Tax contact:
Find out about our Law services.
Tax guides and resources
Connect with us
Stay connected with us through social media, email alerts or webcasts. Or download our EY Insights app for mobile devices.
What Brexit means for businesses
We explore the implications of the UK’s decision to leave the European Union.
Striking a balance
Our new report asks how far HMRC should dictate how businesses should operate, and whether tax administrators should use compliance rather than legislative change to achieve their objectives. It’s about striking the right balance between enabling and mandating 1.5Mb.