Transfer Pricing (TP) inquiries and audits are becoming more widespread and stringent in their approach. See our recommendations for managing and mitigating this risk more effectively.
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Indirect Tax Briefing: planning for the future
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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:
Building a tax manifesto for manufacturing 658K, August 2014
- Midweek Tax News
A weekly update on tax matters to 16 December 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 speak to the relevant contact listed at the end of this issue or to your usual EY contact.
OECD releases discussion drafts on base erosion and profit shifting (BEPS) transfer pricing issues
The OECD yesterday released two new discussion drafts in relation to Action 10 of the BEPS agenda. This Action notes that work needs to be undertaken to develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties.
Action 10 suggests that there is a need to adopt transfer pricing rules or special measures to clarify the application of transfer pricing methods, in particular profit-splits, in the context of global value chains. The discussion draft issued on 16 December considers a number of scenarios in which it may be more difficult to apply one-sided transfer pricing methods (which seek to determine the appropriate return for one party to a transaction without reference to the other) in order to determine outcomes that are in line with value creation. The draft questions when a transactional profit-split method (which allocates profits along a value chain in accordance with the contributions made to overall profits) may be more appropriate, as well as the ways in which the factors used to split the profits can align profits and value creation.
Action 10 also notes the need to adopt transfer pricing rules or special measures to provide protection against common types of base-eroding payments. In this regard, the OECD notes that a number of countries report difficulties in relation to the pricing of cross-border commodity transactions, particularly in terms of determining adjustments to quoted prices; verifying the pricing date; and accounting for the involvement of other parties in the supply chain. The second discussion draft issued on 16 December contains proposed guidance on the transfer pricing aspects of such cross-border commodity transactions.
Responses to both discussion drafts are required by 6 February 2015.
OECD webcast on base erosion and profit shifting (BEPS) actions
The OECD held its latest webcast on Monday to update stakeholders on the progress of its BEPS project. During the webcast, members from the OECD's Centre for Tax Policy and Administration (CTPA) covered both the 2014 and 2015 BEPS deliverables. For the 2014 deliverables, the updates highlighted the points on which further work was underway and confirmed that the scheduled deliverable dates were expected to be met.
In addition to the documents on transfer pricing released yesterday and noted above, the webcast also confirmed that the following documents are due for release this week:
• Action 4: Limiting base erosion via interest deductions and other financial payments. A discussion draft will be issued that covers two possible approaches. The first is a group-wide test which would limit a company's net interest deductions to a proportion of the group's actual net third party interest expense, based on a measure of economic activity such as earnings or asset value. The second is a fixed-ratio test which would apply a fixed benchmark ratio to an entity's earnings or asset value. The draft will also consider a combination of the two tests. Comments will be sought by 6 February 2015 with a public consultation on 17 February 2015.
• Action 14: Making dispute resolution mechanisms more effective. A discussion draft will be issued looking at tax treaty measures to improve dispute resolution mechanisms.
Responding to questions, the CTPA panellists were clear that the need to disclose rulings on preferential regimes should be interpreted broadly to include not only legislative regimes but also administrative practice. However, they were concerned that the forced disclosure of all rulings would provide too much information to be helpful for a risk assessment. It was noted that rulings should form part of the master and local transfer pricing files, providing an obligation on companies as well as governments to make rulings available.
In responding to a question on the UK's proposed diverted profits tax, Pascal Saint-Amans, director of the CTPA, described the tax as “extremely interesting”. He said that the proposals served to illustrate the level of political concern that exists about the practice of tax avoidance by multinationals. He did, however, stress that it would be the OECD's preference that concerns about multinational tax avoidance were addressed by way of agreed and coordinated multilateral action. Separately, he has commented that unilateral action, such as the diverted profits tax, highlights the importance of reaching consensus at the end of the BEPS project, so that any countries who have taken unilateral action can realign their rules to the agreed position.
New regulations issued on tax-free medical treatment for employees
Following a period of consultation, Finance Act 2014 introduced measures to remove any liability to income tax where an employee is provided with recommended medical treatment and where the costs are paid or reimbursed by the employer. The exemption is subject to an annual cap of £500 per tax year. Medical treatment is ‘recommended’ if it is provided to the employee in respect of occupational health services; is made for the purpose of assisting the employee to return to work after injury or ill health; and meets other requirements specified in regulations.
Regulations have now been published, which confirm that the exemption comes into effect from 1 January 2015. In addition, the regulations outline requirements as to the qualifying period of absence; the definition of ‘health care professional’; and the form in which any medical recommendation should be made. Separate regulations have been published which provide an exemption from national insurance for recommended medical treatment.
Employers offering to settle medical fees for employees should ensure that all the conditions for tax exemption have been met.
Draft clauses for 2015 Finance Bills
On 10 December, the Government published draft clauses to be included in the 2015 Finance Bills. The consultation on these draft clauses runs until 4 February 2015. The Government has also published its summary of responses to a number of earlier consultations. Our Finance Bill alert provides an overview of the key issues contained in these documents. We have also produced a tax alert looking at the proposed legislation for the new diverted profits tax in more detail along with a tax alert on the proposed changes to the loan relationship and derivative contract rules.
Given the general election scheduled for 7 May 2015, Parliament is due to be dissolved on 30 March 2015. We expect that, following a Budget in mid-March, there will be a truncated Finance Act passed before the dissolution with another one to follow the election (which should include the provisions on direct collection of debts to HMRC from bank accounts).
As part of its inquiries into the Autumn Statement, the Treasury Select Committee will take evidence on 17 December from the Chancellor of the Exchequer and officials from HM Treasury. Based on past experience, it is possible that, in the course of this evidence, the date for the 2015 Budget will be announced.
Other UK developments
Corporate governance policy and voting guidelines
On 8 December, the National Association of Pension Funds published a revised version of its corporate governance policy and voting guidelines. The guidelines highlight the need for reputational and emerging risks to be appropriately considered. They extend the examples of the key strategic and operating risks facing a business to explicitly include governance and reputational risks. The board of directors' view on these should be set out in the accounts. Interestingly, a company's approach to tax management is given as an example of a reputational risk. The guidelines state that artificial or aggressive tax strategies create risk for companies and require consideration at board level.
New regulations provide for salaried members of limited liability partnerships (LLPs) to be treated as employees for national insurance purposes
Social security regulations have been published that ensure members of an LLP who are treated as employees for income tax purposes are also treated as employed earners for national insurance purposes.
The regulations apply to scenarios where an individual is treated as being employed by an LLP under a contract of service or by virtue of anti-avoidance provisions. Where any amounts are treated as earnings of a salaried member, the LLP is treated as the employer for national insurance purposes and hence liable for employers' national insurance contributions.
These regulations have retrospective effect from the start of the 2014/15 tax year.
Responses to consultation on changes to VAT accounting for prompt payment discounts
On 10 December, the Government published a summary of the feedback and its response to the consultation on changes to VAT accounting for prompt payment discounts. As previously announced, from 1 April 2015, businesses will be required to account for VAT on the full consideration received when prompt payment discounts are offered. For business-to-consumer supplies of telecoms and broadcasting services, these rules came into force on 1 May 2014.
Following the consultation, HMRC now agrees that businesses should not be required to reissue invoices or issue credit notes when there is a reduction in consideration because a prompt payment discount is taken up. Instead, a single invoice setting out the terms of the discount together with other documentary evidence to prove the price paid and the date of payment will be acceptable. HMRC will issue further guidance on this shortly.
HMRC issues guidance on exemption from employers' national insurance for young people
HMRC has issued guidance for employers with employees between the ages of 16 and 21 on the abolition of national insurance contributions for this age group that applies from 6 April 2015.
Government response to stamp duty land tax (SDLT) consultation on property investment funds
The Government has responded to the comments it received in its consultation on the introduction of a seeding relief for property authorised investment funds and co-ownership authorised contractual schemes (CoASCs). The consultation also included changes to the SDLT treatment of CoACSs investing in property so that SDLT does not arise on transactions in the units of a CoASC.
Following the consultation, the Government intends to change the SDLT rules, subject to the resolution of potential avoidance issues. The Government will work further with stakeholders on the exact design in order to ensure that these changes are not used for tax avoidance. Any new rules should be included in Finance Bill 2016.
Upper Tribunal judgment due on application of stamp duty land tax (SDLT) avoidance rule
The case of Project Blue Limited concerns the liability to SDLT arising on the sale of the Chelsea Barracks by the Ministry of Defence to a property developer. The First-tier Tribunal decision provided insight into the extent to which specific SDLT reliefs may be over-ridden by the anti-avoidance rule in section 75A FA 2003. The Upper Tribunal judgment is expected to be handed down shortly. For comments on the implications of the case, please see Midweek Tax News to 13 August 2013.
HMRC tax treaty negotiating priorities for the year to 31 March 2014
HMRC has published a report on the priorities of the UK in its tax treaty negotiations in the year ended 31 March 2014. According to the report, the UK planned to begin negotiations with Bulgaria, Sweden, Tajikistan and Tanzania. A treaty with Tajikistan is currently signed but not yet in force. Work on double tax treaties and protocols with several other countries was also to be taken forward. In addition, tax information exchange agreements were planned with Andorra, Macau and Monaco. The report also requests representations on the future programme of negotiations.
European Court rules on denial of the right to deduct VAT due under the reverse charge procedure
On 11 December, the Court of Justice of the European Union (CJEU) delivered its judgment in the case of Idexx Laboratories Italia Srl. This case concerns whether the taxpayer, who failed to comply with certain formal requirements relating to the purchase of goods from other EU Member States (such as recording the invoices in the appropriate registers), could be held liable for VAT due under the reverse charge procedure (otherwise known as acquisition tax), while at the same time being denied a corresponding input tax deduction. The CJEU held that EU law requires deduction of input tax to be allowed if the substantive requirements are satisfied (ie, the goods are acquired by a taxable person who is liable for the VAT due and who uses the goods for taxable purposes), even if the taxable person has failed to comply with some of the formal requirements (eg, relating to accounts, invoicing and filing returns).
This judgment presents a potential retrospective claim opportunity where EU national tax authorities have assessed taxpayers for reverse charge VAT/acquisition tax due in respect of intra-EU supplies, but denied them a corresponding input tax deduction by virtue of their failure to comply with certain formalities required by national law.
The European Commission publishes its work programme for 2015
On 16 December, the Commission announced its plans for 2015. In the field of taxation, it says it will step up efforts to combat tax evasion and fraud. Starting from the work done on base erosion and profit shifting by the OECD and G20, the Commission intends to propose EU action to help ensure that the country where profits are generated is also the country of taxation, including those for the digital economy. The Commission feels this also requires agreement on a common consolidated corporate tax base. In this context, the Commission intends to swiftly table a proposal on the automatic exchange of information between tax authorities on cross-border tax rulings.
The Commission also intends to encourage the adoption of a financial transaction tax and reinforced rules on money laundering. Work also continues to prevent the avoidance of VAT.
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.
United States: The US Senate is considering a bill passed by the House under which most of the temporary tax provisions that expired in 2013 are to be extended to the end of 2014.
Canada: The special relief for tax deferred on stock options will no longer be available after 31 December 2014.
India: The Government plans to introduce a Constitution Amendment Bill for a goods and services tax. The revenue neutral rate for a goods and services tax is proposed to be 26.7%.
Vietnam: The National Assembly has passed a new law allowing unlimited tax deductions for advertising expenses for businesses and providing incentives for certain manufacturing.
Peru: Congress has approved several changes to corporate income tax including a phased reduction in the rate from 30% to 26% and an increase in the dividends tax from 4.1% to 9.3% in 2019.
Venezuela: Several amended and new laws have been published including reform of the contribution for science, technology and innovation and the taxation of alcohol and tobacco.
Please speak to your usual EY contact, or email us at email@example.com, if you would like to receive a copy of our regular indirect tax newsletter, or 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.
OECD releases discussion drafts on base erosion and profit shifting transfer pricing issues
+ 44 20 7951 4584
OECD webcast on base erosion and profit shifting actions
+ 44 20 7951 0568
New regulations issued on tax-free medical treatment for employees
+ 44 20 7951 9586
Draft clauses for 2015 Finance Bills
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- 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.
Connect with us
Stay connected with us through social media, email alerts or webcasts. Or download our EY Insights app for mobile devices.
Economics for business
Tax Insights examines the journey ahead
Watch our Finance Act webcasts for insight and interpretation around the impact of this year's UK Finance Act from some of our leading tax professionals.
Tax alerts: knowledge when you need it
Building a tax manifesto for manufacturing
The global re-shoring trend is creating new opportunities for the UK, but our report shows it has limited time to set itself up for future high quality manufacturing (658K, August 2014).