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 23 August 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.
OECD discussion draft on branch mismatches released
On 22 August 2016, the OECD published a discussion draft dealing with branch mismatch structures under Action 2 (Neutralising the Effects of Hybrid Mismatch arrangements) of the BEPS Action Plan.
The discussion draft follows on from the OECD's Action 2 report published in October 2015 which set out recommendations for domestic rules aimed at neutralising tax mismatches arising under hybrid mismatch arrangements.
The discussion draft applies the analysis and recommendations set out in the Action 2 Report to mismatches that can arise through the use of branch structures. The discussion draft identifies five basic types of branch mismatch arrangements:
• Disregarded branch structures where the branch does not give rise to a permanent establishment (PE) or other taxable presence in the branch jurisdiction
• Diverted branch payments where the branch jurisdiction recognises the existence of the branch but the payment made to the branch is treated by the branch jurisdiction as attributable to the head office, while the head office jurisdiction exempts the payment from taxation on the grounds that the payment was made to the branch
• Deemed branch payments where the branch is treated as making a notional payment to the head office that results in a mismatch in tax outcomes under the laws of the head office and branch jurisdictions
• Double deduction branch payments where the same item of expenditure gives rise to a deduction under the laws of both the head office and branch jurisdictions
• Imported branch mismatches where the payee offsets the income from a deductible payment against a deduction arising under a branch mismatch arrangement.
The discussion draft then goes on to set out preliminary recommendations for domestic rules, based on those in the Action 2 Report, which would neutralise the tax outcome of the mismatch arrangements.
As a reminder, the Government has already published a series of amendments to the hybrid rules in Schedule 10 to Finance Bill 2016 to be included at the report stage of the Finance Bill on 5 September 2016. It will be interesting to see if the Government believes that any further amendments are needed in light of the OECD's views.
Comments should be submitted by 19 September 2016 and will be considered at a meeting to be held in October this year.
Further consultation launched on the taxation of non-UK domiciled individuals
The Government has published its further consultation on the changes to the taxation of non-doms, along with some draft legislation. The initial headlines are as follows:
• The main proposals to introduce a new deemed domiciled concept are to be introduced unchanged. Individuals with a non-UK domicile of origin will be deemed domiciled in the UK for all taxes once they have been resident here for 15 out of the previous 20 years. Individuals born in the UK with a UK domicile of origin who have acquired a non-UK domicile of choice will be deemed domiciled in the UK whenever resident here.
• However, the original proposal to tax deemed domiciled individuals on the value of benefits paid out of trusts, regardless of the levels of income/capital gains in those trusts has been significantly amended. The new proposals introduce the concept of ‘protected settlements’ and provide differing levels of protections for income and capital gains. In both cases, trusts will only be ‘protected settlements’ where they were established before an individual became deemed domiciled under the new rules and no funds have been added to the settlement once the individual has become deemed domiciled. For capital gains, protection will be lost once benefits are taken out.
• Non-UK property will cease to be ‘excluded property’ to the extent its value reflects an interest in UK residential property and will thus be subject to UK inheritance tax (IHT). Property will be treated as a dwelling where it has been used as a dwelling in the two years before the transfer. Debt can reduce the value of the property only where it directly relates to the property. Debt with related parties will be disregarded. There will be no transitional provisions to allow those with UK properties in offshore structures to unwind those structures.
• Rebasing will apply, with some exceptions, to individually held assets for those becoming deemed domiciled on 6 April 2017. The protection will apply on an asset by asset basis and any deemed gain will not be subject to UK tax even if remitted to the UK. This will not apply to those born in the UK with a UK domicile of origin.
• Those who became non-UK resident before the date of the Summer Budget and sold non-UK assets will still be able to benefit from the remittance basis in respect of those assets on their return – even where they have become deemed domiciled.
• There will be transitional provisions for one year beginning in April 2017 to allow individuals to separate mixed accounts into their constituent parts, thus allowing them to potentially remit clean capital ahead of foreign income and gains. This will not apply to those born in the UK with a UK domicile of origin.
• For those leaving the UK, the ‘tail’ during which they remain deemed domiciled in the UK for IHT will be reduced to four years from the proposed six.
There is a lot of detail in the consultations and associated legislation. We will be publishing more thoughts shortly but, in the meantime, if you have any queries as to how these proposals relate to your individual circumstances, please speak to your usual EY contact.
Representations on corporation tax developments submitted to HMRC
Last week saw the close of the consultation period on three key consultations on areas which form part of the Government's Business Road Map. An overview of our responses to these consultations is set out below:
• Corporation tax loss relief. While we welcome the proposed widening of scope for the utilisation of brought forward losses, we have a number of concerns in relation to the impact of the proposed 50% restriction, not least as it seems to restrict the use of losses by more than 50% of profits in many circumstances. We have suggested a number of changes to the detailed operation of the rules and argued for a carve-out for capital allowances to mitigate the adverse impact of the 50% restriction on capital intensive businesses. We have also questioned whether, in the light of the challenges groups will be facing following the EU referendum and the need to focus on the growth agenda and continue to demonstrate that the UK is ‘open for business’, the proposed 50% restriction should be taken forward at this stage.
• Substantial shareholdings exemption (SSE). We have expressed our support for a widening in the scope of the SSE which we believe will assist the Government in its efforts to make the UK an attractive and competitive place to do business. Specifically, we have proposed a comprehensive exemption together with a lowering of the substantial shareholding requirement to 5%. Should a comprehensive exemption not be possible then we would support a removal of the trading requirement at investor level, coupled with either an expansion of the investee test to include all businesses, or at a minimum a specific extension to include real estate investment. We have also commented on a number of detailed design modifications to improve the current SSE regime and remove some inconsistencies and inequities.
• Transfer pricing secondary adjustments. In our view, a secondary adjustment rule should not be taken forward at all, but particularly not at the current time. We have pointed out that such a rule inevitably increases the complexity of tax legislation and the risk of double taxation and we do not consider that a secondary adjustment is the best way of achieving the stated objectives. If contrary to our view, the decision is taken to proceed with the proposal at this time, we have put forward our concerns with the method chosen for implementing the secondary adjustment and the implementation issues associated with a rule based around a constructive loan (rather than, as we have recommend a deemed dividend or capital contribution).
Your usual EY contact would be happy to discuss any of the above points, how the consultations fit within the Government's overall tax policy and, in particular, how the proposals might impact your specific circumstances.
Other UK developments
Making Tax Digital – what it means for banks, building societies and pension providers
As we covered in last week's Midweek Tax News, on 15 August 2016, HMRC published six consultation documents on specific elements of the Making Tax Digital (MTD) Roadmap published in 2015.
One of those consultations “Making Tax Digital: Transforming the tax system through better use of information” will be of particular interest for banks, building societies and pension providers in their capacity as third party information providers to HMRC in respect of their employees and customers.
The consultation presents an opportunity for businesses to provide input as to what and how customer information should be provided to HMRC and the role businesses may be expected to play in the customer query resolution process. Businesses will also need to give consideration to both the operational and administrative challenges for their organisation, the potential risks to customer relationships and how these may be mitigated.
Our tax services alert looks at the proposals in more detail. We will also be hosting a breakfast briefing on 8 September at 1 More London Place. Please speak to your usual EY contact for further information.
In addition, our global tax alert considers how some of the points raised in the 15 August consultations will feed into, and be reflected in, the proposals for larger and multinational businesses, which are still to be published.
HMRC proposes measures to strengthen tax avoidance sanctions and deterrents
On 17 August, HMRC issued a consultation document putting forward proposals for sanctions for those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC. The consultation also considers changes to the way the existing penalty regime works for those whose tax returns are found to be inaccurate as a result of using such arrangements.
The document contains proposals for penalties for the enablers of tax avoidance, defining when ‘reasonable care’ mitigates tax penalties, and defining a relevant defeat. There are also suggestions of ways in which more ‘real-time’ interventions, targeted at particular decision points, could sharpen perceptions of the consequences of offering/entering into tax avoidance arrangements.
Consultation launched on the introduction of the soft drinks industry evy
HMRC and HM Treasury have issued a consultation document on the new soft drinks industry levy, which is due to be introduced from April 2018. The levy was originally announced by the Government at Budget 2016 and is targeted at producers and importers of soft drinks that contain added sugar. The aim of the levy is to encourage companies to reformulate their product mix to reduce added sugar in their products with an ultimate aim of reducing childhood obesity. The consultation sets out proposals concerning how the levy will be designed and implemented.
Affected parties may wish to provide comments on the consultation by the closing date of 13 October 2016. Legislation providing for the introduction of the new soft drinks industry levy will be included in Finance Bill 2017.
OECD BEPS Action 4 discussion draft – update for banks and insurers
On 28 July 2016, the OECD released its public discussion draft on the tax deductibility of interest for banks and insurers. The draft focuses on the extent of risks posed by banking and insurance groups in relation to Action 4, and potential approaches to address any such risks.
The draft makes an important distinction between banks and insurance companies themselves, and other entities in a broader banking or insurance group such as holding companies or special purpose vehicles (SPVs). The draft notes the expectation that, for the majority of countries, a material BEPS risk from excessive leverage in banks and/or insurance companies is unlikely to be an issue. Accordingly the draft sees no need to develop a single common approach at this time.
Nevertheless, there is a suggestion that net interest expense in other entities in a broader banking or insurance group could pose BEPS risks. A particular concern for banking and insurance groups is the suggestion that regulated banking and insurance entities could be excluded from the fixed ratio rule, whilst still applying the rules to non-regulated entities in the group. Insurance and banking groups may now wish to model the impact of this proposal on their own tax position in order to identify the implications and restructuring which may be required. They may also wish to consider responding to the OECD consultation and entering into discussions at this stage with national governments.
Our update considers the draft in more detail and looks at our own worked examples,
HMRC publishes updated statutory residence test guidance
On 22 August 2016, HMRC published updated guidance in relation to the statutory residence test. This version replaces that published in May 2016 and incorporates a number of changes to the examples in the guidance including the provision of further examples on transit days and clarification on dates that can be ignored due to exceptional circumstances.
Public sector mandatory gender pay gap reporting to be introduced
The Government Equalities Office has published a consultation with proposals for extending mandatory gender pay gap reporting to public sector employers. These new requirements will be based on the same approach that will apply to private and voluntary sector organisations. The Government is not proposing to consult on each individual measure again but would be interested to hear about any particular issues which may be relevant for public bodies.
Public bodies covered by the regulations will be expected to capture their first set of data in April 2017 and publis
US IRS and Treasury's 2016-2017 Priority Guidance Plan published
The 2016-2017 Priority Guidance Plan provides an overview of the issues that the IRS and Treasury intend to address in the 12-month period ending in June 2017. As in prior years, the IRS and Treasury state that they will update and reissue the Plan periodically to reflect additional guidance that they intend to publish, to allow for consideration of comments received from taxpayers and practitioners on additional projects, and to respond to developments arising during the Plan year.
The Plan contains several items of interest to the financial services sector and to other domestic and multinational taxpayers that enter into financial instruments or engage in other Treasury activities. For more details, please see our global tax alert.
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.
Spain: Tax authorities characterize Brazilian Juros as ‘interest’ for tax treaty purposes, notwithstanding the categorisation as dividends under Spanish domestic tax law.
Norway: New rules on mutual fund taxation introduced with effect as of 1 January 2016.
Saudi Arabia: Expansion of capital market for qualified foreign institutional investors announced.
Pakistan: Presidential order shortens to three years the proposed holding period for which capital gains tax on the disposition of real property is assessed.
Turkey: Transfer pricing provisions amended in light of BEPS developments.
Taiwan: Ministry of Finance announces plan to require foreign e-commerce operators who provide services to Taiwanese individual buyers, to register with Taiwan's tax authority and pay business taxes in Taiwan.
New Zealand: Legislation introduced to enable automatic exchange of financial account information for financial institutions with the first exchange to take place by 30 September 2018.
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.
OECD discussion draft on branch mismatches released
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Further consultation launched on the taxation of non-UK domiciled individuals
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Representations on corporation tax developments submitted to HMRC
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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.
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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.