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Managing operational tax risk: survey highlights
Building a tax manifesto for manufacturing
2014 tax risk and controversy survey highlights
Managing indirect tax in the digital age
OECD provides update on the BEPS Action Plan
Tax Policy and Controversy Briefing goes online
Indirect Tax Briefing: eighth edition
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 21 October 2014
Midweek Tax News provides you with a succinct overview of the key tax developments that have occurred each week, to allow you to stay up-to-date on tax issues that may have an impact on your business. If you would like to discuss an article in more detail, please do speak to the relevant contact listed at the end of this issue or to your usual EY contact.
Draft Finance Bill clauses
Following the Autumn Statement to be presented by the Chancellor of the Exchequer on 3 December 2014, draft clauses to be included in Finance Bill 2015 will be published on 10 December. Responses to various policy consultations, explanatory notes on the draft clauses, tax information and impact notes, and other accompanying documents will be published at the same time. The consultation on the draft legislation will be open until 4 February 2015.
This legislation will form the basis of the Finance Bills to be published over the following year.
Tax Focus web seminar 10:00, 3 November – Tax, tax policy and politics: what we can expect
Against the backdrop of a UK General Election in May 2015, a Scottish Election in May 2016 and a possible referendum on the UK's membership of the European Union in 2017, this is an uncertain time for businesses across the UK. The implications of the Scottish referendum vote may also extend to other regions of the UK, as we are seeing the growing debate about the respective roles of the UK's parliaments and assemblies.
Tax policy is likely to play a greater role in this election than in the past, with ‘tax fairness’ remaining high up on the domestic and international agenda. In our next Tax Focus web seminar we will look at key developments in this area including:
- The current tax policy environment and the drivers of future UK tax policy
- The current state of tax policy and proposals across the political parties, both for the UK Government and Scotland
- The impact of external constraints and initiatives on UK tax policy, such as the OECD Base Erosion and Profit Shifting Action Plan
- The taxpayer / tax administrator relationship, including cooperative compliance and greater powers
- Predictions for the Chancellor of the Exchequer's Autumn Statement on 3 December 2014 and what we might expect in the pre-election Finance Bill 2015
Register now for our next Tax Focus web seminar at 10:00 Monday, 3 November to hear Claire Hooper and Chris Sanger discuss the latest developments in these areas.
Base erosion and profit shifting (BEPS) Action 4: Interest deductibility
HM Treasury and HMRC continue to engage through various forums on the progress of the OECD's BEPS initiative.
They are now focussing on the impact of Action 4 of the Action Plan (which looks at ways of limiting base erosion via interest deductions and other financial payments). HMRC is aware that certain sectors (for example the infrastructure industry) are particularly vulnerable to any changes to interest deductibility rules and that any new restriction could have a very significant commercial impact. It is looking to engage with the affected industries to better understand the consequences of any change and examine the available options.
Along with other fiscal authorities, HMRC has submitted a position paper on the topic to the OECD. An OECD Discussion Paper is expected to be released in mid-December 2014 with a short consultation period to follow. The OECD is due to publish further discussion papers on Action 6 (prevent treaty abuse), Action 7 (prevent the artificial avoidance of permanent establishment status), Actions 8 to 10 (assure that transfer pricing outcomes are in line with value creation) and Action 14 (make dispute resolution mechanisms more effective), as well as the Action 1 (tax challenges of the digital economy) VAT business-to-consumer guidelines over the next two months.
Whether using a supplier's infrastructure creates a fixed establishment for VAT purposes
The Court of Justice of the European Union (CJEU) has released its judgment in the Welmory sp. z.o.o. case. The case concerns whether the customer should be treated as having a fixed establishment for VAT purposes in the supplier's Member State, by virtue of using the supplier's infrastructure, which would result in the supplier charging local VAT on the supply to the customer.
The CJEU held that it is for the national court to determine whether the customer in this case has a VAT fixed establishment in the supplier's territory, but stated that it is possible for such an establishment to be created where it has a sufficient degree of permanence and human and technical resources to enable it to receive and use the services for its economic activities. VAT fixed establishments are a constant area of dispute around the EU and the case reaffirms that care needs to be taken in understanding whether a VAT fixed establishment has been created. However, the judgment provides little new guidance on exactly how or when this might occur. It will be interesting to see how different Member States implement the judgment and whether any tax authorities change their interpretation on this point as a result.
Any business which currently uses a supplier's infrastructure or has a supply chain which relies on the services of EU entities in countries in which it is not established for VAT purposes may wish to consider the judgment further.
Other UK developments
Payments of ‘above the line’ research and development expenditure credit (RDEC)
We have had recent discussions with HMRC regarding the process to ensure that claims to repayable RDEC are dealt with as quickly as possible. HMRC has confirmed that companies should ensure that their tax return has been completed correctly and that ‘box 87 – Research and Development tax credit…’ has been populated as this is what triggers HMRC's internal systems regarding potential RDEC repayments. In addition to this, HMRC has suggested that companies contact their Customer Relationship Manager (CRM) to make them aware that a repayment is due.
HMRC also confirmed that it has amended its internal processes to allow CRMs to review RDEC claims and authorise RDEC repayments separately from the company's overall tax affairs. If there are other general enquiries, not involving the RDEC, then HMRC has stated that these should not delay an RDEC repayment.
The Advance Thin Capitalisation Agreement (ATCA) improvement process
HMRC has launched an exercise aimed at improving the ATCA process. As part of this, it has assembled a team who will carry out risk assessments on all ATCA applications to categorise them as ‘low’ risk or ‘not low risk’. The low risk ATCAs will then be fast tracked and HMRC is aspiring to have such ATCAs, including transfer pricing governance, agreed within four weeks. HMRC has not provided a precise definition of what constitutes a low risk case for these purposes as this will be a matter of judgement. Clearly the quantum and other features of the debt will be key considerations.
Advocate General's opinion expected on cross-border group relief rules
The opinion in the case of Commission v United Kingdom (Case C-172/13) is due to be handed down at 08:30 on 23 October. The case relates to the UK's rules on group relief. Following the judgment in Marks & Spencer, the UK amended its legislation governing the manner in which the losses suffered by companies which are members of a group may be transferred and used by another member of the group in order to reduce its tax liability. The provisions governing losses of non-resident companies are now contained in Corporation Tax Act 2010.
Under that legislation, a UK group company may obtain a tax credit for the losses of a non-resident group member only if the latter has no possibility of relief in its state of residence. The European Commission is arguing that the condition requiring that possibility to be determined ‘as at the time immediately after the end’ of the tax year in which the loss was suffered is for all practical purposes impossible to meet. The Commission, therefore, argues that the legislation precludes any relief at all for the losses of a non-resident subsidiary, contrary to the freedom of establishment.
It also argues that as these rules on group relief for foreign losses apply only to losses suffered after 1 April 2006, the exclusion of relief under the legislation for losses suffered before that date is also contrary to the freedom of establishment.
We will provide a brief summary of the opinion in next week's edition of Midweek Tax News.
Restricting non-residents' entitlement to the UK personal allowance
We have now responded to the Government's consultation on the proposed restriction of entitlement to the UK personal allowance for non-residents. HMRC estimates that the cost to the exchequer of maintaining the personal allowance entitlement for non-residents is £400mn a year. If these proposals were implemented as currently drafted then they will have an impact on mobile employees to and from the UK, as well as their employers.
Employees assigned abroad who let out their UK homes would no longer be able to claim the personal allowance against their rental income. The changes will increase the complexity of double taxation claims and may give rise to UK income tax liabilities.
The consultation also suggests that employers will need to assess their employees' residence status which they are not presently required to do. Businesses that rely on using project workers on a short-term basis in the UK, particularly from India, may also find that they need to compensate workers for the resulting UK tax liabilities. A copy of our representations can be obtained from your usual EY contact.
Tax treatment of ‘negative taxable earnings’
HMRC has confirmed that it will not appeal the Upper Tribunal decision in the case of Julian Martin that relief was available for the repayment of part of a bonus as ‘negative taxable earnings’.
The judgment should be considered carefully by any employers who may wish to use clawback provisions and both the initial drafting of documents and the implementation of the arrangements on repayment are likely to be critical to the tax analysis. More detail on the case and its implications can be found in our tax alert.
Tax gap for 2012-13
On 16 October 2014, HMRC published its estimate of the tax gap for 2012-13. The tax gap is the difference between the amount of tax that theoretically should be collected by HMRC and the amount actually collected. It is calculated using a variety of statistical sources but remains an estimate with, by HMRC's own admission, “many sources of uncertainty and potential error”.
The total tax gap for 2012-13 was estimated at £34bn. Only £7.6bn is put down to ‘tax avoidance’ and ‘legal interpretation’. The remaining £26.9bn arises through basic non-compliance (for instance error, evasion, negligence or non-payment).
In this respect, tax avoidance is defined as the “exploitation of tax rules to gain a tax advantage that Parliament never intended.” For the first time there is an explicit statement that the definition of tax avoidance does not include “international tax arrangements such as base erosion and profit shifting”. This is intended to make clear that HMRC does not attempt to estimate the loss of tax where the rules of two different countries, even when they are ‘correctly’ applied, allow certain amounts to be taxed at a lower rate or not at all.
Including peer-to-peer (P2P) loans in Individual Savings Accounts (ISAs)
The Government has launched a consultation on the best way to implement the inclusion of P2P loans within ISAs. The consultation proposes that such loans should comply with existing ISA rules unless there are compelling arguments to adapt the rules. The intention is that only P2P loans provided through platforms regulated by the Financial Conduct Authority or its European Economic Area equivalents should be included in ISAs.
Whether an out of court settlement counts as a decrease in consideration for VAT purposes
In the case of Barlin Associates Ltd, the taxpayer issued invoices and accounted for VAT on services rendered to a client. The taxpayer issued legal proceedings against the client when the invoices remained unpaid. Soon thereafter, the taxpayer ceased trading and was deregistered for VAT purposes. The parties subsequently reached an out of court settlement for a lower amount than that originally invoiced. The taxpayer issued a credit note to the client for the balance of the invoiced amount, including VAT and sought repayment of the VAT shown on the credit note from HMRC. HMRC refused on the basis that it was a bad debt and out of time.
The First-tier Tribunal held that the effect of the court settlement meant that there was no debt at all. Rather, the out of court settlement qualified as a decrease in consideration for a supply under VAT legislation, meaning that the taxpayer was entitled to issue a credit note for the balance of the invoiced amount. The First-tier Tribunal also held that there was no time limit between the original supply and the time at which an adjustment in the consideration can be made. Further, in the case of a deregistered taxpayer, there was no time limit in respect of when it had to make such a claim.
The case serves as an interesting reminder about the treatment of settlement payments. Any business which has agreed a reduction in the value of a supply with a client through an out of court settlement but has not made a VAT adjustment may wish to review their position.
Tribunal rules that one year HMRC enquiry window starts day after return is filed
The case of Dock & Let Limited concerned a situation where HMRC served a notice to enquire into the corporation tax return of a company on the anniversary of the date on which the company filed its corporation tax return. The case focused on whether the 12 month HMRC enquiry window started on the date the return was filed, in which case the HMRC notice would have been one day late, or the day after.
The Tribunal held that the word ‘from’ in paragraph 24(2) Schedule 18 FA 1998, which defines when the 12 month window starts, meant that the enquiry window started from the day after the return was filed, on the basis that the word ‘from’ in that context was akin to ‘after’. HMRC's enquiry notice was, therefore, in time.
Irish Budget 2015
As reported in Midweek Tax News to 14 October 2014, the Irish Finance Minister, Michael Noonan, has delivered the Irish Budget 2015. Our international tax alert summarises the key measures announced. These include:
- Changes to the Irish corporate residence rules to phase out the so called “Double Irish” tax planning structures: From 1 January 2015, all new Irish incorporated companies will be regarded as Irish tax resident, subject to any override within a double tax treaty. For pre-existing companies, the new rule takes effect on 1 January 2021 and, therefore, any impact on existing investors is deferred for a significant grandfathering period. For more details, see our separate international tax alert on this issue.
- Improving the existing tax depreciation regime for intellectual property assets through the elimination of the maximum allowances available in each year and the expansion of the definition of qualifying intellectual property to include assets such as customer lists
- Introducing a Knowledge Development Box from 2016 or as soon as European Union and OECD processes allow
- Expanding the 25% research and development tax credit regime through moving to a full volume based regime as of 2015
- Expanding the expatriate tax regime through improvements to the Special Assignee Relief Program to attract key skills, including the removal of the upper earnings limit to attract senior talent
- Increasing the Irish Revenue's investment in competent authority resources to strengthen its capabilities in the area of transfer pricing
The Minister also reaffirmed Ireland's commitment to the 12.5% tax rate, stating that it is settled Government policy which will not change.
Italy announces major change to regional tax on production activities (IRAP)
As part of the Draft Stability Law for 2015, the Italian Council of Ministers has announced a major change to the way in which the IRAP is computed. While levied at a relatively low nominal rate, the impact of IRAP is often very significant because labour costs are generally not deductible. The draft law provides for the full deduction of labour costs. It is expected to be discussed and formally approved by the Italian Parliament by 31 December 2014.
Our international tax alert has further details.
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.
Germany: The Court of Justice of the European Union (CJEU) has ruled in the German case of van Caster finding that the German flat tax on ‘non-transparent’ investment funds was discriminatory.
Belgium: The CJEU has issued a preliminary ruling confirming the incompatibility of the Belgian tax on the conversion of bearer securities into dematerialised securities or registered securities with Council Directive 2008/7/EC which regulates the levying of indirect taxes on the raising of capital.
India: The Bombay High Court has ruled on the applicability of transfer pricing provisions to the issue of shares to associated enterprises.
US: The IRS has released a Chief Counsel Advice Memorandum that disallows deemed paid credit for foreign income taxes paid as a result of a foreign tax redetermination.
China: The State Administration of Taxation recently put together a plan to investigate dividend distributions made to non-residents in calendar years 2012 and 2013 to allow it to undertake risk analyses and (where appropriate) levy penalties.
China: The Executive Meeting of the State Council of China has announced that new accelerated depreciation methods will be applicable to high-technology assets.
Mexico: The tax authorities have published new regulations regarding the deductibility of pro-rata expense allocations made by non-residents to Mexican taxpayers.
Malaysia: The 2015 Budget includes: an expanded list of items that are exempt from the new GST which will be effective from 1 July 2015; corporate tax incentives for selected industries and expenditure; an extension to the statute of limitation for transfer pricing adjustments; and an increase in the withholding amount for the purpose of real property gains tax.
Key Human Capital Developments is our quarterly publication which provides a summary of the main human capital developments across the globe over the past three months. In this issue we look at:
- UK: Scotland's changing landscape
- Russia: Mandatory notification of dual nationality or foreign residence permits
- India: Changes affecting the taxation of shares granted under employee stock incentive plans
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.
Draft Finance Bill clauses
+ 44 20 7951 7076
Tax Focus web seminar 10:00 3 November – Tax, tax policy and politics: what we can expect
+ 44 20 7783 0859
Base erosion and profit shifting Action 4: Interest deductibility
+ 44 20 7951 2486
Whether using a supplier's infrastructure creates a fixed establishment for VAT purposes
+ 44 20 7951 6337
For other queries or comments please email firstname.lastname@example.org.
- 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.
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.
What’s next for BEPS?
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).