Tax Services

G8 summit: Lough Erne communiqué

At the summit which closed on 18 June, the G8 leaders committed to agree to further transparency on the sharing of tax information. Their communiqué announced that they will move to establish the automatic exchange of information between tax authorities as the new global standard and will work with the OECD to develop a model for this. Other developments on information exchange are covered below.

The G8 leaders also stated their support for the OECD's work to tackle tax avoidance by multinational companies. In their communiqué, the G8 agree to work together to address base erosion and profit shifting, and to ensure that international and their own tax rules do not allow or encourage any multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions.

The G8 called on the OECD to develop a common template for country-by-country reporting to tax authorities by major multinational enterprises, taking account of concerns regarding non-cooperative jurisdictions. This, it is believed, will improve the flow of information between multinational enterprises and tax authorities in the countries in which the multinationals operate to enhance transparency and improve risk assessment. In his closing statements, the Prime Minister expressed the view that this will give governments a new tool against tax avoidance by multinationals and will be particularly helpful to the governments of developing countries.

As part of a commitment that developing countries should have the information and capacity to collect the taxes owed them, the G8 stated that they would support the OECD's feasibility study for its ‘Tax Inspectors Without Borders’ proposal and asked the OECD to find ways to address the concerns expressed by developing countries on the quality and availability of the information on comparable transactions that is needed to administer transfer pricing.

On the specific issue of the extractives sector, the G8 will take action to raise global standards for extractives transparency and make progress towards common global reporting standards, both for countries with significant domestic extractive industries and the home countries of large multinational extractives corporations. Under such common standards companies would be required to report on extractives payments, governments would take steps to ensure disclosure compliance and those governments that wish to move towards the Extractives Industries Transparency Initiative standard will voluntarily report their revenues.

Tax transparency: Ownership proposals

Ahead of the G8 Summit of 17 June, the Government announced that it intends to introduce new rules requiring companies to obtain and hold information on ‘who owns and controls them’. This was subsequently followed by the publication of a ‘UK action plan’ to prevent misuse of companies and legal arrangements. This action plan fits with the G8's overall endorsement of a number of core principles in this area. The G8 sees these core principles as fundamental to providing the necessary transparency and essential to ensuring the integrity of beneficial ownership and basic company information and the timely access to such information by the relevant authorities.

The action plan commits the UK to ensuring that the Companies Act 2006 and UK money laundering regulations oblige companies to know who owns and controls them, by requiring that companies obtain and hold adequate, accurate and current information on their beneficial ownership. It also commits the UK to amending the Companies Act 2006 to require that this information is accurate and readily available to the authorities through a central registry of information on companies' beneficial ownership, maintained by Companies House. The UK will consult on whether information in the registry should be publicly accessible.

There are, as yet, no details as to how complete the information requirement will be, for example, where a company's shareholders include a nominee company, whether the requirement will extend to identifying the ultimate beneficiaries of that nominee company. A pre-consultation paper will be issued as part of a review of corporate transparency, including bearer shares and nominee directors. This review will be carried out by the Department for Business, Innovation and Skills and the paper issued before September 2013.

Tax transparency: Information exchange

On 12 June 2013, the European Commission proposed an extension to the types of information exchanged automatically between national tax administrations of the EU Member States, as part of the EU's fight against tax evasion. Under the proposal, dividends, capital gains, all other forms of financial income and account balances would be added to the list of categories which are subject to automatic information exchange within the EU. This would result in all EU Member States sharing as much information between them as a number of them have already committed to provide to the US under the Foreign Accounts Tax Compliance Act.

The proposal builds upon the Directive on Administrative Cooperation which entered into force on 1 January 2013. This directive included the automatic exchange of information (if available) on five categories of income and capital from 1 January 2015. These categories are income from employment, director's fees, life insurance products, pensions, and ownership of and income from immovable property.

Under European Union processes, the Commission will now submit its proposals to the Council and the European Parliament. For more information please see our Global Tax Alert.

Separately, HM Treasury also announced that all the British Overseas Territories and Crown Dependencies have now signed up to action plans in relation to tax transparency and exchange of information. Those territories have agreed to join the multilateral convention on the sharing of tax information.

Fair tax debate

On 13 June, the Public Accounts Committee (PAC) published its 9th report of its current session, entitled Tax avoidance - Google. The report is based on evidence from recent hearings and has attracted considerable media attention.

The PAC took the view that international tax rules are complex and have not kept pace with global internet businesses. It considers the UK should take a leading role in modernising international tax law and tackling aggressive avoidance, as well as pushing for international tax transparency to enable a fair share of tax to be collected on profits generated in each country. The PAC also believed that HMRC had not been sufficiently challenging of multinationals' ‘artificial’ arrangements.

The indications are that the PAC is intending to turn its attention next to the tax arrangements of those companies involved with Government contracts.

Separately the House of Lords Economic Affairs Committee took evidence on 18 June from officials from HM Treasury and HMRC as part of their inquiry into corporate taxation. The Committee enquired into the Chancellor's proposal to ‘name and shame’ promoters of tax avoidance schemes, statements from HMRC that it had recovered £23bn in additional tax from big business in the last three years and whether the distinction in the tax code between debt and equity should be reviewed.

Also on 13 June, the first report from the Fair Tax Campaign was published. The report scored 25 well known British retailers across three categories:

• Whether the group undertakes country by country reporting

• How close the current tax paid is to the official rate (no account is taken of deferred tax)

• Whether any use is made of tax havens for tax avoidance purposes

There are a number of assumptions open to challenge in the report's methodology. Although this report focuses on retailers, it is expected that the campaign will move on to other sectors.

Real estate investment trusts (REITs): Response to consultation

On 20 March, the Government launched a consultation to assess the potential appetite for including REITs as ‘institutional investors’ and the potential tax risk of such a measure. A number of specific questions were asked by the consultation document, including the impact on new investment (including foreign investment).

This is a change that we have been calling for over the last few years, and as such, we strongly support the proposal to include REITs within the definition of institutional investors. A copy of our response to the consultation is available from your usual Ernst & Young contact.

Real time information (RTI): Ongoing issues

Most employers have now been operating PAYE under RTI for a couple of months and many larger employers will do so over the next few months.

Our Employment Tax Alert highlights some of the recent issues we have seen. These include:

• PAYE codes: An issue has been identified with employees being issued with incorrect tax codes, such as benefits being omitted, due to procedural errors in the submission of RTI returns. HMRC is advising employers in some cases to ignore the codes issued.

• ‘On or before’ rule and payment dates: HMRC had issued guidance setting out a number of relaxations to the strict rule that RTI submissions should be made on or before the date that earnings are paid. Broadly, the guidance confirmed that an employer would not be penalised for a technically late full payment submission. However, the guidance does not address the question of whether there is any linked relaxation to the date when the related PAYE is paid.

• Software challenges: Some employers are also facing various software challenges when operating RTI. A particular example is employers not being able to take into account foreign tax credit in RTI submissions

Consideration of the case for extending the VAT exemption to commercial providers of higher education

HMRC has published the results of the public consultation (launched in September 2012) on the case for extending the VAT education exemption to commercial (ie for-profit) providers of higher education. At Budget 2012, the Government announced that it would review the VAT treatment of higher education, particularly at university degree level, to ensure that commercial bodies supplying courses similar to those supplied by universities are treated fairly. In this regard, the consultation outlined two options and sought views on whether commercial bodies considered the options to be workable.

In the summary report of the outcome of the consultation, HMRC advises that a total of 28 responses were received. Whilst commercial organisations favoured widening the scope of the exemption, they felt that HMRC's proposals did not go far enough. There was a general concern that, whilst efforts were being made to widen the choices for students at higher education level, the proposals did not actively address other equally important areas of education, such as vocational training and further education. In view of the lack of support for either of the options put forward, HMRC acknowledges that consideration needs to be given to alternative options and that further work is required before any changes can be made to VAT legislation. Whilst no decision has yet been made on whether to extend the VAT exemption to cover commercial providers, HMRC advises that there may be a further consultation later this year seeking further views on the case for change and how this might be implemented.

Any commercial providers of higher/further education or vocational training may wish to keep abreast of developments in the consultation process.

Other UK developments

Finance Bill 2013

Consideration of Finance Bill 2013 by the Public Bill Committee reached clause 178 (rates of alcoholic duties) at the close of 13 June. As of that date the following Government amendments/new clauses had been tabled but not yet discussed by the committee (although some of these will have been covered in the session of 18 June, a transcript of which should be available shortly).

• Measures to include a further specific stamp duty land tax avoidance scheme within the proposed avoidance legislation in section 192

• Amendments to the proposals for trusts with vulnerable beneficiaries

• Amendments to Schedule 43 (statutory residence test) and Schedule 44 (ordinary residence)

• Amendments to clause 219 on exchange of information

• A new provision in respect of contribution allowances covering plant and machinery

As a means to open a debate, an opposition amendment to clause 219 seeks a review of the effects on the Treasury's tax receipts of incorporating a global standard for public registration of ownership of companies and trusts via a convention on tax transparency. This includes a requirement on companies to publish a single easily comparable figure for the amount of corporation tax they pay in the UK. A similar amendment in respect of the impact of tax schemes on developing countries has been tabled to clause 220.

The Public Bill Committee sessions are due to complete on 20 June. There is, as yet, no indication as to when the third reading will take place.

Repair or improvement

In the First-tier Tribunal case of Hopegar Properties, the taxpayer successfully argued that a significant proportion of works undertaken to repair a small percentage of an access road, a car park and footpaths were revenue in nature. Key points covered in the Tribunal's judgment were:

• The identification of the entirety of the asset is important. HMRC has accepted in its guidance the concept of ‘entirety’ to distinguish revenue, repairs and capital expenditure. HMRC accepts that the replacement of an entire asset is capital but if less than the entire asset is replaced then it is likely to be revenue expenditure.

• The fact that repairs involve the replacement or renewal of some or part of the asset does not make the expenditure capital. This includes improvements with new materials. The fact that more modern materials were used did not influence the characterisation of the expenditure. On the basis that there was no increased functionality in the asset following the works, they were essentially done to repair the road etc and not to produce something entirely new.

• There were individual heads of repair relating to particular assets and accordingly, it was incorrect to import an overall purpose of improving the site as the reason why the work was undertaken. As such, there was no ‘scheme of works’ and the capital, non-allowable element of the expenditure could be identified and separated out from the amount qualifying as repairs.

• It was accepted that it is possible to have repairs which obviate the need for patching-up but that does not change the character of what was done. The Tribunal stated that it would be nonsensical if the tax system gave relief for patching-up but not for repairs which resulted in the taxpayer not having to do the patching up.

UK/Netherlands double tax treaties

A protocol to the 2008 double tax treaty between the UK and the Netherlands was signed in London on 12 June. The protocol brings Article 7 (Business Profits) into line with the OECD model convention. It will enter into force once both countries have completed their legislative procedures.

On the same day a Double Taxation Convention (Bank Taxes) was also signed by the two countries covering double taxation and fiscal evasion with respect to the UK bank levy and the Netherlands bank tax. It, too, will enter into force once both countries have completed their legislative procedures.

The UK – number one for European headquarters

A new brochure has been published by the UK Trade & Investment Department entitled The UK – number one for European Headquarters. The brochure is designed to stimulate investment in the UK and includes a number of tax references, including a section on competitive taxes.

Ernst & Young's recent UK attractiveness study confirmed that the UK remained Europe's top destination for foreign direct investment projects in 2012, and that the UK secured more investments and a higher market share than in 2011, demonstrating a clear improvement. The survey also showed that investors feel the UK has improved its environment for inward investment through:

• A more flexible financial system

• An effective policy framework to support businesses to set up operations

• Facilitating trade missions

• More investment incentives in key industries and promotional campaigns targeting high-employment sectors

The UK's tax treaty priorities

HMRC has provided details of its programme of work for the year ahead to 31 March 2014. It plans to begin negotiations on double tax treaties and protocols with Bulgaria, Sweden, Tajikistan and Tanzania. It also plans to take forward work on double tax agreements and protocols with Austria, Belgium, Canada, Croatia, Germany, Iceland, Japan, Kosovo, Malawi, Panama, Portugal, Russia, Senegal, Thailand, Turkmenistan, the USA and Zambia. On tax information exchange agreements it will move forward with discussions with Andorra, Macau and Monaco.

Other international developments

US: Discussion on base erosion and profit shifting

On 13 June, the House Ways and Means Committee hearing on ‘tax havens, base erosion, and profit shifting’ focused on whether base erosion options (as set out in the autumn 2011 international tax reform discussion draft, particularly Option C relating to the treatment of intangibles income) can mitigate concerns over profit shifting as part of a potential move towards a more territorial system of taxing foreign earnings. Other themes running through the hearing included the extent to which the current system encourages foreign profits of US companies to be kept offshore and how that situation would be affected by changes in the tax system, and the topic of ‘stateless income’ perceived to escape tax by both the country of residence and the source country.

During the hearing, Republican members tended to focus on the benefits a shift towards a more territorial system that includes an Option C type of approach for preventing base erosion would have on the economy and on the competitiveness of US companies, particularly if such a reform were accompanied by a lower US statutory tax rate. Many Democratic members, in contrast, continued the scrutiny of tax planning techniques utilised by US companies that were highlighted in last month's Senate Permanent Subcommittee hearing, and suggested that moving to a more territorial system, even with an Option C approach, could exacerbate rather than solve the problems of current law.

Spain: Measures to boost the Spanish economy, including changes to ‘patent box’

The Spanish Government published a draft bill, dated 24 May 2013, which contains a number of measures that aim to bolster the Spanish economy and to boost investments in small- and medium-size companies. This draft bill has only just been published, and may undergo changes throughout the approval process.

Included in the draft bill are changes to the ‘patent box’ regime which provides for a partial exemption for income derived from the licensing of certain qualifying intellectual property (IP) rights. An increase in the exemption percentage from 50% to 60% is proposed, but the exempt amount would then be calculated on the net income generated by the assets (currently the exemption is calculated by reference to gross revenue). The draft bill also proposes to extend the exemption to income from the licensing of IP assets acquired from third parties and to extend the exemption to capital gains deriving from the transfer of the IP assets to an unrelated party. Our Global Tax Alert has more details on this and the other proposals in the draft bill.

Russia: Guidance on the deductibility of loan interest

Russia's Ministry of Finance has long expressed the view that interest on loans taken out by Russian companies to finance contributions to the capital of subsidiaries or the acquisition of shares (including shares in foreign companies) is deductible for profits tax purposes.

However, in practice, the position has been open to doubt. While, generally, the courts have followed the position of the Ministry of Finance, there have been instances of the court ruling that the taxpayer cannot deduct such interest on the basis that such loans were not directly connected with the taxpayer's business activity and the taxpayer was unable to prove that such loans were aimed at receiving profit.

The Ministry of Finance has now issued another letter on this issue which confirms that the taxpayer has a right to deduct such interest subject to certain conditions being satisfied. Our Global Tax Alert considers those conditions and how to approach them in practice.

China/Netherlands double tax treaty

On 31 May 2013, a new tax treaty was signed between the Netherlands and the People's Republic of China. When it enters into force it will replace the current tax treaty, which was introduced in 1987.

The new treaty contains certain updated and improved provisions, including in respect of:

• Dividends: The new treaty provides for a reduced source country tax on dividends of 5% (currently 10%). This 5% applies in situations where the beneficial owner of the dividends is a resident company of one of the contracting states and directly holds at least 25% of the capital of the company paying the dividends in that other contracting state.

• Capital gains on shares: The new treaty contains provisions in relation to the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property and more generally on participations of at least 25% of the share capital.

• Permanent establishment: There are changes to the definition of a permanent establishment and to the determination of the profit of such a permanent establishment.

• Anti-abuse: The new treaty includes anti-abuse provisions for dividends, interest and royalties. In addition, article 23 of the new treaty, confirms that the treaty and its provisions shall not prejudice the right of each contracting state to apply its own domestic anti-abuse rules.

More detail is available in our Global Tax Alert.