We highlight government proposals for new legislation, an overview of global tax policy trends and individual countries’ policy developments.
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 3 May 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.
Union Customs Code (UCC) has gone live with effect from 1 May 2016
The core EU customs legislation is facing its biggest change in over 20 years with the introduction of the UCC, which came into force on 1 May 2016. The UCC will serve as an entirely new framework of the rules and procedures for customs activities throughout the EU and will entail radical changes to some customs regimes and controls. This means that it will have a significant impact on both the finances and the operations of many companies which have international supply chains. The practical challenges that businesses may face as a result of the changes include those noted below.
• The need to obtain new authorisations or renew existing authorisations to use customs simplification procedures: Operators which do not meet Authorised Economic Operator (AEO) standards or gain AEO accreditation will not be approved for entry into declarants' records or the use of customs simplifications, including special procedures such as inward processing relief, customs warehousing, duty reliefs and duty deferments.
• Financial guarantees for all actual and potential duty debts: If any customs procedures, such as warehousing or customs duty reliefs, are operated, financial guarantees will be required unless the importer is AEO accredited. This could lead to a much greater financial burden on businesses. Guarantee waivers and reductions will be available to businesses where the AEO criteria are met or the AEO accreditation is held.
• Under the UCC, a significant proportion of royalty, trademark and licence fees paid in relation to imported products will be considered dutiable. This is regardless of who pays the licensor and the timing or structure of the payment. HMRC has already published guidance which confirms that it will take this position going forward.
• According to the wording of the UCC, non-EU exporters are facing the prospect of no longer being able to be the named exporter on the export declaration. This will have a particular impact for non-EU principal structures. Some customs authorities have provided guidance for a transitional period which states that a non-EU exporter can still be the named exporter. However, the length of this transitional period is unclear and whether this will be applied consistently across the EU remains to be seen.
The UCC legislative changes have been accompanied by a drip feed of interpretive guidelines and practical instructions from the European Commission, HMRC and customs authorities in other Member States. Often, the commentary and messaging has been inconsistent and this has added a further layer of complexity for businesses trying to address these changes and adapt to the UCC.
In light of the changes, affected businesses may wish to undertake an initial high level impact assessment and determine the extent to which they may be able to utilise any relevant transitional provisions.
US Treasury considers voluntary country-by-country reporting (CBCR) for 2016
Robert Stack, the US Treasury Deputy Assistant Secretary, has said that the US Treasury and IRS are working on allowing optional CBCR filing for US-headed groups for 2016. This is intended to help US groups deal with the fact that many jurisdictions are implementing CBCR earlier than the US, which has not yet published final regulations bringing in the measure recommended in the OECD's final report on BEPS Action 13.
The earliest the US CBCR regulations are likely to apply is for periods beginning on or after 1 July 2016. However, CBCR between tax authorities is being implemented in some territories for accounting periods beginning on or after 1 January 2016, as recommended by the OECD. This means that, for accounting periods beginning before US implementation, the secondary filing obligation for subsidiaries of US-headed multinationals will apply when they are resident in a territory that has implemented CBCR from 1 January 2016. Although the EU's directive on CBCR has made secondary filing voluntary for 2016, some Member States, including the UK, have implemented it with effect from 1 January 2016.
Mr Stack noted that further work was necessary to ensure that an optional filing in the US was sufficient to obviate secondary filing requirements in other jurisdictions. In particular, we expect that the IRS would have to automatically share the optional CBCR reports with other tax authorities. Mr Stack is asking US groups to engage in the debate to ensure that an optional filing protects them from a secondary filing requirement.
Please see our global tax alert for more details.
Australian Tax Office (ATO) releases guidance on international tax issues affecting multinational groups
The ATO has issued four taxpayer alerts on practices being undertaken by certain multinational groups where it has concerns about the tax outcomes being sought. The alerts are not formally binding ATO advice, but constitute guidance to groups, and highlight ATO compliance action and potential penalty exposures.
The four alerts cover the following matters:
• Inappropriate recognition of internally generated intangible assets or the revaluation of intangible assets to increase the balance sheet of a group for Australian thin capitalisation purposes.
• Arrangements in response to Australia's multinational anti-avoidance law (MAAL), which has some similarities to the UK's diverted profits tax and is effective from 1 January 2016. The ATO advises that groups should “work with the ATO on arrangements they are considering for the purpose of avoiding the application of the MAAL.”
• Cross-currency interest rate swaps in relation to foreign currency funding that give rise to payments which are not interest in their legal form in order to mitigate Australian thin capitalisation, withholding tax or transfer pricing outcomes.
• Cross border leasing arrangements, including lease-in/lease-out transactions, where the Australian intermediary lessor is inserted to benefit from a tax treaty or where the amount brought into tax does not reflect the contribution generated in Australia.
Please see our global tax alert for more details.
Banking and capital markets breakfast seminar this Thursday, 5 May 2016
EY is hosting a breakfast seminar at 8:00 am this Thursday, 5 May 2016 to provide a UK tax update for banking and capital markets businesses. We will reflect on the policy detail and draft guidance that has emerged since Budget Day, as well as explore the practical implications of these announcements. The seminar will consider:
• The contents of the Government's ‘business tax roadmap’
• The proposed fundamental changes to UK's loss relief rules
• The anti-hybrid legislation included in Finance Bill 2016
• The proposals for restrictions on interest deductibility
We will also take the opportunity to survey the banking tax landscape in 2016 including the key dates and reporting deadlines coming up over the next six months.
To reserve your place please get in touch with the contact at the end of this week’s issue of Midweek Tax News.
Other UK developments
Court of Appeal decides HMRC not bound by closure notice issued in error
The Court of Appeal heard cross appeals in the case of Bristol & West from HMRC on whether it was bound by a closure notice it issued in error, and from the taxpayer on whether a taxable credit under the derivative contract rules arising from interest rate swaps fell out of account as a result of transitional provisions.
In respect of the closure notice, the Court of Appeal noted that an HMRC official erroneously instructed the HMRC computer system to generate a closure notice in respect of the relevant periods, even though the dispute over the interest rate swaps had not been resolved. Before the day ended, the mistake had been noticed and failed attempts were made to stop the closure notices being posted. HMRC emailed the taxpayer that day to say that a closure notice had been sent erroneously, which was acknowledged by the taxpayer. However, a letter was sent by HMRC around a week later said that the notices did mark the completion of the enquiries into the returns. If the closure notice was valid, HMRC could not amend the taxpayer's return to disallow the credit.
Allowing HMRC's appeal, the Court of Appeal found that the erroneously issued closure notice was not valid as it had to be considered in the context of HMRC emailing the taxpayer to say that it had made a mistake. The letter was also not a valid closure notice in itself because, although it stated HMRC had completed its enquiries, it did not state its conclusions as the statute required a closure notice to do. Thus, HMRC was not bound by the closure notice.
On the issue of whether the derivative contract credit could be disregarded, the Court of Appeal endorsed the decision of the lower tribunals and dismissed the appeal of the taxpayer, finding that the transitional rules in question did not apply to the facts of the case.
First-tier Tribunal finds that a discovery assessment failed to take account of taxpayer's human rights
In the case of Fessal, the taxpayer had moved from assessing his profits on a cash basis to on an accounts basis. However, due to carelessness, he overstated his profits in 2006/07, while understating them in in 2005/06 and 2007/08. HMRC informed him that he was out of time to claim the overpayment for 2006/07, while making discovery assessments for the underpaid tax in the other years.
The taxpayer claimed that HMRC's refusal to take into account the tax he had overpaid meant he was taxed on the same profits twice. This, he held, breached his human right of peaceful enjoyment of his possessions. The First-tier Tribunal held that the rules on discovery assessments were intended to allow tax to be assessed in certain circumstances even though the time limit for doing so would otherwise have expired. However, imposing tax twice on the same profits was not a necessary consequence of that aim and so the taxpayer’s rights could be applied without going against the ‘grain of the legislation’. The Tribunal also held that the overpaid tax was a possession of the taxpayer.
Therefore, the Tribunal required that the overpaid tax for 2006/07 be applied against the underpayment for 2005/06 and that the penalty imposed for the earlier year be calculated on the reduced liability.
The right to peaceful enjoyment of possessions applies to ‘legal’ persons as well as individuals, so the principle in this case may have wider application.
First-tier Tribunal holds that alternative evidence to support VAT deduction should be considered
The First-tier Tribunal has released its decision in the case of Eastern Atlantic Helicopters. HMRC disallowed VAT claimed on an invoice from a UK supplier company relating to the sale of a helicopter registered with the US Federal Aviation Administration. HMRC contended that there was no supply to the taxpayer on which VAT could be charged, as the supplier company was not the legal owner. Even if it was the case that the company's director was the owner, HMRC considered that no VAT was chargeable as he was not a taxable person. HMRC further considered that the invoice was defective on the basis that the supplier's name on the invoice was the company's former name rather than the current one.
The First-tier Tribunal concluded that there was a taxable supply of the beneficial interest in the helicopter between the supplier company and the taxpayer company and, although the consideration was paid by the taxpayer to another person, this did not prevent there being a taxable supply from the supplier company to the taxpayer, upon which VAT could, in principle, be reclaimed. The First-tier Tribunal agreed with HMRC that the invoice was technically invalid because it did not state the correct name of the supplier. However, in light of its finding that a taxable supply took place, the Tribunal invited HMRC to exercise its discretion and consider permitting a VAT deduction against alternative evidence, on the basis that denying VAT against a technically invalid invoice would be unreasonable and appealable.
Any taxpayer which has had VAT deductions refused on the basis of a technically invalid invoice, may wish to consider the impact of this latest UK decision which is in line with recent European case law on the issue.
EY BEPS and Indirect Tax breakfast seminar on 19 May 2016
We will be holding a BEPs and Indirect Tax event on Thursday, 19 May 2016, at 1 More London Place.
The OECD's final package of 15 reports on BEPS has received wide coverage in respect of the direct tax implications. From an indirect tax perspective, only BEPS Action 1 (tax challenges in the digital economy) specifically refers to VAT in the context of cross-border supplies of digital goods and services. However, there are a number of significant direct and indirect tax interactions across several other BEPS Actions. For example, changes to the direct tax definition of permanent establishment could influence the application of VAT or GST on supplies of goods and services. Also, BEPS Actions that have an impact on transfer pricing and supporting documentation may have an effect on customs duty.
Our event will provide an overview of the main indirect tax implications arising from relevant BEPS Actions, highlighting the key indirect tax issues that businesses may wish to consider.
To register for the seminar, please click here.
HMRC publishes consultation on ending national insurance election for non-tax advantaged share schemes
A consultation has been published by HMRC with regard to whether companies with non tax-advantaged employee share schemes require the continued availability of a national insurance contribution (NIC) election.
The ability for employees to be responsible for paying some or all of the employer NICs arising on employee share options was brought in at the start of the millennium to assist companies hedging for unknown and uncapped liabilities arising on exercise. This was latterly extended to restricted stock awards. There are two ways that this can be achieved: through an election to transfer the liability to the employee (which must be agreed with HMRC) or an agreement to reimburse the employer (where the liability to pay remains with the employer).
The reason for the alternative approaches was mainly for US accounting reasons (as many of the companies that took advantage of these arrangements were US-based). However, over the years, changes in US accounting treatment mean many of the companies that use these provisions do so via the less complicated agreement to reimburse rather than the election. Accordingly, HMRC is seeking views on the proposal that only agreements to reimburse remain.
The closing date for comments is 13 July 2016.
Select Committee notes doubt over aspects of the UK's country-by-country reporting (CBCR) regulations
The House of Commons Select Committee on Statutory Instruments has reported that it considers there is doubt as to whether the implementation of the UK CBCR regulations is intra vires in respect of the enabling powers granted to HM Treasury by Finance Act 2015. The specific point that the committee highlights is the anti-avoidance rule included in the regulations which is intended to neutralise arrangements with a main purpose of avoiding the obligations in the regulations. Nonetheless, it is to be expected that any deficiency in the powers to enact the regulations will be made good by an amendment to Finance Bill 2016, which is currently before Parliament.
HM Treasury responds to the Public Accounts Committee report on corporation tax settlements
HM Treasury has published the Treasury Minutes for April 2016 which include a response to the Public Accounts Committee report on corporation tax settlements, as well as various unrelated reports. In the response, the Government accepted all the recommendations in the report on corporation tax settlements. However, no new policy initiatives were announced because it believed it had already implemented the recommendations through its existing policies.
US IRS focusing on audits of mobile workers
We are seeing evidence that suggests an increase in the number of IRS audits focusing on both the employment tax and corporate tax issues relating to deemed or actual intercompany payments and supporting data for US inbound mobile workers. These audits are used to validate positions taken by groups with regard to transfer pricing, withholding tax and permanent establishments.
Recent information requests have asked for detailed records kept by US companies in respect of foreign employees and other foreign individuals performing services in the US. The IRS has also requested detailed presentations, in person, from groups' mobility functions on how they keep track of foreign employees or people performing services in the US, including those employees that are not managed by the mobility function, such as business travellers.
Information requests are becoming very detailed on these subjects and very specific around the company controls for tracking and handling the mobile workforce (irrespective of whether the employees are on formal assignments or not). Groups may wish to review their systems.
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.
France: The Finance Minister has announced an intention to make public the French register of the beneficial owners of trusts, which was set up in 2013.
Luxembourg: The automatic exchange of tax rulings and advance pricing agreements, in accordance with the relevant EU directive, will come into effect from 1 January 2017.
South Africa: Changes to the income tax return for companies include the requirement to provide additional information on transfer pricing.
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 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.
Union Customs Code has gone live with effect from 1 May 2016
+ 44 20 7951 1446
US Treasury considers voluntary country-by-country reporting for 2016
+ 44 20 7951 1417
Australian Tax Office releases guidance on international tax issues affecting multinational groups
+ 44 20 7951 7076
Banking and capital markets breakfast seminar this Thursday, 5 May 2016
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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.
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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.
Read all our commentary, thought leadership and insight into Budget 2016.
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