With new automatic exchange of information agreements on the way, early review of offshore financial affairs could mean that any historical UK tax liabilities could be disclosed taking advantage of the favourable terms of the LDF and any areas of uncertainty can be clarified.
Liechtenstein Disclosure Facility
Collaborative deployment: a key to global mobility
Summer Budget 2015
EY ITEM Club Summer Budget preview 2015
Tax policy and controversy briefing
Global indirect tax controversy
Managing tax transparency and reputation risk
Tax Insights: Tax policy in developing economies
A new GAAR for Europe's Parent-Subsidiary Directive
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: Engaging with HMRC
255K, July 2015
Corporate Governance Code meets Tax Code of Practice
203K, July 2015
Building a tax manifesto for manufacturing
658K, August 2014
- Midweek Tax News
A weekly update on tax matters to 25 August 2015
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.
First-tier Tribunal considers application of loan relationship rules where accounts are GAAP compliant
In the case of GDF Suez Teeside Limited, the First-tier Tribunal has considered the tax treatment of the 2006 assignment of a number of contingent debt claims to a wholly owned Jersey subsidiary, this subsidiary being a controlled foreign company (CFC). The consideration for the assignments was in each case an issue of shares in the CFC.
The Tribunal considered the following questions:
Was the accounting treatment adopted by the taxpayer in respect of the transfer of the claims permissible in accordance with UK GAAP at the material time?
The Tribunal found that the accounts were UK GAAP compliant and expressed the view that it should be slow to upset accounts which have been given audit sign off as GAAP compliant accounts. In particular, the Tribunal accepted the analysis that, in accordance with FRS 12, contingent assets have a nil value at inception and should not be re-valued until they are realised in the form of cash.
Were there any alternative accounting treatments available in respect of the transfer that would have been permissible in accordance with UK GAAP? If more than one UK GAAP compliant accounting treatment was available, was the taxpayer required to bring debits and credits into account for corporation tax purposes in accordance with one of those alternative accounting treatments in particular?
The Tribunal did not believe that HMRC had made a convincing case for an alternative set of GAAP compliant accounts but, in any event, agreed with the taxpayer that if the accounts are GAAP compliant, they have to be accepted. The Tribunal noted that it does not follow that if GAAP compliant accounts result in a sum disappearing as part of a tax avoidance scheme, it necessarily means that the accounts are not GAAP compliant or in some other way inferior.
Was the taxpayer required to bring debits and credits into account for corporation tax purposes in respect of the transfer otherwise than by reference to UK GAAP compliant accounts, and if so, how were such debits and credits to be determined?
The Tribunal noted that on any realistic commercial approach to this transaction, the claims were monetised when they were exchanged for shares in the CFC. It concluded that taxable profit should be recognised in the taxpayer for the accounting periods when the claims were transferred to the CFC despite the fact that no profit was recognised for accounting purposes.
The Tribunal's view was that it must be possible to recognise a credit, at least as far as accelerating credits which would otherwise be recognised in a later accounting period. However, it then went further, noting that the judgment in DCC Holdings made it clear that it is legitimate in determining whether a fair representation of profits has been achieved to look at all circumstances of the case.
The Tribunal noted that in the normal case the accounting measure of profits will give a fair view of a company's taxable profits. However, it made the point that this was not the normal case; this was a structured transaction in which the Tribunal noted accounting rules had been used in order to both defer and potentially remove profits from the UK tax net.
Implications of recent UK tax changes for captive insurers
During the last few years, the focus has sharpened on captive insurers with captive arrangements specifically referenced as part of the OECD BEPS project and, in some countries, subject to specific tax treatment such as under the UK's CFC regime.
Certain countries have introduced anti-avoidance legislation in response to BEPS Action 7 and Actions 8-10 with the most notable development being the diverted profits tax (DPT) recently introduced in the UK. The UK DPT takes effect from 1 April 2015 and can potentially affect captive insurers located anywhere in the world whether the affiliated group is headquartered in the UK or overseas. Guidance released by HMRC in respect of DPT contains a specific captive insurance example that illustrates the trend of increasing scrutiny and risk of challenge for these arrangements.
Our tax services alert sets out how recent developments in the global tax environment may impact groups with a captive insurer located anywhere in the world.
Many large groups have a captive insurer within the group and should now be considering a risk review without delay and, in any event, before the end of the first year DPT notification period.
Proposals for bank surcharge and bank levy to be debated on 8 September
The proposals for a reduction in the bank levy rate and the introduction of a new banking surcharge (set out in Schedules 2 and 3 of the summer Finance Bill) will be debated in the House of Commons on 8 September. The proposals for the taxation of bank compensation payments will be considered subsequently in the Public Bill Committee.
The gradual reduction in the bank levy rate over the six year period starting from 1 January 2016 is set out in the summer Finance Bill. However, the Bill does not contain details of the proposals that the taxable base for bank levy will be re-defined to exclude non-UK balance sheets and this is due to be implemented in the next Parliament.
The bank surcharge provisions will apply to accounting periods beginning on or after 1 January 2016 and, therefore, will potentially need to be included in quarterly instalment payments from 1 July 2016. The surcharge will be equal to 8% of a banking company's ‘surcharge profits’. A surcharge allowance of £25 million will be available for individual banking companies or groups containing two or more banking companies.
Double tax relief will be available against the surcharge for foreign tax suffered after all eligible amounts have been credited first against corporation tax payable. Any CFC apportionment charge may be increased by the 8% surcharge depending on whether the immediate UK chargeable company is a banking company. Similarly, the diverted profits tax rate is increased to 33% for diverted banking surcharge profits.
The surcharge proposals give rise to a number of practical issues that affected groups may need to consider. These may include not only operational issues, such as allocating the surcharge allowance and tracking the timing of income and expenses as the surcharge is introduced, but also the need to review the group's holding structure, the location of any research and development activities and the ability to make effective use of capital losses. There is likely to be an increased focus on transfer pricing affecting items such as intra-group services and central cost recharges.
Both the proposals for the bank surcharge and the bank levy were discussed in our seminar on the Summer Budget for the banking industry held on 20 August. Please speak to your usual EY contact if you would like to discuss any of the points raised above and which were covered in that seminar.
Other UK developments
First-tier Tribunal considers what is meant by a main object of a transaction
In the case of Lloyds TSB Equipment Leasing (No 1) Ltd (now Lloyds Bank Leasing (No 1) Ltd) the Court of Appeal found that the First-tier Tribunal had not properly considered the question whether the main object, or one of the main objects, of the transactions in the case was to obtain a 25% writing-down allowance. In particular, the Court of Appeal found that, although the First-tier Tribunal was entitled to find that each transaction in the relevant series served a genuine commercial purpose, it did not follow that the obtaining of the capital allowances was incapable of also being a main object of the transactions, even if it was not the main object of the transactions.
Accordingly the case was remitted back to the First-tier Tribunal for a re-consideration of the issue. A newly constituted First-tier Tribunal has now held that the findings of the original Tribunal can lead only to the conclusion that the agreements were structured as they were not only for commercial reasons but also in order that the requirements of the relevant tax legislation should be met. Correspondingly, the new First-tier Tribunal concluded that the securing of the allowances was a main object of the transactions, or at least some of them. It took the view that although the transactions would have gone ahead in some form driven by their paramount commercial purpose, it was unlikely that they would have taken the form they did but for the possibility that allowances would be available.
Film tax credit changes receive State Aid approval
In the March 2015 Budget, the Government announced that it would increase the rate of film tax relief to 25% for all qualifying productions. Previously, the rate was 25% for the first £20 million of qualifying expenditure and 20% for spending above this threshold. The distinction between limited budget films and all others will be removed.
The scheme has now been given State Aid approval by the European Commission which means it will go ahead as planned. The Government has announced that its effective date will be back dated to April 2015.
Payment to terminate onerous undertaking not deductible for capital gains tax purposes
The Upper Tribunal has held in the Blackwell case that a payment made to release a taxpayer from an onerous obligation, thereby enabling him to freely dispose of shares to another buyer, was not deductible from the capital gain on the disposal of the shares. The First-tier Tribunal had originally allowed the taxpayer's appeal, holding in particular that the payment, whilst relating to the release of an onerous undertaking, nonetheless reflected itself in the state of the shares at the time of the disposal by the lifting of the threat of legal action which would have prevented their sale. The Upper Tribunal disagreed, holding that, while the payment may have affected the rights and obligations of the shares held by the vendor, the shares acquired by the buyer were unchanged, and so the expenditure could not be said to have been reflected in their state or nature. The taxpayer raised an alternative argument that the expenditure was incurred in establishing a right over the shares, but this was also rejected by the Upper Tribunal.
New PAYE arrangements for short-term business visitors
On 8 July, HMRC announced a new format of payroll compliance agreement for certain short term business visitors inbound to the UK. HMRC has now released the agreement together with further guidance on the conditions to be met and has confirmed that it will apply from the current, 2015-16, tax year. The new agreement allows a number of useful relaxations from the normal PAYE reporting requirements. However, it is only relevant to those individuals who spend no more than 30 days in the UK and who are resident in countries with which the UK does not have a double tax treaty, or who are ultimately employed by a UK entity through an overseas branch structure.
For more details please see our global tax alert.
Proposed changes to the UK tax treatment of termination payments
On 18 August, HMRC held one of several roundtable meetings to discuss the consultation document issued on 24 July. The proposals outlined in the consultation document include:
• Changes, if implemented as outlined in the consultation document, that would be likely to result in payments on termination of employment being treated in the same way as earnings, liable to income tax, PAYE withholding and national insurance contributions (NICs) for both the employee and the employer
• The £30,000 income tax exemption being replaced by a new, more limited tax and NIC free allowance
• The current foreign-service relief being withdrawn completely and replaced with a tax charge based on the rules that apply in relation to employment earnings. The existing reliefs for payments with regard to death or disability are likely to be retained.
The discussion at the roundtable meeting was wide-ranging and your usual EY contact would be happy to consider with you the key points coming out of the meeting. The intention is that responses to the consultation will be considered before proposals are taken forward in the Autumn Statement. Legislation would be included in Finance Act 2016 to take effect from 6 April 2017. Any national insurance changes would be contained in a separate Act and have a slightly different timescale.
VAT recovery on white goods and carpets installed in newly built homes
In the case of Taylor Wimpey plc, the taxpayer has appealed the First-tier Tribunal's decision in favour of HMRC to the Upper Tribunal. This case concerns the application of the ‘builders' (input tax) block’, the effect of which is to prevent developers from recovering VAT on certain goods that are incorporated in new homes. The disputed issue is whether the taxpayer was entitled to make a substantial retrospective ‘Fleming’ claim seeking recovery of VAT incurred on white goods (ovens, washing machines, dishwashers etc) and carpets installed in newly built homes in the period between 1973 and 1997. The First-tier Tribunal concluded that the taxpayer was not so entitled.
Given the sums at stake, it was to be expected that this decision would be appealed. Any housing developers who have submitted (or are considering submitting) similar claims may wish to stay abreast of developments in this litigation.
Whether a company operating a tax avoidance scheme should be wound up in the public interest
The case of Secretary of State for Business Innovation and Skills v PAG Management Services Ltd considered whether a company which operated a business rates avoidance scheme should be wound up in the public interest under the Insolvency Act 1986. To obtain such an order, the Secretary of State must satisfy the court that the public needs protecting from the company in question and that, as a result, it is just and equitable that it be wound up.
The scheme took advantage of the exemption from business rates for non-domestic properties that was available to companies which were themselves in the process of being wound up (in this case under a member's voluntary liquidation).
The High Court noted that it is not necessary for the business of the company to involve illegality and a company may be wound up if its business is “inherently objectionable” because its activities are contrary to a clearly identified public interest. However, the Court was not persuaded that companies and partnerships that offer tax mitigation schemes (not being tax evasion schemes) are in general carrying on a business which is inherently objectionable even if the products offered are highly artificial. Instead, it held that a winding up order would be justified on the basis that the activities in question constituted a misuse of insolvency legislation and demonstrated a lack of commercial probity.
US regulations promised on non-recognition of property contributions to partnerships
The IRS and Treasury Department have announced that they will issue regulations requiring, for transactions on or after 6 August 2015, that US persons recognise the gain on contributions of certain built-in gain property to certain entities treated as partnerships for US federal income tax purposes. Such regulations are intended to override the general non-recognition treatment on partnership contributions. An important exception may allow the US persons to spread the recognition of such income or gain over a period of time, subject to certain conditions.
Our global tax alert provides more detail of the proposals.
Australian Senate committee issues interim report on corporate tax avoidance
On 18 August, the Australian Senate Economics Reference Committee released its interim report setting out 17 recommendations, including greater tax transparency measures directed at large corporations. Although not representing government policy, the report is likely to influence the public debate on and perceptions of the taxation of large corporates and multinational corporations.
Key recommendations include:
• Mandatory tax reporting code on large companies operating in Australia
• Maintaining existing Australian Taxation Office (ATO) public reporting of large company tax data
• ATO publication of the names of companies subject to tax avoidance settlements
• Large proprietary companies to lodge financial reports with the Australian Securities and Investments Commission
The final report is expected to focus primarily on transfer pricing and profit shifting, with a secondary focus on excessive debt loading; avoiding permanent establishments in Australia; and tax haven use. There is a provisional date for the final report of 30 November 2015.
More detailed discussion is available in our global tax alert.
Australia and New Zealand seeking to collect GST on inbound digital services and low-value imported goods
The Australian tax authorities have announced that the threshold below which GST does not have to be paid on goods imported into Australia will be reduced from the current level of AU$1,000 to zero with effect from 1 July 2017 (ie, the threshold will be eliminated). As such, all goods imported into Australia after this time will be subject to GST. The mechanism for levying and collecting the GST remains unclear at present, but this may involve overseas businesses registering for Australian GST. As previously announced, it is also proposed that the supply of electronic services by an overseas business to Australian consumers will be subject to GST from 1 July 2017.
In a similar vein, the New Zealand tax authorities have published a consultation document seeking views on proposed new rules that would require overseas suppliers to register and account for GST when they supply electronic services to New Zealand-resident consumers. It also foreshadows future changes to the threshold below which GST does not have to be paid on imported goods. The consultation runs until 25 September 2015. Our global tax alert provides further details.
These developments will be relevant to any overseas businesses that make supplies of goods or electronic services into the Australian or New Zealand markets. Australia and New Zealand join a growing list of countries that either have or are in the process of introducing new rules to collect VAT (or their local equivalent) on inbound digital services.
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.
Angola: The Angolan tax authorities have started to apply penalties for failure to file transfer pricing documentation.
Tanzania: The Government of Tanzania has introduced a tax clearance certificate as an additional requirement for business licenses.
Puerto Rico: The Commission for Alternatives to Transform Consumption Taxes has issued its report, recommending the implementation of a VAT system, instead of an excise tax system. The issuance of this report is the final step in the statutory process allowing the implementation of VAT in Puerto Rico in 2016.
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.
First-tier Tribunal considers application of loan relationship rules where accounts are GAAP compliant
+ 44 20 7951 0568
Implications of recent UK tax changes for captive insurers
+ 44 20 7951 5993
Proposals for bank surcharge and bank levy to be debated on 8 September
+ 44 20 7951 7750
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.
Summer Budget 2015
Read all our commentary, thought leadership and insight into Summer Budget 2015 and the Finance Bill.
Economics for business
Tax Insights examines the journey ahead
Watch our Finance Act webcasts for insight and interpretation around the impact of this year's UK Finance Act from some of our leading tax professionals.
Tax alerts: knowledge when you need it