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 24 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.
Measures against tax evasion and a soft drinks levy included in the Queen's Speech
The Queen's Speech at the State Opening of Parliament last week announced legislation to implement a number of previously announced tax measures.
A new corporate offence of failure to prevent the criminal facilitation of tax evasion was confirmed. A detailed consultation document, including draft legislation and guidance, had already been published in April. The draft legislation on the new offence includes a defence that the company had reasonable compliance procedures in place to prevent the facilitation of evasion by its employees. The consultation closes on 10 July 2016.
The Speech also confirmed that the Government will bring in a new soft drinks industry levy from 2018, targeted at producers and importers of soft drinks that contain added sugar. It is anticipated that the levy will equate to 18p per litre for drinks in the lower band and 24p per litre for the higher band, and it is expected to raise £520 million in the first year. Legislation providing for the introduction of the new soft drinks industry levy will be included in Finance Bill 2017.
Finally, the Speech confirmed plans to reform business rates, including the increase of the business rate retention by local authorities from 50% to 100%. Although details are not yet available, this appears to mean that local authorities will be able to keep all additional business rate revenue that they generate from attracting new businesses to their areas.
Court of Appeal clarifies rules on double tax relief (DTR) for underlying tax
In dismissing the taxpayer's appeal in the case of Peninsular & Oriental Steam Navigation Company, the Court of Appeal has clarified certain aspects of the rules on DTR for underlying tax suffered on dividend payments.
The case involved the on-shore pooling rules that allow DTR to be claimed for tax borne by a UK company at the end of a chain of dividends up to the ultimate holding company. In this case, the UK company at the end of the chain (company C) paid a dividend to a non-UK intermediate holding company (company B). Company B paid two dividends to its UK resident parent, the taxpayer (company A), which claimed DTR for tax borne by company C. Company C had not actually paid any tax because its liability had been extinguished by tax allowances and group relief. However, the Court ruled that DTR could, in principle, be available on ‘deemed tax’ which was not actually paid due to other reliefs.
Nonetheless, the Court dismissed the taxpayer's appeal because it found the dividends paid by company B did not ‘represent’ a dividend from company C, as the legislation required. The Court found that the dividends paid by company B to company A could not have come out of distributable profits created by the receipt of the dividend from company C that bore the tax. In the case of one dividend, this was because the dividend from company C had not been received at the time the dividend was paid by company B. In the case of the second dividend, almost all the dividend from company C had gone into writing down company B's cost of investment in company C. Thus, it did not produce a distributable profit. Where the distributable profits out of which a dividend is paid, the Court found, are not the result of a dividend received, the paid dividend cannot ‘represent’ the received one.
The Court did find that the small residue of the dividend from company C that was recognised in distributable profits by company B could be represented in the second dividend paid by company B and so DTR was available to company A in respect of this small amount only.
European Commission publishes guidance on what constitutes State Aid
The Commission has published a Notice on the notion of State Aid setting out its current thinking of what constitutes unlawful State Aid. The Notice has a wide scope and includes some detailed comments on the taxation practices that the Commission considers can amount to State Aid.
State Aid is only treated as unlawful if it gives rise to a selective advantage from the use of public resources which also affects cross border trade. The Commission's Notice clarifies how this might apply to tax policy in certain situations:
• Tax rulings: Rulings which allow a deviation from the arm's length principle, as interpreted by the Commission, may entail selectivity, especially if they are not available to all undertakings in a similar factual and legal situation
• Collective investment schemes: Tax measures that provide for tax neutrality for investment funds are not in themselves selective as long as they are open to all funds in a comparable factual and legal position
• Tax amnesties: Amnesties open to all in a similar situation can be acceptable as long as the tax authorities do not have discretion over who to accept and do not waive verification procedures
• Tax settlements: These may constitute State Aid if they reduce a tax liability in a disproportionate manner, or the tax settlement is contrary to the applicable tax provisions and to the advantage of the taxpayer
There are also brief comments on how rules for depreciation, amortisation, anti-avoidance rules and fixed tax regimes can be selective and hence amount to State Aid in certain circumstances.
The Notice is a useful summary of the criteria that the Commission considers during State Aid investigations and groups may wish to consider its possible application further.
Please see our global tax alert for more details.
Other UK developments
European Court decision on VAT liability of credit and debit card handling fees due tomorrow
The Court of Justice of the European Union (CJEU) will deliver its judgments tomorrow, Thursday 26 May, in the UK cases of Bookit Ltd and National Exhibition Centre Ltd. These cases ask fundamental questions about the scope of the EU VAT exemption for payment processing.
Depending on the CJEU's response, a large number of businesses could be affected including banks and traditional card providers, third party outsourcers, and travel and hospitality businesses. Such businesses may wish to review the decision when it comes out.
First-tier Tribunal finds that taxpayer who took professional advice was not careless
The First-tier Tribunal has allowed the taxpayer's appeal against a discovery assessment issued by HMRC to assess an insufficiency of capital gains tax on the grounds that the taxpayer had acted carelessly. Although the Tribunal found that HMRC had discovered an insufficiency of tax, it also found that the taxpayer had not acted carelessly, and therefore the normal four year time limit for making a discovery assessment was not extended.
The taxpayer had made a capital gain in respect of the sale of company shares with consideration being provided by the issue of new shares in a different company. HMRC enquired into the valuation of these shares and as a result the valuation was increased. HMRC issued a discovery assessment to increase the sale proceeds and assess the increase in the capital gains tax charge.
The taxpayer's valuation was based on advice from a professional services firm and an independent third party offer made by another potential purchaser of the business around ten days before the actual sale (this offer had not been accepted). HMRC's contention was that a taxpayer taking reasonable care would have obtained his own independent valuation. However, the Tribunal found that it was reasonable for the taxpayer to have placed reliance on the ‘serious’ third party offer and his professional adviser in these particular circumstances.
Although this case is fact specific, it does provide useful commentary on what constitutes reasonable behaviour and particularly a taxpayer's ability to rely on professional advice.
Timing of consultations may be affected by Government purdah
The purdah period for the EU referendum will begin this Friday, 27 May 2016, being four weeks before the poll on 23 June 2016. During the purdah period, central and local government are prohibited from publishing material relating to the referendum, although some exemptions apply.
We are awaiting consultation documents announced at Budget 2016 on corporate tax loss restrictions and on the substantial shareholding exemption. We hope that these may be published this week, but if not, it may be that they will not appear until after the referendum.
Welsh Government seeks input on land transaction tax (LTT)
From April 2018, the Welsh Revenue Authority will have the responsibility to collect and manage LTT, the tax that will replace stamp duty land tax (SDLT) in Wales. The Welsh Government has been working with HMRC to map the current SDLT processes so as to better understand the complexities in the collection of the tax and also to identify the potential areas for improvement. The Welsh Government is now looking to engage with taxpayers and advisors to discuss the way the process currently operates and we will be contributing to this discussion.
European Parliament calls for stricter limits on interest deductions
The European Commission's proposal for an anti-tax avoidance directive was yesterday approved by the Parliament's Economic and Monetary Affairs Committee. However, MEPs called for a ratio of 20% to be used in the fixed ratio rule restricting interest deductions, rather than 30% as proposed in the draft directive. MEPs did support interest deductions for all groups being allowed up to €2 million. MEPs also called for a limit to the period during which interest deductions can be made to five years. Although it is not entirely clear, we assume that this refers to the carry forward of disallowed interest, which the draft directive allows to continue indefinitely.
Furthermore, the Committee called for the switchover rule in the draft directive to apply where income received from a territory outside the EU is taxed at a rate of less than 15% (rather than at a rate lower than 40% of the recipient’s national rate as per the Commission’s proposal). The switchover rule provides that passive foreign income received in the form of dividends, capital gains and branch profits from low or no tax jurisdictions would be taxed, with credit for foreign tax, rather than be tax-exempt.
The EU's Economic and Financial Affairs Council (ECOFIN) is due to discuss the draft directive at its meeting today.
Germany considers centralising claims for withholding tax repayments
The Upper House of the German Parliament, the Federal Council, has proposed that claims for certain refunds of withholding tax with respect to portfolio dividends should be provided to a central authority for administrative processing. The lack of rules on which authority is responsible for processing these claims is seen as one of the reasons why EU refund claims have been kept on hold by the German tax authorities. The Federal Council has suggested a new law which, if ultimately adopted, would provide for legal certainty for non-resident investors regarding the refund of withholding tax based on EU law.
Various claims for withholding tax refunds under EU law have been made by many entities. However, these have been held up over a number of years in part due to disagreements over whether they should be processed by local or central tax authorities in Germany.
The proposals of the Federal Council echo recommendations by the German Federal Accountability Office last year. The German Government says it will review the proposal in detail.
Please see our global tax alert for more details.
VAT Expert Group adopts opinion in favour of Commission's Action Plan on VAT
The VAT Expert Group, which assists and advises the European Commission on VAT matters, has adopted an opinion on the VAT Action Plan presented by the Commission in April. The plan sets out ways to reform the current EU VAT system to make it simpler, more fraud-proof and business-friendly. Our global tax alert provided further details.
The Expert Group has welcomed the initiative of the Commission to further explore possible options for implementing the destination principle in business-to-business cross-border trade in order to ensure a level playing field between EU cross-border and domestic transactions, and at the same time tackling the problem of VAT fraud.
The VAT Action Plan is due to be discussed at the ECOFIN meeting today.
Greek VAT rate increased to 24% from 1 June 2016
The Greek Parliament has passed legislation to increase the standard rate of VAT in Greece from 23% to 24%. The change takes effect from 1 June 2016. This is the sixth VAT rate rise in as many years in Greece. Businesses operating there may need to make urgent systems changes to deal with the increase in rate.
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: A decree has been issued to make the register of the beneficial owners of trusts available online to the public as of 30 June 2016.
Russia: The Government has signed the multilateral instrument on the automatic exchange of financial information under the common reporting standard.
Austria: A draft law has been published implementing country-by-country reporting and the transfer pricing local and master file recommendations in the final report on BEPS Action 13.
Liechtenstein: The Government has issued a consultation paper on implementing aspects of the BEPS agenda, including requiring transfer pricing documentation to be maintained.
The EY 2016 UK attractiveness survey: Positive rebalancing is now available. Our annual survey, which has been running from 1997, shows the UK attracted 1,065 foreign direct investment (FDI) projects, creating over 42,000 jobs. It confirms the UK as Europe's FDI leader.
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.
Measures against tax evasion and a soft drinks levy included in the Queen's Speech
+ 44 20 7951 0568
Court of Appeal clarifies rules on double tax relief for underlying tax
+ 44 20 7951 2686
European Commission publishes guidance on what constitutes State Aid
+ 44 20 7951 4246
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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