As the proliferation of changes associated with indirect taxation and new legislation spreads, it’s essential to manage your indirect taxes. See the latest developments worldwide.
Indirect tax developments in 2015
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We’ll help you navigate the global tax landscape
The business and tax landscapes have changed dramatically, and the pace and complexity of change continues to increase. Governments are tempering the need for revenue with increased competition for labor and capital. Tax authorities are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. Companies are balancing competing priorities, ensuring they maintain compliance while adding value.
We can assist you with these critical issues in today's tax environment, including:
Building a tax manifesto for manufacturing 658K, August 2014
- Midweek Tax News
A weekly update on tax matters to 28 April 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.
Tax Focus web seminar this morning, 29 April, at 10:00: Who cares about tax risk?
In a period of unprecedented change in the global tax environment and when the tax affairs of multinational businesses continue to be under the spotlight, organisations are demanding more transparency and value from their tax functions.
Join our Tax Focus web seminar to learn how these demands are driving organisations to improve their operational tax risk management through stronger tax governance structures, the development of board approved tax policy documents and enhanced tax risk management frameworks. This can lead to increased confidence that the basics are taken care of and to stronger foundations from which to build value.
Register now to hear Claire Hooper, Mandy Pachol and James Egert address why tax risk management should be a key priority for your business.
European Court rules German rollover relief unlawful in a judgment that may affect UK rules
The European Commission referred this case to the Court of Justice of the European Union (CJEU) in relation to capital gains rollover relief provisions in Germany. German tax law permits gains on the sale of certain assets arising in a German permanent establishment to be rolled over into certain replacement assets, where the replacement assets also relate to a German permanent establishment. Where the replacement assets are acquired in relation to a permanent establishment outside Germany, rollover relief is not permitted and so the gain is taxed immediately.
The CJEU held that this treatment was discriminatory and contrary to the freedom of establishment. It confirmed that, in accordance with the principle established in the National Grid Indus judgment, the German tax authorities still retain the right to tax the capital gain arising on the original asset when the replacement asset is sold. However, it was discriminatory that the gain could only be deferred where the replacement asset was held by a German permanent establishment but not where it was held by a permanent establishment elsewhere in the EU.
Chargeable gains legislation in the UK has a similar restriction in relation to rollover relief. Specifically, gains crystallising in a UK permanent establishment can only be rolled over where the replacement assets are held in the UK. Therefore, this case is likely to have implications for UK law in this area.
Consequences of VAT grouping following the European Court judgment in Skandia
The European Commission has published a working paper setting out its views on the consequences of VAT grouping following the judgment of the Court of Justice of the European Union (CJEU) in the case of Skandia America Corporation, including whether the conclusions drawn by the CJEU apply in circumstances which differ from the facts of the case. The Commission intends to discuss the issues raised in the working paper with the EU VAT Committee, with a view to reaching a common and consistent position on the consequences deriving from the Skandia judgment.
The dispute in Skandia revolved around the VAT treatment of services supplied by the head office of a company in a non-EU country to a branch of that same company in the EU (specifically, in Sweden), where the branch was a member of a VAT group in that Member State. The CJEU held that, for VAT purposes, the head office should be treated as supplying its services not to that branch, but to the VAT group. As the VAT group was a separate taxable person from its constituent members, it was required to account for VAT on those services under the reverse charge procedure. The Commission considers that the judgment should apply to services supplied between two establishments of the same legal entity, where one of the establishments is a member of a VAT group.
HMRC recently announced that the Skandia judgment does not require any changes to the current UK VAT grouping rules. However, VAT may become due where an overseas establishment of a UK entity is located in a Member State that operates similar ‘establishment only’ VAT grouping provisions to Sweden (ie, grouping of the local establishment rather than the whole legal entity, as is the case in the UK). Consequently, from 1 January 2016, businesses must treat intra-entity services provided to or by such establishments as supplies made to or by another taxable person and account for VAT accordingly.
The Commission's views, as reflected in the working paper, call into question the validity of the current UK VAT grouping rules and HMRC's proposed implementation of the Skandia judgment in the UK, insofar as the impact is seen as limited to those Member States that, like Sweden, operate ‘establishment only’ VAT grouping provisions.
Other UK developments
Supreme Court refuses permission to appeal loan relationships avoidance case
In the case of Vocalspruce, the Supreme Court has refused to hear the taxpayer's appeal against the decision of the Court of Appeal last year. The Supreme Court found that the case “does not raise an arguable point of law of general public importance.”
The case involved a scheme where the taxpayer argued that amounts transferred to share premium account were not taxable. The taxpayer had received certain zero-coupon loan notes from another group company in return for which it had issued shares. Accounting for the transaction required that the taxpayer transfer credits it recognised on the accretion of the loan notes from its profit and loss account to its share premium account.
However, in a unanimous decision, the Court of Appeal decided that the accounting consequences of the transaction should be disregarded for tax purposes because it was a transfer within a group. Thus, the taxpayer had to ignore the fact it had transferred credits to its share premium account as result of the transaction. Following the Supreme Court's announcement, this decision is now final.
Political parties announce additional tax plans
The Conservative Party has announced its proposals for ‘English votes for English laws’. Under the proposals, the line-by-line scrutiny of new bills would be reserved for MPs from the nations affected by the legislation. A new grand committee of all English MPs – or English and Welsh MPs where appropriate – would also have to approve any legislation relating only to England – or to England and Wales. The Conservatives promised to publish firm proposals within 100 days of forming a government, which would be fully implemented by the time of next year's Budget, likely to be in March 2016.
On Monday, the Labour Party pledged that stamp duty would be abolished for the first three years of a Labour government for all first-time buyers buying a home for under £300,000. This proposal would be funded by an increase in stamp duty of at least 3% on the purchase of property by persons from outside the EU, as well as a crackdown on property tax avoidance and on ‘rogue landlords’ who claim tax relief.
The Liberal Democrats have proposed a stability Budget within 50 days of the general election and have made it a condition of entering into a coalition.
HMRC responds to case on cross-border group relief claims
HMRC has now started to write to companies with pre-2006 cross-border group relief claims, inviting them to review and, where appropriate, withdraw those claims. HMRC's position is based on the Court of Justice of the European Union (CJEU) judgment in February 2015 in the case of Commission v United Kingdom.
In that judgment, the CJEU rejected the European Commission's claim that the UK legislation on cross-border group relief claims was too restrictive in its operation and, therefore, incompatible with the freedom of establishment. The CJEU judgment only considered the position for periods beginning on or after 1 April 2006 (the periods for which legislation had been introduced). It accepted that the UK was not required to legislate for cross border group relief prior to that date, as the UK explained that the earlier legislation was now construed in accordance with EU law.
The judgment raised the question of whether, for the purpose of UK group relief, the ‘no possibilities’ test would need to be considered at two different times, depending on the period for which group relief is claimed. For periods ending on or before 31 March 2006, when there was no explicit relief available in the UK legislation, the test as set down by the Supreme Court in the case of Marks and Spencer is to consider the claim at the time it is made. For periods beginning on or after 1 April 2006, the test is to be considered at the end of the accounting period in which the loss arose. It is HMRC's view that the CJEU's judgment means that, for all periods, the ‘no possibilities’ test should be considered at the end of the accounting period in which the loss arose. It believes that a Tribunal or Court would be bound to follow the CJEU ruling rather the Supreme Court decision, even in relation to periods ending on or before 31 March 2006.
HMRC is seeking responses to its letters within a short period of time. However, in our view, HMRC's approach might be capable of being challenged and companies receiving such a letter from HMRC may wish review their options before responding.
Italian Government proposes a tax on ‘virtual’ permanent establishments and publishes details of major tax reform
We understand that the Italian Government is considering a 25% withholding tax on foreign multinationals selling into the Italian market without a permanent establishment. The tax is to be administered by banks and financial intermediaries withholding it from payments to foreign multinationals in connection with transactions with Italian customers. It would be applied on the assumption of a ‘virtual’ establishment based on the concept of a significant digital presence and would be triggered when over €1 million of payments are made in respect of the ‘virtual’ establishment within a period of six months. The goal of the Italian Government is to introduce the new withholding tax in June 2015.
Draft legislation for various other tax reforms has been published. The reforms significantly reshape aspects of international tax, as well as enacting measures on simplification and avoidance.
A new type of ruling for investments of at least €30 million and with a positive and long lasting impact on employment will be introduced. The draft legislation also provides that dividends received from foreign controlled subsidiaries will be included in earnings before interest, tax, depreciation and amortisation (EBITDA) for the purposes of computing the 30% EBITDA cap for net interest expense deductions. However, Italian groups will no longer be able to count foreign entities' EBITDA for the interest cap, which is currently allowed under certain circumstances.
The advance ruling procedure to switch off the controlled foreign companies (CFC) legislation is no longer to be mandatory. The conditions required for the exemption from the regime can now be proved during the tax audit phase. In addition, CFC rules will be applicable only to controlled companies as opposed to the current legislation which applies also to qualifying minor shareholdings.
It is expected that draft legislation should become final shortly with some of the relevant provisions entering into effect this year.
Canada's federal budget for 2015 announced
Canada's federal Budget for 2015 includes a number of measures to support economic growth by focusing on support for specific industries and research programmes; providing additional support to small businesses; and promoting high-skilled employment. For instance, the small-business deduction currently reduces the federal income tax rate from 15% to 11% on the first $500,000 of qualifying active business income of a Canadian-controlled private corporation. The Budget proposes to reduce the 11% rate by 0.5% each year, commencing 1 January 2016, to give a 9% rate effective from 1 January 2019. No changes are proposed to the general corporate income tax rate.
Our global tax alert has more information on Canada's budget.
The Budget also contains a measure to provide relief from the Canadian withholding tax requirements for payments by qualifying non-resident employers to qualifying non-resident employees. Please see our separate global tax alert for more information on this announcement.
The latest developments on base erosion and profit shifting (BEPS)
The OECD has announced that its next webcast updating stakeholders on progress will be at 15:00 CET on Monday, 8 June 2015. Topics to be covered include progress on deliverables; the latest discussion documents; developing countries' engagement; and the schedule for the release of the final BEPS package.
Our global tax alert on the discussion draft issued by the OECD last week on BEPS Action 11 (improving analysis of BEPS) is now available.
As previously reported in Midweek Tax News, this week we are expecting a discussion draft covering cost contribution agreements, which is part of Actions 8 – 10 (transfer pricing). Revised discussion drafts on Action 6 (treaty abuse) and Action 7 (permanent establishments) are scheduled for release on 15 May with a discussion draft on risks, non-recognition and intangibles, also part of Actions 8 – 10, due by the end of May.
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.
US: The IRS and Treasury have issued proposed regulations regarding the exclusion of a foreign insurance company's income from the definition of passive income.
Japan: The Parliament has ratified the ‘exit tax’ on certain unrealised gains on financial assets. This tax will now apply to individuals who exit Japan on or after 1 July 2015.
Sweden: The Government has proposed a limitation to participation exemption rules and amendments to extend the Swedish Tax Avoidance Act to cover the Swedish Coupon Tax Act.
Germany: The Federal Finance Court has issued two landmark judgments regarding the VAT treatment of intra-Community chains of transactions for the supply of goods.
Switzerland: The Swiss Federal authorities have published a revised law on expatriate deductions, introducing new restrictions from 2016.
Brazil: The police have been investigating suspected corruption at the Administrative Council of Tax Appeals. As a result, the court has suspended consideration of pending cases until further notice.
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.
Tax Focus web seminar this morning, 29 April, at 10:00: Who cares about tax risk?
+ 44 20 7951 7092
European Court rules German rollover relief unlawful in a judgment that may affect UK rules
+ 44 20 7951 7076
Consequences of VAT grouping following the European Court judgment in Skandia
+ 44 20 7951 2249
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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Read our news, analysis and insight into measures announced in Budget 2015.
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.
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