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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
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Building a tax manifesto for manufacturing
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- Midweek Tax News
A weekly update on tax matters to 24 November 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.
The Chancellor of the Exchequer gives his Autumn Statement today
George Osborne, the Chancellor of the Exchequer, gives his Autumn Statement to the House of Commons today at 12:30 pm. Government borrowing figures in October, that were poorer than expected, give him less room for manoeuvre than he might have liked, as he announces the results of his spending review. We expect that the emphasis today will be on public expenditure decisions, with most of the detail about tax changes deferred until Wednesday, 9 December when the draft clauses of Finance Bill 2016 will be published. Nonetheless, it is possible that tax changes could be announced or updates provided in the Chancellor's speech or other material released today.
We will be sending out a tax alert this evening with a summary of today's announcements and our initial thoughts on what it all means. Then, following the publication of the draft Finance Bill clauses, our next Tax Focus web seminar will be at 4:00 pm on Thursday, 10 December. Claire Hooper, Chris Sanger and David Kilshaw will be giving an update on the Autumn Statement and the draft Finance Bill clauses. To register for the web seminar, please click here.
Finance (No. 2) Act receives Royal Assent and is now law
Finance (No. 2) Act 2015 received Royal Assent on 18 November. The Act locks in the rates of income tax and VAT for the life of the Parliament (the lock on national insurance contributions being covered separately); reduces the corporation tax rate to 19% in 2017 and 18% in 2020; and makes substantial changes to the provisions on loan relationships and derivative contracts, including a new regime-wide targeted anti-avoidance rule. A new 8% corporation tax surcharge is imposed on banks, while relief for bank compensation payments is denied. Conversely, the bank levy is reduced in steps down to 0.1% of chargeable liabilities in 2021.
A substantial number of amendments were made at the report stage before the Act was passed by the House of Commons on 26 October. Among the amendments was a new clause providing that payments of restitution interest will be chargeable to corporation tax at a special rate of 45%. This will impact both direct and indirect tax claims. Restitution interest will apply in situations where compound interest is recovered from HMRC (either by agreement or an order of a court) and the interest is not limited to simple interest at a statutory rate. No reliefs, such as losses, can be offset against the taxable restitution interest. Other changes widened the scope of the disguised management fee and carry provisions in the Act and made changes to the rules on venture capital trusts and enterprise investment schemes.
Following the passage of the pre-election Finance Act 2015 through the House of Commons in a single day, it is unfortunate that these further substantial changes were made without time for detailed scrutiny. Businesses affected, especially those with outstanding restitution claims, may wish to keep developments under review.
EY sends initial representations on patent box consultation
EY has submitted initial representations on the HMRC and HM Treasury joint consultation document on changes to be made to the patent box to make it compliant with the outcome of the OECD's base erosion and profit shifting Action 5 on harmful tax practices. We intend to submit more detailed representations to the proposals by the closing date of 4 December 2015 but have sent in some initial comments given the limited time between the closing of the consultation and the publication of the draft Finance Bill clauses on 9 December.
The introduction of a modified patent box regime based on the nexus approach recommended by the OECD will create considerable extra work on the part of both the taxpayer and HMRC in order to meet the increased compliance requirements. We consider it important that the compliance burdens and restrictions imposed by the modified regime are minimised. In our representations and in the meetings we have had with HMRC and HM Treasury we set out a number of suggestions in this regard.
The proposed changes will also limit the benefits of the regime and, whilst we welcome the proposed relief for certain mergers and acquisitions, we suggest that this should be made as wide as possible. We also make some suggestions in respect of other transfers within the UK. Furthermore, we suggest changes with regard to sub-contracting research and development to unrelated parties where it is passed through a related party and to transitional issues where a product or service contains both grandfathered intellectual property (IP) and IP immediately within the new regime.
When the UK originally introduced the patent box it was seen as a competitive advantage for the UK. Now that several other countries also have attractive IP regimes, or are proposing to introduce one, the UK risks putting itself into an uncompetitive position if its regime is seen to be less attractive than those elsewhere. We, therefore, believe it is an appropriate time to re-visit the range of IP that can qualify for the benefits of the regime so that the UK can maintain its competitive position.
Please get in touch with your usual EY contact if you would like to discuss our representations or the impact of the new rules on your business.
Other UK developments
Upper Tribunal rules on the source of interest income subject to deduction of tax
In the joined cases of Ardmore and Perrin, the Upper Tribunal has rejected both the taxpayers' appeals, finding that they were obliged to deduct income tax from interest payments and account for the tax to HMRC. The cases concerned UK residents paying interest through arrangements offshore and whether the interest paid arose in the UK.
The Upper Tribunal considered the House of Lords decision in National Bank of Greece, finding that this decision required that a multi-factorial test should be used to ascertain the source of income rather than just the ‘nationality’ or ‘residence’ of the relevant loan documents. That meant that the First-tier Tribunals which considered the cases had not erred in using a multi-factorial test. However, the Upper Tribunal disagreed with the approach taken by HMRC in its guidance that the residence of the debtor was the most important factor, finding that it is a material factor but not the most important factor, since National Bank of Greece did not establish any hierarchy of materiality or weight.
The Upper Tribunal then considered the multi-factorial analysis by the First-tier Tribunals in both cases. For Perrin, it found the First-tier Tribunal had made no material error in deciding the income arose in the UK because the debtor, the taxpayer, was resident in the UK and his obligations originated in the UK. For Ardmore, the Upper Tribunal found that the First-tier Tribunal was right to give weight to the UK residence of the debtor, being the taxpayer, and the source of the income, being the taxpayer's trading activities in the UK. Thus both taxpayers were required to deduct tax from the interest.
Corporation tax rate of 12.5% proposed for Northern Ireland
The agreement by the parties to talks in Northern Ireland to A Fresh Start: the Stormont Agreement and Implementation Plan has opened the way to the devolution of corporation tax powers, which is expected to lead to a reduction in the corporation tax rate to 12.5% by April 2018. This follows the Corporation Tax (Northern Ireland) Act 2015 that comes into effect on a date still to be stipulated in regulations.
Under the Act, the Northern Ireland Assembly will have the power to set the corporation tax rate over most trading profits in a new Northern Ireland corporation tax regime. This does not include non-trading profits such as income from property. Power over the corporation tax base, including reliefs and allowances, will remain with the UK Parliament. However, the Act does contain rules on the treatment of capital allowances as well as special tax reliefs for the creative sector and research and development.
The legislation also includes specific rules for attributing Northern Irish profits of smaller companies to prevent disproportionate administrative burdens and uses existing international rules for profit allocations for larger companies to avoid unnecessary complexity. Profits from some trades will remain in the UK main regime including lending and investing activities (including those of treasury companies); asset management; finance leasing; long-term insurance (including life insurance); and reinsurance activities of both general and life insurance. Oil and gas extraction will also be excluded from the Northern Ireland regime and remain subject to the UK ring fence rules.
Date for the Scottish Budget announced
The Scottish Budget will be held on 16 December. As part of the Budget, the Scottish rate of income tax (SRIT), to apply from April 2016, is expected to be announced. There is no indication at present that the rate set for SRIT from April will lead to different rates of tax between Scottish taxpayers and taxpayers in the rest of the UK.
From 6 April 2016, the rate paid by Scottish taxpayers will be calculated by reducing the basic (20%), higher (40%) and additional (45%) rates of UK income tax by 10% and adding a new Scottish rate set by the Scottish Parliament. The Scottish Parliament may set any rate, but under the Scotland Act 2012 it must be a single rate.
Further powers on rates and bands are contained in the Scotland Bill currently progressing in the House of Lords. Under the provisions of that Bill, expected to come into force from April 2017 at the earliest, there will be no restrictions on the thresholds or rates the Scottish Parliament can set. All other aspects of income tax will remain reserved to the UK Parliament, including the personal allowance, the taxation of savings and dividend income, the ability to introduce and amend tax reliefs and the definition of income.
The introduction of the SRIT means that businesses with employees who are Scottish taxpayers will need to consider whether their payroll systems are ready for the change.
US toughens up rules on tax-driven inversions
The US Treasury has released new anti-corporate inversion guidance intended to make corporate inversions more difficult and less beneficial. However, Treasury Secretary Jack Lew noted “only legislation can decisively stop” tax-driven inversions.
Under current law, certain US anti-inversion rules apply if, after the transaction, less than 25% of the new combined multinational entity's business activity is in the home country of the new foreign parent and the shareholders of the former US parent end up owning at least 60% of the shares of the new foreign parent.
If this continuing ownership stake is 80% or more, the new foreign parent is treated as a US resident corporation, thereby nullifying the corporate inversion for tax purposes. If the continuing ownership stake is between 60% and 80%, US tax law respects the foreign status of the new foreign parent but other potentially adverse tax consequences may follow.
The new guidance limits the ability of US companies to merge with foreign entities using a new foreign parent in a third country and to avoid the 80% ownership rule by ‘stuffing’ assets into the foreign acquirer as part of the inversion transaction. Finally, the guidance requires the new foreign parent to be a tax resident of the country in which the foreign parent is created or organised. These new rules are effective for deals that closed on or after 19 November 2015.
The guidance also reduces the tax advantages of an inversion by limiting the ability of an inverted company to transfer its foreign operations to a new foreign parent after an inversion transaction without paying US tax. This change has effect from 22 September 2014 when previous guidance was released. Finally, there are two corrections to previous guidance, also effective from 22 September 2014.
Please see our global tax alert for more details.
Australia launches discussion document on implementing anti-hybrid rules
The Australian Board of Taxation has released a discussion paper on the implementation of anti-hybrid rules developed by the OECD. The Board has been asked to undertake a consultation on the implementation of new tax laws to neutralise hybrid mismatch arrangements following the recommendations in the OECD final report on base erosion and profit shifting Action 2 (hybrid instruments).
The OECD report sets out best practice for rules to neutralise hybrids which give rise to deductions in more than one territory or a deduction in one territory and no corresponding taxation in any other territory. As a primary rule, it recommended that, in general, a deduction be denied. Where the payer's jurisdiction has not implemented such a rule, it generally recommended that the recipient be taxed on the receipt.
The consultation contains 39 questions for comment including on a possible start date from 1 July 2017. The deadline for comments is 15 January 2016.
Africa tax seminar on 14 January 2016
EY's Africa Attractiveness Survey confirms that Africa remains one of the top locations for global foreign direct investment. In light of the continued attractiveness of the continent as an investment destination, we will be hosting a half day seminar in London from 8:30 am on Thursday, 14 January 2016.
Speakers from the Africa sub-area and our EMEIA Pan African Tax Desk will provide specialist insight on current trends and relevant issues from a taxation perspective for both new and existing investments into the Sub-Saharan Africa region. The seminar will be followed by a networking lunch and there will be opportunities for private meetings in the afternoon.
For more details and to register for the seminar, please click here.
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.
Ireland: Finance Bill 2015 includes implementation of country-by-country reporting as well as transfer pricing documentation including local and master files.
India: A High Court has ruled that a liaison office of a foreign sportswear company does not give rise to a taxable presence or permanent establishment in India.
Sweden: The Supreme Administrative Court has concluded that taxation of employee stock options earned from work abroad is in breach of the EU's principles on freedom of movement.
Mexico: The tax authority has issued amendments to the beneficial tax regime for investments made by foreign pension and retirement funds in Mexico.
Our new report Striking a balance: Moving from enabling to mandating asks how far HMRC should go in terms of deciding how businesses should operate as a tool for enforcing tax compliance.
With the non-dom consultation now closed and the consultation meetings over, the fourth edition of The non-dom newsletter considers the latest thinking on the proposed reforms.
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.
The Chancellor of the Exchequer gives his Autumn Statement today
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Finance (No. 2) Act 2015 receives Royal Assent and is now law
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EY sends initial representations on patent box consultation
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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.
Economics for business
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