See our latest edition to learn how the BEPS project transcends a rewrite of the global tax framework to become a business transformation issue.
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 21 June 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.
EU anti-tax avoidance directive agreed by Council of Ministers
Political agreement to the anti-tax avoidance directive has now been reached and the directive will be submitted to a forthcoming Council meeting for adoption. As proposed in the ECOFIN meeting of 17 June, it seems that the directive should be transposed in Member States' national laws not later than 31 December 2018 and come into effect a day later (although some elements have later dates).
The comments below are based on the last public draft but reflect our understanding that the ‘switchover’ clause has been removed.
Interest limitation rule: The directive limits the deduction of ‘net’ borrowing costs to 30% of taxable earnings before interest, taxes, depreciation and amortisation (EBITDA). In addition to this fixed ratio, countries may give taxpayers who are part of a consolidated group the option to either (i) deduct net borrowing costs based on a group ratio determined by dividing the third party net borrowing costs of the group by group EBITDA (group ratio rule) or (ii) deduct their borrowing costs in full, if they can demonstrate that their equity to total assets ratio is no more than two percentage points lower than the equivalent group ratio (equity escape rule). Both these rules featured in the OECD recommendations under BEPS Action 4.
Furthermore, Member States are allowed to apply a de minimis limit of €3 million and apply grandfathering to loans concluded before 17 June 2016. Borrowing costs on loans used to fund long-term public infrastructure projects within the internal market can be excepted and financial undertakings excluded from the rules altogether. The directive provides several possibilities with regard to the carry forward and back of disallowed borrowing costs or interest capacity.
Member States that have equally effective national targeted rules preventing BEPS risks from interest deductions, can continue applying these rules until the end of the first full fiscal year following the publication of an agreement between the OECD members on a minimum standard with regard to OECD BEPS Action 4, but not later than 1 January 2024.
Exit taxation: A taxpayer shall be subject to tax in four specified circumstances on an amount equal to the market value of the transferred assets, at the time of exit, less their value for tax purposes. Where the transfer is between members of the EEA, the tax can be paid in instalments over five years (subject to interest). The exit tax provision needs to be transposed in Member States’ national laws by 31 December 2019 and will apply as of 1 January 2020.
General anti-abuse rule: Member States are required to ignore arrangements that have as a main purpose, or one of the main purposes, obtaining a tax advantage that defeats the object or purpose of the applicable tax law and are not put in place for valid commercial reasons reflecting economic reality.
CFCs: Member States must have CFC rules that apply in the case of a ‘50% controlled’ entity or permanent establishment. It seems the rules should apply where the corporate tax paid by the CFC is lower than 50% of the actual tax that would have been charged in the Member State of the taxpayer.
Where the entity or permanent establishment is treated as a CFC, the Member State should either:
• tax the non-distributed income of an entity or permanent establishment derived from specified categories (unless the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances). Member States may choose to not apply this carve-out for substantive economic activity if the CFC is resident or situated in a third country that is not party to the EEA Agreement, or
• tax the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage (substance approach). Arrangements shall be regarded as non-genuine to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risks which generate its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out. Only income generated through assets and risks which are linked to significant people functions carried out by the controlling company need be taxed under the CFC rules.
There are exemptions, including by percentage for the category approach or amount for the substance approach.
Hybrid mismatches between Member States: The directive establishes that where a hybrid mismatch results in a double deduction, the deduction should be granted only in the Member State where the payment has its source. Similarly, where a hybrid mismatch results in a deduction without inclusion, the Member State of the payer shall deny the deduction of such payment.
As the hybrid rules apply to hybrid mismatches within the EU only, several Member States expressed interest in having these provisions extended to third country hybrid mismatches. In this regard, a Council statement has been tabled requesting the Commission to put forward a proposal on hybrid mismatches involving third countries in October 2016, at the latest, with the aim to reach agreement by the end of 2016.
The UK is already in the process of legislating for BEPS Action 2 (hybrids) and Action 4 (interest) and it does not seem that the directive will have a significant impact on this legislation. The Government will need to consider whether its existing legislation in the other areas is compatible with the directive.
Tax Focus web seminar on consultations on corporate tax loss relief and the substantial shareholding exemption (SSE) on Tuesday, 28 June
Our next Tax Focus web seminar will be at 10:00 am on Tuesday, 28 June 2016 when we will be looking at consultations released on 26 May on the reform of the corporation tax loss relief rules, and the possible reform of SSE.
It is proposed that the loss relief rules will be reformed from 1 April 2017 so that:
• Losses arising from 1 April 2017 can be carried forward and set against different types of taxable profits within a company and its fellow group members
• The amount of annual profit that can be relieved by carried-forward losses will be limited to 50% from 1 April 2017, subject to an allowance of £5 million per group
The consultation sets out in more detail how these proposed rules may work.
The SSE consultation discusses a possible reform of SSE, with the aim of making it simpler, more coherent and more internationally competitive. It therefore sets out a wide range of options for possible reform, from detailed changes within the existing rules through to a comprehensive exemption for gains on substantial share disposals.
Join us for our web seminar on 28 June which will focus on the proposed changes to the loss rules but will also cover the potential reform of SSE. In particular, we will consider:
• How the proposed new corporation tax relief rules are expected to work
• The practical implications of the loss changes on groups and actions that could be considered prior to 1 April 2017
• The possible options for a reformed SSE regime together with the detailed changes being proposed to the existing regime
Register now to hear Claire Hooper and Mandy Pachol discuss these and other issues.
European Court finds no requirement to round up VAT partial exemption calculations
The Court of Justice of the European Union (CJEU) has released its judgment in the German case of Kreissparkasse Wiedenbrück. The taxpayer, a credit institution which operated a ‘partial exemption special method’ (PESM), sought to round up its VAT recovery rate to the next whole number. The Court held that EU law does not require rounding up of the partial exemption VAT recovery rate to the next whole number when using a PESM. This was on the basis that the purpose of a special method was to provide greater accuracy in determining the extent of the right to deduct VAT.
The case picks up on the unsuccessful argument previously advanced in the case of Royal Bank of Scotland Group. In that case, the CJEU held that the requirement to round up the partial exemption VAT recovery rate was limited to turnover-based calculations. Member States were not required to apply the rounding-up rule in relation to PESMs, but could if they wished.
Whilst the previous case was concerned with the wording of the Sixth Directive, the current case was concerned with the equivalent provisions of the Recast VAT Directive. The Court held that there was no distinction between the two sets of provisions and consequently the decision in Royal Bank of Scotland still applies. The Court further held that, in the event of an adjustment such as a capital goods scheme adjustment, the rounding-up rule should only be applied where that same rule was used to determine the initial VAT deduction.
This outcome was to be expected in view of the decision in Royal Bank of Scotland and appears to close off any potential claim opportunity with regard to rounding up on PESMs. In the UK, VAT recovery rates calculated under the standard method must be rounded up to the next whole number unless the business incurs more than £400,000 residual input tax per month on average, in which case a more exact figure must be used. Therefore, one issue which arguably remains unresolved in the UK, is whether the disapplication of the rounding-up rule in this scenario is correct on the basis of fiscal neutrality.
Other UK developments
First-tier Tribunal finds that partners can assess different profits from the partnership return
In the case of King and Ors, the First-tier Tribunal found that the taxpayers, who were partners in a limited liability partnership, were entitled to declare different profit share figures on their individual tax returns to that declared on the partnership tax return, if they assessed the figure declared on the partnership return to be incorrect.
The case involved a partnership of accountants. The audited accounts of the partnership disclosed a loss but certain provisions were added back so that the partnership's tax return showed a profit. In their individual tax returns, the partners noted that they believed this profit figure was incorrect and explained, in varying levels of detail, what they assessed the correct figure to be.
The Tribunal found, given the weight of evidence, that the amounts disclosed in the individual partners' returns, being based on the audited and GAAP-compliant accounts of the partnership, were the ‘correct’ amounts, rather than those in the partnership return. HMRC argued that, if the partnership return was incorrect, then it was for the partnership to challenge the partnership closure notice, or for the partners to claim against the partnership. The Tribunal rejected this and decided that the partners were entitled to appeal against the closure notices issued by HMRC to them. Therefore, it allowed the taxpayers' appeal.
Swiss Parliament approves wide-ranging corporate tax reform
A package of corporate tax measures has been approved by both houses of the Swiss Parliament. The package replaces various preferential tax regimes with new incentives that are compliant with the OECD's BEPS agenda. The reforms are intended to be accompanied by broad reductions in corporate tax rates to maintain Swiss competitiveness. The abolition of capital duty and the introduction of a tonnage tax have been postponed.
The reform abolishes various preferential tax regimes at a date to be decided, but after 1 January 2019. At federal level, tax regimes for principal companies and finance branches will be affected, whereas at the cantonal level, the holding, domiciliary and mixed company regimes will end. Conversely, a patent box compatible with BEPS Action 5 (harmful tax practices) and enhanced deductions for research and development are to be introduced. The rules also include a notional interest deduction for companies that have surplus equity, based on the yield on 10 year Swiss federal bonds, and a tax free step-up in tax basis when a company or business is relocated to Switzerland.
Please see our global tax alert for more details.
OECD holds webcast on the latest BEPS developments
The OECD has held a webcast to update stakeholders on BEPS project developments since the delivery of the BEPS package in October 2015 and its work programme for the coming months. Pascal Saint-Amans, Director of the OECD's Centre for Tax Policy and Administration, provided an update on the implementation of BEPS so far, noting that 101 jurisdictions have committed to automatic information exchange under the Common Reporting Standard; 82 jurisdictions have signed up to the multilateral competent authorities agreement on automatic exchange of financial account information; and 96 jurisdictions are participating in the multilateral convention on mutual administrative assistance in tax matters.
The OECD will facilitate peer reviews of the implementation of four BEPS minimum standards, Action 5 (harmful tax practices), Action 6 (treaty abuse), Action 13 (country-by-country reporting) and Action 14 (dispute resolution). The implementation of the other actions will be monitored and the task force on the digital economy will continue.
Mr Saint-Amans also noted that further discussion drafts on Action 7 (permanent establishments) and Actions 8-10 (transfer pricing) covering profit split methods and profit attribution are in preparation.
EY breakfast briefing on opportunities and challenges in China on 14 July
We will be holding a breakfast briefing in conjunction with the CBI at 8:00 am on Thursday, 14 July at our office at 1 More London Place. The briefing by the CBI's China Representative, Guy Dru Drury, will cover the latest political, regulatory and business news as well as looking at the aftermath of President Xi's visit to the UK last year, and the state of China's economy and business environment. It should be of interest to groups investing or considering investment in China.
If you would like to attend please contact Angela Li (+ 44 20 7951 8864).
Update on the implementation of Indian GST
The Empowered Committee of State Finance Ministers has approved the model Indian Goods and Services Tax Bill. Accordingly, the model draft GST law has now been released for stakeholder consultation. The Central GST for the whole country will be based on the model law while the individual States will draft their own State GSTs based on the model law with minor variations incorporating State-based exemptions.
The release of the model law with the support of almost all States is a significant step in the process of Indian GST implementation and is expected to facilitate clearance of the long pending Constitutional Amendment Bill, which is required to introduce a GST. The Indian Government is hopeful that Indian GST will be implemented at an early date subject to the successful passage of the Bill, which will be presented in the monsoon session of Parliament, which commences in the first week of July.
Stakeholders may wish to take this opportunity to put forward their suggestions, if any, on the draft model law so that concerns may be addressed before the implementation of Indian GST.
Legislation passed to levy Russian VAT on electronic services purchased from abroad
As reported in Midweek Tax News to 15 March 2016, Russia is planning to impose VAT on electronic services supplied by foreign businesses to Russian customers. The draft legislation has now passed its third and final reading in the State Duma. The changes will come into force with effect from 1 January 2017. According to the draft legislation, for business-to-consumer transactions, the foreign service provider will be required to register and account for VAT in Russia. For business-to-business transactions, the reverse charge mechanism will apply.
Russia joins 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 electronic services. This development will be relevant to any overseas businesses that make supplies of electronic services into the Russian market. Affected suppliers may wish to consider the associated commercial and systems implications ahead of the implementation of the changes.
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.
Sweden: The Government has proposed that interest on certain subordinated debt issued by financial institutions should no longer be deductible for tax purposes.
Italy: The tax authority has issued a circular providing details on the new advance tax rulings scheme for new investments in Italy.
Pakistan: The Budget for 2016/17 cuts corporation tax by 1% to 31%, extends tax on capital gains and enacts transfer pricing documentation requirements in line with the BEPS agenda.
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.
EU anti-tax avoidance directive agreed by Council of Ministers
+ 44 20 7951 2486
Tax Focus web seminar on consultations on corporate tax loss relief and the substantial shareholding exemption on Tuesday, 28 June
+ 44 20 7783 0859
European Court finds no requirement to round up VAT partial exemption calculations
+ 44 20 7980 9644
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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