Midweek Tax News

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A weekly update on tax matters to 15 August 2017

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.

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In the run up to the next round of Brexit negotiations at the end of August, the UK Government has published the first of several position papers on its vision of the future partnership with the EU, which are intended to help inform the negotiations. The first paper, published on 15 August 2017, covers the Government's proposals for future customs arrangements with the EU, although the EU's initial stance remains that it will not discuss Britain's future trading relationship, including any customs arrangements, until the withdrawal negotiations have progressed sufficiently.

The customs position paper sets out two broad approaches that the UK considers could be adopted in conjunction with the EU in order to facilitate trade and encourage growth with the EU and the rest of the world, whilst allowing the UK to pursue its independent trade policy objectives. Both proposals involve the UK leaving the EU Customs Union. The proposals are:

• Creating a highly streamlined customs arrangement between the UK and EU, with customs requirements that are as frictionless as possible and using technology-based solutions to make it easier to comply with customs requirements.

• Establishing a new customs partnership with the EU, aligning the UK's approach to the customs border in a way that removes the need for a UK-EU customs border. This could involve the UK mirroring the EU's requirements for imports where the final destination of goods and services is the EU.

In the position paper, the Government has made it clear that any option chosen must avoid a hard border between Northern Ireland and the Republic of Ireland. Furthermore, the avoidance of a hard land border should not result in a new custom's border between Northern Ireland and Great Britain. The Northern Ireland border is one of the key areas that are to be addressed as part of the withdrawal agreement, and the Government is expected to publish its guiding principles for a land border arrangement later today, 16 August 2017.

The customs position paper considers that either option could be beneficial for both the UK and the EU, but that there would be a need for transitional arrangements to allow the UK and EU Member States to implement the arrangements. This should mean that taxpayers should only need to adjust once to a new customs arrangement. The customs position paper suggests that this could involve a new and time-limited customs union between the UK and the EU, based upon a shared external tariff and without customs processes and duties between the UK and the EU. The paper itself does not specify the length of any transitional period, however the Secretary for Exiting the EU, David Davis, has indicated that the period is likely to be two years or shorter, and that it would need to have finished by the time of the next election, scheduled to be in 2022.

Regardless of the future relationship with the EU, the UK will need to introduce a new domestic customs regime, as well as making changes to the VAT and excise regimes. Most of the existing rules governing customs are contained within EU law and the customs position paper recognises that the current UK legislation is insufficient to create a standalone customs regime. As outlined in the Queen's Speech earlier this year, the Government is planning to introduce a new Customs Bill in the autumn. Whilst the Government hopes to reach a negotiated settlement on customs arrangements that are in the interests of all parties, the Bill will allow the Government to prepare for every eventuality.

The position paper follows on from statements made by the Chancellor, Philip Hammond, and the International Business Secretary, Liam Fox, where they agreed that Britain would be outside of the customs union and treated as a ‘third country’ during any post-Brexit transition phase. Crucially, this would allow the UK to strike trade deals with countries outside the EU in its own right, although the position paper notes that the UK would not seek to bring into effect any new arrangements with third countries that were not consistent with the transitional arrangement whilst this was in place.

For further details, please see our alert here.

The position papers that are being published will not only set the scene for the Brexit negotiations in Brussels, but are also likely to be heavily scrutinised by UK MPs ahead of the Second Reading debates on the European Union (Withdrawal) Bill, the first day of which is scheduled to commence on Thursday 6 September 2017.

On Thursday, 10 August 2017, HMRC published additional guidance on country-by-country reporting in its International Exchange of Information Manual. HMRC had previously published some guidance on the notification requirements under the UK's country-by-country reporting rules, in order to give taxpayers some guidance in advance of the deadline for the first notifications (which, for many groups, will fall on 1 September 2017). However, the guidance has now been expanded to cover other aspects of the reporting process, including giving examples of filing and notification obligations.

As expected, the UK guidance makes heavy references to the OECD guidance on Action 13 of the BEPS Project, as HMRC are keen to ensure that country-by-country reporting is applied in a globally consistent manner.

As a reminder of some of the key deadlines:

• Notification of who the top UK entity expects to file the country-by-country report must be made to HMRC by the end of the accounting period or, if later, 1 September 2017 (for groups with a calendar year end, this means a notification will be required on 1 September 2017 for the 2016 and 31 December 2017 for 2017)

• Country-by-country reports must be filed in the UK by the 12 month anniversary of the end of the period to which the report relates

• If the report is filed in another country that has an agreement in place to allow for the sharing of country-by-country reports, the top UK entity will not need to file a report itself, although it will need to notify HMRC when and where the filing was made and by whom

HMRC expects that upcoming notifications by UK entities will be made on a spreadsheet and sent to a dedicated email address that has been set up for this purpose. The final country-by-country reports will need to be submitted via a secure online portal, which HMRC has been testing throughout August.

In addition to the commentary on country-by-country reports, the updated guidance also notes that the transfer pricing documentation required to support an arm's length position should be the same as that specified in the first two annexes of the Action 13 report (which cover master and local files), although these do not need to be filed with a country-by-country report. Guidance published in HMRC's International Manual has previously suggested that taxpayers should consider the recommendations set out in Chapter V of the OECD's Transfer Pricing Guidelines (which has been updated to reflect Action 13), but has not mandated its use.

Other UK developments

Although non-binding at this stage, the outcome of the recent UK First-tier Tribunal case Development Securities (No 9) Ltd & Ors, reported in Midweek Tax News to 25 July 2017, could represent a fundamental development for the meaning of central management and control for international groups.

The case illustrates HMRC's willingness to challenge the tax residence of companies despite the fact that board meetings take place in an offshore location.

The tax residence of a company is ultimately a question of fact and, although the case was based upon specific facts and circumstances, HMRC may seek to apply general principles established in the case to other fact patterns.

Our alert, prepared with insurance and captive insurance companies in mind, considers the case in more detail and sets out a summary of the potential implications. Our alert is available here.

In its most recent Agent Update (published on 8 August 2017), HMRC has outlined, amongst other items, its plan to provide an online digital service for PAYE Settlement Agreement (PSA) submissions and payment from 6 April 2018, which should remove the need for an upfront PSA. In addition, HMRC will update and clarify its PSA guidance.

The new digital PSA process is being developed in response to the PSA consultation exercise that was undertaken in 2016.

International developments

On the 8 August, the International Monetary Fund published a working paper on Taxation and the Peer to Peer Economy, describing its current research on the growth of the peer-to-peer (P2P) economy to encourage debate.

The report notes that the P2P model, consisting of transactions of goods and services between individual buyers and sellers, is not a new way of conducting business, but recognises that what has distinguished it in recent years is the technological developments that have eliminated various costs associated with running a business, allowing smaller-scale activity to expand and challenge larger-scale corporate business.

The paper explores how governments should approach the challenges presented and how the technology behind digital platforms presents an opportunity to assist with compliance and administration. The online intermediaries record data on the transactions taking place in the virtual markets they oversee, which, if governments had access, could allow them to authenticate income and expenditure, which could strengthen enforcement and allow better quantification of activity that has previously been misreported or undocumented.

The paper seeks to address several questions, including:

• What are the implications of the P2P economy for tax policy and administration?

• Are the current tax policies sufficient to deal with the economic activity in these businesses and, if not, does the current tax structure present an opportunity for greater tax avoidance by P2P participants?

• Can the information which platforms accumulate help improve compliance with minimal cost?

• Does the scale and nature of P2P activities suggest an alternative system of taxation, or a simplification of existing taxes, is required? (The paper suggests that from a tax policy perspective, the case this is not immediately obvious).

The paper concludes that the tax treatment of the P2P economy will ultimately depend on each government's preferences. Some governments may wish to minimise tax policy differences between P2P sellers and traditional businesses, whereas others may instead see the rise of the P2P economy as positive and provide tax incentives to encourage it.

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.

Nigeria: Nigeria has published a list of 27 new industries that are eligible for pioneer status incentive, including e-commerce services, software development and publishing.

Singapore: Singapore and Nigeria have signed an income tax treaty, which includes a ‘most favoured nation’ clause, which will enter into force once the exchange of notifications have taken place.

South Africa: We take a further look at South Africa's draft amendments on tax impairment allowance legislation to bring tax closer to the accounting treatment for the banking industry.

Other publications

Please speak to your usual EY contact, or email us at eytaxnews@uk.ey.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.

Further information

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.

UK Government's position papers on a future partnership with the EU

Email Marc Bunch

+ 44 20 7980 0298

HMRC publishes further guidance on country-by-country reporting

Email Simon Cowan

+ 44 20 7951 1581

For other queries or comments please email eytaxnews@uk.ey.com.

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