Midweek Tax News

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A weekly update on tax matters to 27 June 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.

The Queen's Speech, which sets out the Government's plans for the next parliamentary session, was delivered on 21 June 2017. The Speech was, as expected, dominated by Brexit, and confirmed the Government's priority to secure the best possible deal to leave the EU and its commitment to building consensus within Parliament on the terms of the Brexit deal. Eight of the twenty-four Bills set out in the Speech address Brexit, including the Repeal Bill, which will repeal the European Communities Act 1972 and transpose current EU laws into UK law, thus ensuring legal continuity when the UK leaves the EU.

In addition, the supporting documents, published alongside the Speech, confirmed that there will be three Finance Bills in the next two years, alongside a National Insurance Contributions (NICs) Bill that will legislate for the NIC changes announced in the 2016 Budget and the 2016 Autumn Statement.

A Summer Finance Bill 2017 will include a range of tax measures including those to tackle avoidance. In a column published this week, Mel Stride, the new Financial Secretary to the Treasury, said that he had been “working hard with officials in the Treasury to place a firm focus in the [Summer Finance] Bill on ensuring that we catch up with those large corporations who are avoiding paying their fair share of tax via tax avoidance schemes”. It is unclear whether this means there will be ‘new’ anti-avoidance legislation in the Bill when it is published.

We do expect that the Bill will include at least some of the measures withdrawn from Finance Act 2017 as a result of the general election. It is not yet known when the Bill will be published but we presume it will be available before Parliament rises for summer recess on 20 July.

As a first step, the Government will need to survive votes on the Queen’s Speech and the amendments tabled by both Labour and the Liberal Democrats, which will be considered on Wednesday 28 and Thursday 29 June. In order to provide support for its Queen's Speech, the Government has agreed a ‘confidence and supply’ deal with the Democratic Unionist Party (DUP). The DUP has agreed to support the Government on all motions of confidence; and on the Queen's Speech; the Budget; Finance Bills; Money Bills, supply and appropriate legislation and Estimates. They will also support the Government on legislation pertaining to Brexit and national security. Support on all other matters will be agreed on a case by case basis.

The agreement lasts for the lifetime of the Parliament, scheduled to be five years, but is also to be reviewed at the end of the each session – with the first review therefore due in two years' time.

On 22 June 2017, the Maltese Presidency of the Council of the EU issued a compromise text on proposals to introduce public country-by-country reporting.

Under the compromise text, the reporting requirement would cover multinational groups and certain non-affiliated undertakings. The text also provides that the information should be reported regardless of where the ultimate parent entity is established. Similar to the subsidiary filing requirements under existing rules for country-by-country reporting to tax authorities, where the ultimate parent entity is located outside of the EU, the EU subsidiary or undertaking should request information to prepare the report, with a disclosure being made if the information is not provided. If information about the whole group is not made available and the subsidiary itself exceeds the reporting threshold, it will need to publish its own report.

The European Commission's proposal suggested that a public country-by-country report should be prepared where the consolidated net turnover of a group exceeded €750 million. The compromise amends this to require reporting only where the consolidated revenue of a group exceeds €750 million for the last two consecutive financial years, with the report being prepared for the later of these. Groups established in a single Member State (without subsidiaries or branch undertakings in another tax jurisdiction) would not be subject to the reporting requirements even if they exceeded the threshold.

The compromise text introduces an exemption to the reporting requirement where it would be commercially prejudicial to publish such information. The exemption would require prior approval and would be valid for one year, although it could be renewed. The exemption would need to be disclosed in the report, together with a detailed account of the basis for any exemption granted.

The text also makes changes to the involvement of the statutory auditor, requiring a statement to be made on the existence of a report even if one has been published. The original proposals only required non-compliance to be highlighted.

Finally, the text extends the transposition deadline by a year so it must be transposed within two years of the date the directive enters into force. The rules need to apply from the first financial year starting on or after one year from the transposition deadline.

The Presidency compromise will now need to be considered by the Council of the EU. It is understood that France, Sweden and the UK have indicated that national parliamentary scrutiny of the proposals will be required.

In addition to the compromise text to be considered by the Council of the EU, the European Parliament's committees on Economic and Monetary Affairs and Legal Affairs issued a report on 21 June which will be debated in the plenary session of the European Parliament on Tuesday, 4 July. The report sets out a draft legislative resolution for the European Parliament containing the proposed amendments to the Commission's original draft directive that were adopted by the joint European Parliamentary committees earlier this month.

On 21 June 2017, the European Commission published a draft directive containing proposals for new transparency rules applicable to tax intermediaries and advisors. The proposals would amend the Directive on Administrative Cooperation to provide for the mandatory disclosure of certain tax planning arrangements, as well as extending the scope of the automatic exchange of information provisions to cover these.

The proposed directive is similar in many respects to the UK's own disclosure regime and has the following main features:

  • It obliges intermediaries to disclose potentially aggressive tax planning arrangements to tax authorities if they design and promote such arrangements as part of their profession
  • The obligation is limited to cross-border arrangements (ie, involving either more than one Member State, or a Member State and a third country)
  • The disclosed information would be exchanged automatically between national tax authorities via a central directory accessible by all Member States
  • The obligation to disclose would move to taxpayers using the arrangement if the obligation is not enforceable on the intermediary (due to legal professional privilege or the intermediary having no presence within the EU) or there is no intermediary because the taxpayer has developed the arrangements in-house
  • Reportable arrangements would need to be disclosed by intermediaries within five days of the arrangements becoming available to a taxpayer for implementation (where disclosure is required by the taxpayer, it would need to be made within five days of the arrangement, or the first step in a series of such arrangements, being implemented)
  • An arrangement meeting one or more of the proposed hallmarks indicative of tax avoidance or abuse would trigger a reporting requirement
  • Member States would determine the penalties and sanctions for non-compliance with the rules
  • Transposition would be required into national law by 1 January 2019

The proposals will now be submitted to the European Parliament for consultation and to the Council of the EU for adoption.

For further details, please see our global alert.

On 26 June, the UK Government published a detailed white paper setting out its offer to the EU on the continuing rights of EU citizens currently living and working in the UK. The Government undertakes to treat EU citizens in the UK according to the principles below, in the expectation that the EU will offer reciprocal treatment for UK nationals resident in its Member States:

  • ‘Settled status’ would grant EU citizens already in the UK rights equivalent to British citizens (eg, the right to work, pensions, NHS and other public services access), after five years' continuous and legal residence in the UK
  • The cut-off date for new EU citizens arriving in the UK is expected to be somewhere between 29 March 2017 and 29 March 2019
  • Those EU citizens arriving in the UK prior to the cut-off date but who have not built up five years' residence by 29 March 2019 will be permitted to remain in the UK with temporary leave until they reach five years and can then qualify for settled status
  • Those EU citizens arriving in the UK after the cut-off date but prior to 29 March 2019, if indeed these dates are different, will have a two year ‘grace period’ in which to regularise their stay by applying for a visa or immigration status under the yet to be announced immigration scheme that will replace Freedom of Movement
  • The application process will be a separate legal scheme, in UK law, rather than the current one for certifying the exercise of rights under EU law (the application process is not yet open, but the Government has promised that it will be streamlined and that fees will be reasonable)
  • EEA and Swiss citizens who are not also EU citizens will be offered the same treatment as EU citizens

Until the UK's exit, while the UK remains a member of the EU, EU citizens resident in the UK will continue to enjoy the rights they have under EU Treaties. After the UK leaves the EU, it will create new rights in UK law, enforceable in the UK legal system. The proposals are without prejudice to Common Travel Area arrangements between the UK and Ireland (and the Crown Dependencies), and the rights contained in the Ireland Act 1949.

Further talks are likely to take place on this before an agreement is reached. Although the final agreement may change as a result of the negotiations, the UK's offer represents what will be seen as a ‘baseline’ outcome with regards to the rights of EU citizens in the UK and British citizens in the EU: the final agreement is unlikely to be less generous and employers and businesses may want to start to plan against this baseline as a minimum.

On 22 June 2017, the OECD released discussion drafts on the revised guidance on profit splits (BEPS Action 10) and additional guidance on the attribution of profits to permanent establishments (BEPS Action 7). Both discussion drafts build on the work performed and comments received on the respective 2016 discussion drafts. Comments on both are sought by 15 September 2017.

Attribution of profits to permanent establishments

The BEPS Action 7 discussion draft provides additional guidance on the attribution of profits to permanent establishments (PEs) arising from Article 5(5) of the OECD Model Tax Convention (the MTC), including dependent agent structures, and with respect to PEs arising from the changes in Article 5(4) of the MTC, including the anti-fragmentation rule.

The discussion draft clarifies that while the changes made to Article 5(5) and 5(6) of the MTC by the report on Action 7 have modified the threshold for the existence of a deemed PE under Article 5(5), they have not modified the nature of the deemed PE. Therefore, any approach on how to attribute profits to a PE that is deemed to exist under the pre-BEPS version of Article 5(5) should therefore be applicable to a PE that is deemed to exist under the post-BEPS version of Article 5(5). The new guidance on profit attribution to PEs also takes into account the work performed in relation to transfer pricing under BEPS Actions 8-10.

The discussion draft contains four non-numerical examples, which illustrate the attribution of profits to PEs resulting from either the changed definition of a dependent agent PE or the anti-fragmentation rule.

Unlike the BEPS Action 10 discussion draft on profit splits, the guidance provided in the BEPS Action 7 discussion draft does represent a consensus view of the OECD's Committee on Fiscal Affairs and the Inclusive Framework on BEPS. The OECD intends to hold a public consultation on the BEPS Action 7 discussion draft in November 2017.

Profit splits

The BEPS Action 10 discussion draft deals with the clarification and strengthening of the guidance on the transactional profit split method and sets out the text of the proposed revised guidance on the application of this method. Changes to the guidance compared to the 2016 discussion draft include the addition of 10 illustrative examples.

The proposed guidance in the BEPS Action 10 discussion draft does not represent a consensus view of the OECD's Committee on Fiscal Affairs nor of the Inclusive Framework on BEPS, and the discussion draft does not include any reference to an upcoming public consultation.

More detail on both discussions drafts is available in our global tax alert.

In the lead case of The Learning Centre (Romford) Limited (TLC), TLC applied for retrospective VAT de-registration on the grounds that it considered its supplies of education, activities, and entertainment to vulnerable adults with learning difficulties should have been exempt from VAT. HMRC refused its application.

To fall within the exemption under UK VAT law, TLC needed to meet the definition of ‘a state-regulated private welfare institution’ providing welfare services. It was not in dispute that TLC provided welfare services. The First-tier Tribunal held that TLC was not a state-regulated private welfare institution, as its supplies were not approved, licenced, registered or exempt from registration. TLC further challenged whether UK law implemented EU law too narrowly. Under EU VAT law, organisations recognised as ‘being devoted to social wellbeing’ fall within the VAT exemption. The Tribunal held that Member States have discretion to decide which private bodies should benefit from the exemption for welfare services and the UK had not therefore improperly exercised its discretion in recognising only state-regulated welfare providers.

The Tribunal also concluded that any fiscal inequality between a local authority (which as a public body qualifies for VAT exemption) and TLC, is an inherent inequality with no remedy. However, there is a breach of fiscal neutrality in respect of bodies located in Scotland and Northern Ireland who benefit from exemption due to stricter regulation requirements in those parts of the UK. The Tribunal clarified that while it is not unlawful for the UK to have regional differences in their laws on the regulation of care providers, it is unlawful to have regional differences in its VAT law. On this basis, TLC was entitled to rely on the direct effect of EU law as ‘a body devoted to social wellbeing’, meaning that its supplies are, and always have been, exempt.

This is the latest case to consider the principles of fiscal neutrality in the context of welfare services. Any private organisations providing welfare services may wish to consider the implications of this latest decision.

Other UK developments

Regulations bringing certain Scottish partnerships (known as ‘eligible Scottish partnerships’) within the scope of the ‘people with significant control’ rules were laid before Parliament on 23 June 2017 and came into force on 26 June (although requirements which apply on registration of a Scottish limited partnership only come into force from 24 July 2017).

The rules have been introduced to improve the transparency associated with Scottish partnerships and seek to bring eligible Scottish partnerships in line with other legal entities in the UK by requiring them to disclose the identity of their owners who have significant control. However, unlike other entities within the scope of the rules, eligible Scottish partnerships will not be required to maintain their own register, although details will need to be reported to Companies House within 14 days of the partnership becoming aware that a person meets the conditions to be registered. Eligible Scottish partnerships are all Scottish limited partnerships and Scottish general partnerships that are ‘qualifying partnerships’ (ie, a partnership where each of its members is a limited company or an unlimited company/Scottish partnership each of whose members is a limited company).

Scottish qualifying partnerships already in existence on 24 July 2017 will need to provide registration information within 14 days of that date, with partnerships becoming qualifying partnerships after that date (due to formation or a change in partners) needing to register within 14 days of becoming a qualifying partnership.

Unregistered companies and companies on prescribed markets also come within the ‘people with significant control’ rules from 26 June 2017 as part of the implementation of the Fourth Anti-Money Laundering Directive.

In the case of BNP Paribas (London Branch), the First-tier Tribunal has considered whether a purchase and sale of dividends to enjoy a tax advantage was a trading transaction. The London branch had purchased the right to receive certain dividends from a Luxembourg subsidiary of the bank and then sold those rights, arguing that it should obtain a deduction for the cost of purchasing the rights but that the proceeds on sale were not taxable as a result of provisions (now repealed) that treated the dividends as continuing to accrue to the Luxembourg company.

Following a detailed review of the facts, the Tribunal found that the transaction was not part of the financial trade of the London branch, rather it was simply a tax recovery arrangement despite having certain effects that would usually be regarded as indicating commerciality.

Even if the transaction was part of the trade, the Tribunal considered that the expenditure was not incurred wholly and exclusively for the purposes of the trade but rather (at least in part) for the purpose of obtaining the tax benefit.

The Office of Tax Simplification (OTS) has updated its focus paper of 2 December 2016 on the tax issues and implications arising from the gig economy and the sharing economy. The aim of the updated paper is to promote discussion of some of the associated tax issues and implications. The OTS highlights that a key issue is how the gig economy interacts with the tax system and how that interaction can be made as simple as possible. The paper is not a consultation document as such, and the OTS has not posed specific questions for response. However, the updates to the paper reflect comments received and the OTS would welcome further contributions and observations.

On 26 June, the OTS also published its first annual report since being placed on a statutory footing, covering the period to 31 March 2017. The first annual report also takes into account the period since the OTS was first set up on an informal basis in July 2010. The report notes that the OTS' immediate focus is the finalisation of its reports on VAT, the corporation tax computation and ‘paper’ stamp duty. It will also continue to engage on Making Tax Digital and expects there to be ongoing work in relation to employment status and the gig economy.

Over the next three years, the OTS intends to consider whether more should be done in relation to issues arising from the corporation tax computation report, owner managed business and measures designed to support investment and the raising of capital. It may also look to consider savings, tax reliefs and the complexity index.

Coinstar Limited, through kiosks in supermarkets, provides a facility for customers to quickly count and exchange coins for vouchers to be redeemed in store on the same day. Alternatively, the customer can opt to donate the coins to charity. Coinstar charges a commission for its service, which HMRC contended was a payment for a service which fell short of the requirements for exemption.

The Upper Tribunal has held that the First-tier Tribunal correctly took into account the contractual arrangements and economic reality between Coinstar and its customers. The Upper Tribunal agreed that the coin counting aspect of the transaction was merely the necessary pre-condition to the issue of the voucher and was not an aim in itself. The typical customer was seeking to exchange inconvenient loose change for a more convenient voucher and the counting of the change was necessary to ensure that a voucher in the correct amount was issued. The Upper Tribunal considered that there is no relevant difference between a foreign exchange transaction and the supply made by Coinstar. The service of counting is therefore an ancillary and essential part of an underlying exempt service.

The outcome in this case appears to be in line with the single supply principles established in the CPP case. Businesses providing services which may be subject to different rates of VAT may wish to review the VAT treatment of their supplies.

International developments

The Platform for Collaboration on Tax, a joint initiative of the International Monetary Fund, the OECD, the United Nations and the World Bank Group, has published a toolkit to provide practical guidance to developing countries to better protect their tax bases. A draft of the toolkit was published in January and has been updated following the receipt of comments.

The toolkit specifically addresses the ways developing countries can overcome a lack of data needed to implement transfer pricing rules. This data is needed to determine whether the prices the enterprise uses accord with those which would be expected between independent parties. The guidance will also help such countries set rules and practices that are more predictable for business.

Extractive industries are particularly relevant for developing countries and so the toolkit also addresses the information gaps on prices of minerals sold in an intermediate form (such as concentrates).

The toolkit is expected to be available in French and Spanish shortly.

In Australia, the Goods and Services Tax (GST) treatment of the importation of low value goods valued at less than AU$1,000 has been an issue for many years. Australian retailers have maintained that they face an uneven playing field with their sales to Australian consumers being subject to GST, while those of their foreign competitors generally are not. The Australian Government committed to eliminating this discrepancy.

The Australian Federal Parliament passed legislation which will extend GST to low value goods imported into Australia with effect from 1 July 2018. The new provisions had been scheduled to take effect from 1 July 2017 but have been delayed to allow businesses time to make the relevant systems changes.

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.

Estonia: Estonia has enacted changes to corporate income tax rules, including a reduced tax rate for regular profit distributions.

India: The Indian Tax Authority has issued rules to support the implementation of secondary transfer pricing adjustments, describing the time limit for repatriation and the method for calculating interest.

South Africa: The South African Revenue Service has issued country-by-country reporting, master file and local file guidance for taxpayers.

Sweden: The Swedish Government has proposed major corporate income tax changes, including a reduction of the tax rate and the introduction of an EBITDA-based corporate interest restriction and anti-hybrid rules.

Other publications

Global insurance premium tax newsletter – Issue 1, 2017: The first 2017 issue of our global insurance premium tax newsletter is now available. This issue considers the global trend of rate increases across the world, as well as covering recent changes in Canada, Australia and New Zealand, where premiums are subject to sales taxes. The ‘Country Focus’ section looks at the complex regime in Greece, where the amnesty for declaring historic insurance premium tax liabilities has recently been extended.

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.

The Queen's Speech and what it means for tax legislation

Email Claire Hooper

+ 44 20 7951 2486

Maltese Presidency of EU proposes compromise for public country-by-country reporting

Email Edward Cawdron

+ 44 12 1535 2745

European Commission proposes new transparency rules for intermediaries

Email Claire Hooper

+ 44 20 7951 2486

The UK's Brexit offer on the continuing rights of EU citizens in the UK

Email Matthew Watt

+ 44 11 7981 2248

OECD revised discussion drafts on profits splits and attribution of profits to permanent establishments

Email Gary Mills

+ 44 20 7951 1608

Email Andy Martyn

+ 44 20 7951 9539

First-tier Tribunal considers the UK's implementation of the welfare services exemption unlawful

Email Andrew Needham

+ 44 19 1247 2621

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

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