A weekly update on tax matters to 19 January 2021
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.
Public consultation meeting on the OECD Reports on the Pillar One and Pillar Two Blueprints
As part of the ongoing work to develop a solution to the tax challenges of the digitalisation of the economy, the OECD/G20 Inclusive Framework on BEPS recently published blueprint documents for Pillars One and Two of its work and invited public comments. EY and over 200 other contributors provided written responses.
The OECD held a public consultation meeting on the blueprints on 14 and 15 January 2021. Discussion focused on the key questions identified in the consultation document and raised in the written submissions received as part of the consultation process. Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, told the participants that the Inclusive Framework (IF) is continuing to fine-tune the pillar proposals while it waits for a new US Treasury tax policy team to be put in place. Over 3,000 people attended the virtual meeting, which Mr Saint-Amans said shows the high level of interest but also the divergent views which exist, particularly around the scope of Pillar One. In his summary at the end of the two-day meeting, he said that it was clear that there was agreement that the international tax framework needed to be updated, but that more work needs to be done on coordination of the rules, and minimising complexity.
In terms of next steps, the working party meetings continue and the IF plenary meeting on 27 and 28 January will be public. The next G20 Finance Ministers’ meeting is scheduled for the end of February 2021, and the IF is now aiming to reach agreement on the proposals before the G20 Finance Ministers meeting on 9-10 July 2021.
European Commission publishes roadmap for new ‘digital levy’
On 14 January, the European Commission opened a four-week feedback period on its roadmap for the introduction of a ‘digital levy’ to address the issue of fair taxation of the digital economy. This represents the first step towards the potential introduction of an EU-wide digital tax, but progress will depend on the progress made at OECD level.
With reference to the objectives of the roadmap, the document notes that it is important for the initiative not to undermine the ongoing discussions at the OECD nor to fuel international trade tensions. The initiative should therefore be designed in a way that is compatible with the international agreement to be reached in the OECD as well as broader international obligations. The baseline scenario will take account of developments at international level and the Commission will identify additional policy options, such as corporate income tax top-up to be applied to all companies conducting certain digital activities in the EU; a tax on revenues created by certain digital activities conducted in the EU; and a tax on digital transactions conducted business-to-business in the EU.
The feedback period runs from 14 January to 11 February 2021. There is no timescale for further action after this feedback period and indeed the next steps are likely to be driven by what progress can be made at OECD level.
For further information see our global alert.
USTR finds UK DST to be discriminatory against US companies and comments on potential EU DST
In June 2020, the Office of the United States Trade Representative (USTR) initiated an investigation under Section 301 of the Trade Act of 1974 into DSTs adopted or under consideration in ten countries. Section 301 allows the US to respond to “unfair trade practices” and implement retaliatory tariffs if they are found to discriminate against US companies.
On 14 January, the Office of the US Trade Representative (USTR) issued further findings in its Section 301 investigations of DSTs adopted by various jurisdictions – covering Austria, Spain and the UK. In each case, the USTR concluded that the DST discriminates against US companies, is inconsistent with prevailing principles of international taxation, and burdens or restricts US commerce. No specific actions in connection with the findings are being taken at this time but the USTR will continue to evaluate all options. In a statement, the US Trade Representative, Robert Lighthizer, said that “the best outcome would be for countries to come together to find a solution”.
The Spanish Government responded saying that its position remains that the Spanish DST is not discriminatory and confirming that it will come into force on 16 January 2021. However, payments due under the tax (and under the Spanish Financial Services tax) will be postponed until later this year.
As part of a status update released on 14 January, the USTR set out its specific concerns regarding the EU’s potential approach to digital services taxes. The report discusses the details of the EU DST proposal made in 2018 – which called for a 3% tax on revenue from digital services, and also featured revenue thresholds, such that only companies generating at least €750million in annual global revenues and €50million in annual EU-wide revenues would be subject to the tax. USTR states that a potential EU DST based on this 2018 proposal would raise concerns including that revenue thresholds may be discriminatory against U.S. companies; that the tax could be inconsistent with international tax principles and that an EU DST may burden or restrict US commerce.
The release of the USTR’s findings in relation to the UK, Austria and Spain follows the publication on 6 January of its findings on Italy, India and Turkey, and the suspension of punitive tariffs which had been scheduled to be imposed by the US on French goods from January 2021. A global alert on these developments – which was produced prior to the publication of the most recent reports on 14 January – is available.
UK digital services tax: reminder of upcoming deadlines
As a reminder, deadlines for registering, making payment and filing returns for the UK digital services tax (DST), which came into effect from 1 April 2020 are fast approaching for some businesses. For example, businesses with 30 April 2020 year ends, and which are within the scope of DST, have until 1 February 2021 to make their first payment, and businesses with 31 December 2020 year ends have until 31 March 2021 to notify HMRC if they are within the scope of DST.
The Commons Treasury Committee has been examining the UK tax system in light of the economic effect of the coronavirus crisis. In particular, it has sought evidence on what overall level of taxation the economy can bear, the role of tax reliefs in rebuilding the economy, and whether there is a role for windfall taxes in the post-coronavirus world.
In the last of its sessions, held on 18 January, the Committee heard from the Financial Secretary to the Treasury, Jesse Norman. While saying that he would need to leave specifics on tax policy to the Chancellor in the Budget, Mr Norman did say that on tax the Government was still looking to see how the fiscal position played out. He commented that it was not obvious that tax rises would be needed, depending on the performance of the economy. He did make reference to the Chancellor expecting “to think in terms of strong and sustainable public finances” but suggested that this could be over the longer term as circumstances permit.
The Treasury Committee session came after rumours of a possible rise in corporation tax in the Budget alongside rumours of a proposal to replace stamp duty land tax and council tax with a proportional property value tax.
On Tuesday, 2 February at 13:00, we will host a practical discussion, focusing on how clients and businesses can respond to the second phase of HMRC initiative Making Tax Digital, coming into effect April 2021.
The critical point of this second phase is around the digital journey from records to return. This means that VAT registered businesses will need to be able to justify any data manipulation made on transactional data from ERP/business systems up to when VAT return are filed electronically via approved software.
During the webcast, our panel will discuss the latest updates on HMRC's Making Tax Digital initiative, and how technology can help you be compliant, not only from 1 April 2021 but also future proofing your business for potential future requirements in relation to digital tax reporting.
To register to join this webcast, please click here.
Other UK developments
Compounded by untested systems, the scope and complexity of new red tape following on from the UK-EU Trade and Cooperation Agreement have imposed considerable strain on supply chains. The UK Government has forecast significant additional disruption in the coming weeks as stockpiles are reduced and the new lockdown takes effect.
In our webcast at 15:00 on 3 February, we will address the immediate and practical challenges to business continuity plus the steps businesses are taking to adapt their operations. We will look at:
- Behind the headlines: a perspective from Maritime UK, the umbrella body for the maritime sector, on the evolving situation at UK ports and the impact on freight flows
- Regulation in practice: how companies are reacting to new and increased compliance obligations including ‘at the border’ barriers (e.g. rules of origin and VAT requirements) and ‘behind the border’ barriers such as product labelling and safety standards
- Northern Ireland: how the Northern Ireland Protocol is being implemented, why the UK as a distribution hub causes issues for EU businesses which re-export to Europe, and understanding the customs easements in place
Please register for the webcast here.
Other indirect tax developments this week include confirmation by HMRC that it will be reinstating the VAT margin scheme for cars imported and resold by car retailers in Northern Ireland, and updates to the HMRC guidance on Authorised Economic Operator status. For further details of these and other indirect-tax developments please refer to VAT News.
In the case of Padfield & Ors, the First-tier Tribunal has considered the application of the Ramsay principle. The taxpayers had entered into arrangements involving forward contracts for the purchase and sale of securities (shares, certificates of deposit or gilts) and associated purchase and sale of securities on the market. Each taxpayer had realised a large loss on the transfer of shares (or certificates of deposit) under one forward contract, and a matching gain on the transfer of gilts under the other contract. They argued that the loss in respect of the shares or certificates of deposit was (respectively) either allowable for capital gains purposes or deductible against miscellaneous income, whereas the gain on gilts was exempt under s115 TCGA.
The key issued considered by the First-tier Tribunal was whether the Ramsay principle should apply to disregard the separate identity of the contracts, such that no allowable loss would arise in respect of the shares or certificates of deposit. The taxpayers argued that the Ramsay principle did not apply because the transactions were not self-cancelling, and the arrangements had real legal effect, due to the associated acquisitions and disposals of securities on the market. However, the Tribunal disagreed. It considered that the facts of the case fell “fairly and squarely” within the principle laid down in Ramsay. In its view, the two forward contracts together with the related acquisitions and disposals should be considered as one single self-cancelling transaction, such that no allowable or deductible loss would arise. The Tribunal noted that there had been at the outset of each set of transactions a possibility that no loss would be realised – however, it considered that this was a commercially irrelevant contingency, because it was clear that the taxpayers had intended to continue entering into transactions until a loss was realised. Accordingly, the taxpayers’ appeal was dismissed.
As part of its commitment to transparency, and to deter fraudulent claims, HMRC will publish the names of employers who make CJRS claims for periods from December 2020 onwards. The first publication, on 26 January 2021, will be of employer names only. However future monthly publications will contain more detailed information including an indication of the value of claims within a banded range. In addition, employees will be informed if their employer has made a claim for them.
On 11 January 2021, in response to a written question, Jesse Norman, the Financial Secretary to the Treasury, confirmed that 100% first-year capital allowances for electric vehicles would be extended to 2025. However, Mr Norman specified that these enhanced capital allowances would not apply to vehicles purchased for leasing as these could be leased outside the UK, meaning the environmental benefits of the incentives would not contribute to the Government achieving its commitment to achieve net zero carbon dioxide by 2050.
Other International developments
Portugal assumed the Presidency of the Council of the European Union from 1 January, and its priorities include seeking to “create the conditions for reaching a political agreement on the revision of the rules on disclosure of information concerning tax on revenues for certain companies and branches.” On 13 January, the Council of the EU published a new consolidated compromise proposal on the introduction of public country-by-country reporting (CbCR).
The main revisions, compared to the previous proposal on this matter, relate not to the technical details in the directive, but rather to the purpose of the proposal. In particular, the revisions highlight that the proposal is to protect the interests not just of investors and creditors, but also other interested third parties, including competitors and the general public.
As a reminder, the public CbCR proposal would, if implemented, require multinational enterprises or standalone undertakings with a total consolidated revenue of more than €750 million in each of the past two consecutive financial years to disclose the income tax they paid in each Member State along with other relevant tax-related information. The draft amending directive would also require medium-sized and large subsidiary undertakings and branches that are governed by a Member State's national laws and controlled by a relevant ultimate non-EU parent undertaking to publish a report on the income tax information of that ultimate parent undertaking, to the extent that the information is available to the subsidiary undertaking – therefore UK companies could fall within the rules.
The issue of public tax reporting has been on the EU agenda since 2016, with the aim of amending the EU Accounting Directive to require EU Member States to introduce public CbCR and not just share tax information between tax authorities as required by the OECD. However, the previous proposals have stalled due to uncertainty about whether the proposal is a tax directive and therefore requires unanimity.
This proposal is scheduled to be considered by a working party on 22 January 2021.
The Irish Minister for Finance, Paschal Donohoe, has published an update to Ireland’s 2018 Corporation Tax Roadmap, which outlines actions Ireland has taken to date and sets out the further actions that will be taken over the coming years. Included in those further actions are commitments to implement Interest Limitation Rules in 2021 in accordance with the ATAD standard, to legislate for the reverse hybrids aspect of ATAD anti-hybrid rules (effective from January 2022) and to adopt the Authorised OECD Approach for transfer pricing of branches. A consultation will be launched in 2021 on the possibility of moving to a territorial regime. Ireland’s commitment to its 12.5% rate was reaffirmed.
To assist businesses in staying up to date with global tax-related COVID-19 developments, EY's Tax COVID-19 Stimulus Tracker provides a snapshot of the policy changes that have been announced in countries around the world. It is regularly updated and supplemented by individual global tax alerts.
Please also see links to a selection of our tax alerts in respect of the following non COVID-19 developments. Additional articles are available in our global tax alert library.
United States: A global alert is now available, following the US Treasury Department’s release last week of additional final regulations with guidance on the business interest expense limitation under Section 163(j).
Italy: The Italian government has announced a one-month deferral of the digital services tax (DST) payment and filing deadlines for the first year of application of the DST (financial year 2020).
Poland: Poland has introduced an annual tax strategy publication requirement for tax capital groups and taxpayers with revenues over €50m. The first reports will be due in 2021 (in respect of 2020).
Luxembourg: The Luxembourg Tax Authorities have published a circular clarifying certain technical aspects of the interest limitation rules which were introduced in 2018 to implement the EU ATAD directive.
Permanent establishments: The January summary of the latest international developments regarding permanent establishments is available (PE Watch). This issue considers the OECD Multilateral Instrument; case law developments in France and India; domestic law developments in Finland, Portugal, Ukraine and the United States; and PE developments in response to COVID-19 in Germany.
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.
Taxation of the digitalised economy: OECD public consultation, EU DST roadmap, and USTR findings on UK DST
Claire Hooper (+44 20 7951 2486)
Budget: Treasury Committee hears evidence on need for immediate tax rises
Chris Sanger (+44 20 7951 0150)
For other queries or comments please email firstname.lastname@example.org.