Midweek Tax News

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A weekly update on tax matters to 18 September 2018

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.

Following our recent joint EY/HMRC Making Tax Digital (MTD) for VAT webcast, we invite businesses to attend an MTD drop in workshop in London next Monday, 24 September 2018. During the session, our VAT and tax technology specialists will be on hand to answer questions and to demonstrate some of the scalable options we have to assist businesses in becoming MTD compliant including digital records, the digital journey and electronic submission to HMRC.

To register for the event or to register an interest in a similar MTD event outside of London, please click here.

On 2 October 2018 at 2:30pm, we will be hosting a webcast discussing the impact of the new UK corporate criminal offence (CCO) legislation. The webcast will include a discussion of the following:

• Experiences to date, including common risk-assessment findings and the implementation of reasonable procedures after the risk assessment

• International considerations – the challenges faced and how they have been overcome

• HMRC activity – learn how HMRC is responding and when to expect the first prosecutions

• An update on the wider use of ‘failure to prevent’ legislation by the UK and the future direction of compliance in businesses

If you would like to register for the event please click here.

On 13 September 2018, the US Treasury Department issued proposed regulations under the Global Intangible Low Taxed Income (GILTI) regime enacted as part of the December 2017 law commonly known as the Tax Cuts and Jobs Act. The regulations package also includes proposed amendments and additions to the subpart F income and consolidated return regulations.

Under the GILTI regime, a US shareholder of one or more controlled foreign corporations (CFCs) generally must include currently in gross income its pro rata share of the net profits of those CFCs to the extent that the profits exceed a routine return on certain tangible depreciable assets held by the CFCs. For a corporate US shareholder, the inclusion is subject to US federal income taxation at a 21% tax rate, but is generally eligible for a 50% deduction (resulting in an effective tax rate of 10.5%). The new law applies to the first tax year of a CFC beginning after 31 December 2017, and the US shareholder's year with or within which that year ends, and all subsequent tax years.

The proposed regulations include provisions that:

• Describe how to calculate the fundamental elements underlying the GILTI inclusion (e.g., tested income and qualified business asset investment)

• Set out anti-abuse rules for certain basis ‘step-up’ transactions for purposes of the GILTI regime

• Describe how consolidated groups compute their GILTI inclusions (including a rule generally requiring a consolidated group to compute its GILTI inclusion as a group, rather than member-by-member)

• Adopt a hybrid ‘aggregate/entity’ approach to US partnerships and their partners for purposes of the GILTI regime

The proposed regulations published on 13 September do not include foreign tax credit computational rules relating to GILTI however a US treasury official has confirmed that further guidance will be published later this year.

We are hosting a webcast on Thursday 20 September 2018 at 8.00pm to discuss the proposed regulations. If you would like to join this webcast please register here. A recording will be available after the event.

For further information please speak to your usual EY contact.

On 13 September 2018, the Department for Exiting the EU issued 28 further notices intended to highlight the implications of a ‘no-deal’ Brexit on particular areas. This takes the total number of notices issued to 53, and a further 17 notices are expected in due course. Although none of the notices specifically referred to tax, there were some interesting points contained in the notices on corporate mergers and competition (covering the continuation of the EU merger regime up to the point of exit) and on data protection (highlighting post-Brexit issues on transfers of personal data from organisations (including data centres) established in the EU to organisations established in the UK).

Separately on 13 September 2018, HMRC sent letters to 145,000 VAT registered businesses that it has identified as trading in goods with the EU only, who may experience import/export procedures for the first time in the event of an exit from the EU without a withdrawal agreement. The letter makes it clear that the UK Government still believes a Brexit deal with the EU is possible, but provides high level guidance (and links to further resources) in the event of no deal. HMRC has also estimated there are in excess of 100,000 unregistered businesses that will also be affected and further communications are planned via a 'partnership pack' due to be published this month. The UK's ‘no-deal’ notice on VAT was published in the first batch of notices issued in August 2018 while the European Commission has also now published its own notice on the consequences of UK withdrawal from the EU for the EU VAT rules.

On 18 September 2018 the Migration Advisory Committee (MAC) published its final report on the impact of EEA migration in the UK. The report assesses a range of areas, including labour market impacts, productivity, innovation, investment and training impacts, consumer and house price impacts, public finance, public service impacts and community impacts.

It outlines its main recommendations on the basis that the UK's post-Brexit immigration system could be decided by the UK on its own (rather than as part of the Brexit negotiations). The report stresses, however, that this should not be taken as a recommendation from the MAC that migration should be excluded from negotiations with the EU. The recommendations from the report include:

• The move to a system in which all migration is managed with no preferential access for EU citizens. Ending free movement (which the report takes as the ability of migrants to come to the UK for work, or other reasons, unrestricted) would not mean that visa-free travel for EEA citizens would end, just that a visa would be needed to settle and work in the UK for any period of time

• That changes should be made to the existing Tier 2 (General scheme) for high-skilled workers to: abolish the cap; to extend the scheme to workers in medium-skilled jobs; and to retain the salary threshold at £30,000 but to expand the list of eligible occupations

• That the public sector should not receive special treatment in the migration system and that the current immigration system which has only very limited regional variation should be retained

The Government will now analyse the report in putting together its post-Brexit immigration system.

Finally, the Taxation (Cross-border Trade) Bill (the Customs Bill) received Royal Assent on 13 September 2018. Amongst its provisions, the Customs Act provides for the establishment of an independent customs regime once the UK has withdrawn from the EU. It does not presuppose any particular outcome from the UK's negotiations with the EU and allows for a range of outcomes, including an implementation period or the UK leaving without a negotiated outcome. By contrast, the Trade Bill, which makes provision about the implementation of international trade agreements, will be debated in committee by the House of Lords, no date for which has yet been set.

With the upcoming EU meeting in Strasburg this week, businesses will want to keep a track on developments from all sources (both UK and EU) and the implications for their Brexit strategy. Our publication ‘Brexit and financial services: navigating the negotiation’ although aimed at financial services businesses does provide a useful recap of the possible next steps, which may be of more general interest.

Other UK developments

On 12 September 2018, the Finance Bill Sub-Committee of the House of Lords Economic Affairs Committee published a call for evidence on certain draft provisions to be included in the Finance Bill 2018. The deadline for submissions is 1 October 2018. The review will focus on:

• HMRC's powers and the balance of powers and safeguards between HMRC and taxpayers, with particular focus on HMRC's proposed powers under the draft provisions extending the security deposit regime to corporation tax and the construction industry scheme, and time limits for assessments

• The progress of Making Tax Digital (MTD) for VAT. In particular, the inquiry will consider the improvements made to the project since March 2017, how prepared HMRC and software providers are for the implementation of MTD for VAT in April 2019, and the potential costs of MTD for VAT for businesses

HMRC has published a consultation requesting comments on two draft orders which seek to implement changes to the VAT treatment of business to consumer supplies of digital services and the use of the Mini One Stop Shop (MOSS) scheme. The draft legislation proposes two changes, which will take effect on 1 January 2019:

• The introduction of a €10,000 threshold for total supplies to the EU in a year of sales of digital services. This change means that businesses under this threshold may apply the VAT rules in their home country, rather than in the country where customers are located. Businesses can continue to apply the current rules if they prefer.

• Allow non-EU businesses, which are registered for VAT for other purposes, to use the MOSS scheme to account for VAT on sales of digital services to consumers in EU member states. This group is currently excluded from using MOSS.

These changes are a result of agreement at EU level and are intended to ease the administrative burden on businesses making sales of digital services. Any businesses (EU or non-EU) with a UK MOSS registration may wish to consider the changes required in light of Brexit as the UK will currently no longer be part of the MOSS simplification scheme (although UK businesses will be able to register for the non-Union scheme in another Member State).

The consultation is open for comment until 8 October 2018.

The First-tier Tribunal has released its decision in the case of Amoena UK Ltd, a case considering the limits on the powers of the European Commission. In 2006, the Supreme Court released its decision in an earlier case relating to the taxpayer, holding that mastectomy bras are subject to customs duty at 0%. A Commission Implementing Regulation was then published in 2007 which required mastectomy bras to be classified using a commodity code with a duty rate of 6.5%. The taxpayer imported mastectomy bras into the UK in 2017 and later applied for a refund of customs duty on the basis that the 6.5% duty rate contravened its earlier Supreme Court decision.

The Tribunal has referred the case to the Court of Justice of the EU (CJEU) in order to seek guidance on whether the Council Implementing Regulation introducing a higher duty rate is a valid act of the Commission. This case will be of interest in understanding the limits of the Commission's powers in relation to implementing regulations which contradict national court decisions.

International developments

The Latin America Business Center (LABC) are hosting their second Latin America Tax Day event on 1-2 November 2018 in London. The event is relevant for those interested in hearing the latest international tax perspectives, trends and opportunities from the Latin America region. Keynote speakers include figures from the OECD's Centre for Tax Policy and Administration and the Inter-American Center of Tax Administrations (CIAT) in addition to EY leading tax professionals.

The two day event is themed around current tax transformation topics, and will explore how digital transformation and tax policies including BEPS and the multilateral instrument (MLI) are being implemented in the LatAm region. The agenda is customisable to your interests with multiple panels available, in addition to the main plenaries. Individual meetings are available to discuss particular topics or countries relevant for your business' international expansion agenda.

To view the agenda, find out more about the event and register yourself, please click here. For information or questions about the event, please email the event team.

On 12 September 2018 President Juncker outlined the European Commission's key priorities for the years ahead in his State of the Union speech. The next European Union summit will take place in Sibiu on 9 May 2019 (six weeks after Brexit and two weeks before the European Parliament elections) at which the EU leaders will reflect on a new Strategic Agenda to guide the work of the EU over the next five years.

In his speech, Juncker spoke about Brexit and confirmed that the EU agrees with the statement made in Chequers that the starting point for such a partnership should be a free trade area between the UK and the EU. Aside from Brexit, in his Letter Of Intent Juncker set out the following key tax initiatives for delivery before the European Parliament elections in May 2019:

• Adoption of the proposals on Fair Taxation in the digital economy; on the Common Consolidated Corporate Tax Base; and on the creation of a single EU Value Added Tax definitive regime

• Adoption of Brexit preparedness legislation (this includes a proposal to place the UK on either the ‘visa required’ list of third countries or the ‘visa free’ list)

• More efficient law-making in the field of taxation and identification of areas for a move to qualified majority voting (January/February 2019)

On 13 September 2018, the OECD released additional guidance to give certainty to tax administrations and multinational enterprise (MNE) groups on the implementation and operation of Country-by-Country (CbC) Reporting.

The existing guidance has been updated to address the following issues:

• The treatment of dividends for purposes of ‘profit (loss) before income tax’, ‘income tax accrued (current year)’ and ‘income tax paid (on cash basis)’

• The use of shortened amounts in Table 1 of CbC reports

• The number of employees to be reported where the financial data of a ‘constituent entity’ is reported on a pro-rata basis

The updated guidance also includes a summary table of the existing interpretative guidance on cases of mergers, demergers and acquisitions.

The guidance will continue to be updated with any further guidance that may be agreed by the Inclusive Framework on BEPS. Taxpayers should continue to closely monitor new or amended reporting requirements and how countries implement or react to the new guidance.

The OECD also published additional exchange relationships that have been activated under the Multilateral Competent Authority Agreement on the exchange of CbC reports with respect to Bermuda, Curaçao, Hong Kong and Liechtenstein. This will reduce the need for local filing for MNE groups located in these countries.

Further information is available in our global alert here.

Israel and Lithuania have deposited their instruments of ratification under the MLI with the OECD. The MLI will enter into force for both countries on 1 January 2019.

This takes the total number of countries to have ratified the MLI to 11. The two countries offer a good reminder of the effect of the MLI. Where both territories have specified a treaty should be a covered tax agreement, the MLI will make amendments. Lithuania specifies the UK as a covered tax agreement (and vice versa) such that the MLI will modify the UK/Lithuania treaty in due course. However, the Israeli final position does not include the UK and therefore the MLI will not make amendments to this treaty.

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.

Germany: The German tax authorities are currently systematically investigating foreign companies with real estate property in Germany for suspected evasion of real estate transfer tax due to intragroup restructuring and M&A transactions. Our alert illustrates the risks and gives groups recommendations for action when dealing with German real estate transfer tax.

Israel: Israel's Tax Authority (ITA) has released circulars on transfer pricing methods and profitability ranges in certain local transactions. Multinationals with operations in Israel may want to review these circulars and examine their level of compliance with the ITA's positions on methodology and profitability.

Peru: The Peruvian General Anti-Avoidance Rule (GAAR) was enacted on 19 July 2012, but was suspended until regulations were issued through a Supreme Decree. Following the recent enactment of new legislation, the GAAR will apply for tax audits reviewing facts, acts and situations from 19 July 2012.

Poland: Poland's draft 2019 tax reform bill announced in August 2018 will introduce significant changes to the tax law in Poland, including changes to the withholding tax system and the introduction of an intellectual property regime, which are likely to have a significant impact on international groups operating in Poland.

Poland: Poland offers several investment incentives for new investments into the country. A new law has been enacted that allows companies to apply for a corporate income tax exemption for new investment to be placed at any location in Poland.

Uruguay: Uruguay has issued regulations on the taxation of foreign entities' income from services rendered directly through the internet, technological platforms and computer applications. The regulations apply to audio-visual services, which will be considered Uruguayan sourced, as long as the acquirer is located in a Uruguayan territory.

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.

Making Tax Digital technology workshop on 24 September 2018

Email Fiona Campbell

+44 20 7951 3625

Impact of the new corporate criminal offence legislation: EY webcast on 2 October 2018

Email Paul Dennis

+44 121 535 2611

US Tax Reform: Proposed regulations released on global intangible low taxed income

Email Joe Kledis

+44 20 7980 9094

Brexit update: Further Brexit notices issued as well as Migration Advisory Committee report

Email Mike Gibson

+ 44 20 7951 0568

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