Midweek Tax News

  • Share

Previous editions...

A weekly update on tax matters to 17 October 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 OECD's request for input on the tax challenges of the digital economy closed on Friday, 13 October 2017. There have been some concerns that the short timeframe for responses may mean that some areas of the digital economy, particularly small and medium enterprises (which may include new start-up businesses that have typically been seen as a key part of the digital economy) may not have been properly represented. The OECD will now consider the responses ahead of the public consultation that will take place on 1 November 2017 in Berkley, California. The OECD has stated that it expects to publish its report on 18 April 2018.

The EU is also progressing its discussions this topic alongside its work on the Digital Single Market, with a working party meeting covering this topic taking place on 16 October 2017. It is hoped that a common understanding between ministers can be reached at the ECOFIN meeting on 5 December 2017. The paper produced by the European Commission in September indicated that the EU should be ready to adopt new rules if progress at the international level proves too slow.

As a reminder, a number of different solutions are being considered, including:

• Introducing a taxable presence where a company has significant economic presence by virtue of digital transactions with customers

• Introducing a withholding tax on revenues generated from the provision of digital services or advertising activity

• Introducing an equalisation tax on the turnover of digitalised companies, either in all cases or only where that income is untaxed or insufficiently taxed

• Within Europe, introducing the Common Consolidated Corporate Tax Base

There are challenges associated with all of the proposals, including risks of double taxation or stifling growth, which will need to be carefully considered. However, there is increasing pressure to address the perceived problems even though there appears to be some lack of clarity as to which particular aspects any new rules should provide a solution to. Some believe the rules should focus on the risk of tax avoidance created by digital transactions (although the BEPS measures which may address some of these issues have yet to be fully implemented), others consider they should focus on the perceived value generated by the customer through the creation and exploitation of data, while a further group suggests that the ability to easily relocate profits as a result of the digital economy means that an entirely new method of taxation is required.

The UN will also be considering the tax consequences of the digitalised economy relevant for developing countries during the 15th session of its Committee of Experts on International Cooperation in Tax Matters, which runs from 17 to 20 October 2017. This meeting is also due to consider addressing BEPS risks in an updated UN model tax convention and updating the UN transfer pricing guidelines for developing countries.

Although the first notification deadline for reporting to HMRC which entities will be filing a country-by-country report may now have passed for many groups, there are still a number of aspects that need to be considered and actioned. In particular, the first filing deadline is now fast approaching for many groups, and they may wish to consider the following issues whilst preparing their reports:

• Assessing quality of data available and accuracy of mapping this to the country-by-country report

• Ensuring that the report can be converted into XML for submission, either by obtaining access to conversion software or by engaging a third party provider

• Performing a detailed risk assessment on the draft report before submission to assess any areas of likely challenge by the tax authorities and whether any additional disclosures may be required

• Ensuring that transfer pricing documentation and the published tax strategy are aligned with the country-by-country reporting data and disclosures

It is also important to review the current position regarding the exchange agreements which will allow tax authorities to share the reports next year, since if countries do not have effective agreements in place, secondary filing obligations could exist and penalties could arise for missing these. There have been further developments on the status of exchange agreements, with the OECD publishing updated information on the existence of automatic exchange agreements that have been agreed.

As a reminder, our country-by-country reporting webcast at 10:00 am today, 18 October 2017, will consider these points, amongst others.

To register for the webcast if you have not already done so, please click here.

The fifth round of negotiations between the UK and the EU drew to a close last week, with ‘deadlock’ existing in a number of areas.

One of the areas still to be resolved is the question of citizens' rights, which could have an impact for employers. Almost all forms of ‘people issues’ are likely to feel the impact of Brexit and we will be hosting a webcast at 1:00 pm on Thursday, 19 October 2017 where we will share some suggestions for immediate actions that could be taken over the next three to six months. This webcast is being led by our People Advisory Services practice and will focus on HR issues. To register, please click here.

Separately, the UK and EU have sent a joint letter to all the members of the World Trade Organisation (WTO), setting out their intended approach to certain issues following Brexit, in particular customs tariff-rate quotas. When the UK leaves the EU, it will have its own schedule indicating maximum tariff rates that can be applied to certain imported products, as well as quantities that can be imported duty-free (or discounted). The joint letter states that both the UK and EU intend to apportion the existing EU tariff-rate quotas to reflect current trade flows to ensure WTO members maintain the same level of access (if not more) that they enjoy at present. A common approach will also be followed in relation to domestic subsidies for agriculture. It is reported that a number of nations are challenging the proposals on the basis that the division of quotas reduces their flexibility to supply.

Alongside the WTO developments, the Financial Reporting Council (FRC) has published its summary of key developments for 2017/18 annual reports. Although there is no specific reference to tax in the letter, there is a paragraph on the implications of Brexit, which can include tax. The FRC notes that the majority of reports it had recently reviewed included disclosure on the continuing uncertainties regarding the effects of the EU referendum. A consistent theme was that it was too early to measure the longer-term effects of the decision and how business strategies would be impacted. However the FRC goes on to note that many are beginning to identify, in more detail, the specific nature of the likely risks. It suggests that companies should consider how their assessment of the potential impact on their business has developed over the year and make appropriate disclosures to reflect their latest analysis.

Other UK developments

The latest OECD survey, published on 17 October 2017, has attracted significant press coverage for its comment that “In case Brexit gets reversed....the positive impact on growth would be significant.” The report also warns of the risk of economic shock arising from a break-down of UK-EU negotiations, damaging the prospect of a trade deal in the near future, and highlights the need for the closest possible economic relationship between the UK and the EU. It acknowledges that the outcome of the Brexit negotiations is hard to predict.

What is also interesting are the OECD's comments on productivity and taxes. It suggests introducing tighter criteria to restrict self-employment to truly independent entrepreneurs and gradually reducing the gap between national insurance contributions for the self-employed and for employees. It remains to be seen whether any of the OECD's suggestions (including those on pension indexation and devolution of property taxes) are reflected in the UK's Budget on 22 November 2017.

The Committee Stage of the Autumn Finance Bill, which introduces measures previously withdrawn from the pre-election Finance Bill (including the corporate interest restriction rules and the corporation tax loss reform) commenced on Wednesday, 11 October 2017, with the Committee of the whole House agreeing without amendment the three clauses under its remit (relating to termination payments, business investment relief and the Northern Ireland tax rate).

The remaining clauses are now being considered by the Public Bill Committee, whose proceedings are due to be completed by 26 October 2017 at the latest. Ahead of the first sitting, the Government tabled two minor amendments to the clause extending the substantial shareholding exemption to qualifying institutional investors to correct a technical defect and allow the revised rules to operate as intended.

In addition to the ongoing consideration of the Finance Bill, HMRC has also released draft regulations in order to expand the simplified group relief arrangements to include group relief for carried forward losses, which is being introduced as part of the corporation tax loss reform.

Following the consultation launched in November 2016 and the draft regulations published in July 2017, two statutory instruments were laid before Parliament on 12 October 2017 to introduce the new framework and tax regime for Insurance Linked Securities. Under the new tax regime, insurance risk transformation activity undertaken by certain qualifying entities will not be subject to corporation tax, with investors being taxed as normal.

In the case of Amalgamated Metal Corporation, the First-tier Tribunal was asked to consider the taxation of damages. The taxpayer was one of the claimants in the Advanced Corporation Tax Group Litigation Order and its legal advisors had incorrectly settled with HMRC for interest payable on all outstanding claims by the company, despite being instructed to only settle in relation to amounts in the last six years before the claim. The taxpayer was subsequently awarded damages against its solicitors, but did not include the receipt as income for the relevant period, claiming the benefits of an extra-statutory concession (ESC D33).

The Tribunal dismissed the appeal against an assessment to tax, concluding that it did not have jurisdiction to deal with matters relating to the extra-statutory concession.

Although the Tribunal did not have jurisdiction, it concluded that if it had, it would have found that the damages were taxable as interest, on the basis that the amount represented lost interest receivable from HMRC. As such, the case is interesting for its analysis of the taxation of damages.

On Friday, 13 October 2017 HMRC launched technical consultations on two draft statutory instruments in relation to the soft drinks industry levy, which is due to be introduced from 6 April 2018. The first draft instrument set out the detailed scope and operation of the levy, with the second covering the specific enforcement and compliance powers required by HMRC in connection with the levy.

Responses to the technical consultations are due by 8 December 2017.

International developments

The OECD held its seventh Tax Talk web seminar on 17 October 2017, giving an update on a number of important recent and upcoming developments in the OECD's work on international taxation.

During the seminar, the OECD noted that over 71 jurisdictions were covered by the Multilateral Instrument, which amends existing bilateral treaties to address BEPS risks. The Multilateral Instrument requires ratification by five signatories before it can enter into force and so far only Austria has notified ratification. The OECD expects that five ratifications will be received by the end of the year such that the Multilateral Instrument is expected to enter into force in early 2018 (three months after the fifth ratification is notified).

The seminar also gave updates on the work addressing the tax challenges of the digital economy, harmful tax practices and country-by-country reporting. It also highlighted the current work by the OECD to prevent, minimise and resolve treaty disputes, as well as covering the International Compliance Assurance Programme, which will use country-by-country reports and other information to facilitate engagement between multinational enterprises and tax administrations, with a view to providing early tax certainty and assurance. This is currently being developed in workshops and the pilot is expected to commence in January 2018 (including the UK and US), with a wider roll-out following approximately 12 months after.

On 16 October 2017, the OECD published a progress report on actions taken to tackle preferential regimes that can lead to harmful tax practices. The report notes that of the 164 preferential regimes reviewed by the Inclusive Framework on BEPS in the last 12 months, 99 required action to address BEPS risk, although all but 6 of these have either already been amended or the changes have been initiated.

The peer reviews on a small number of regimes have been extended due to extenuating circumstances, such as the impact of the recent hurricanes on some Caribbean territories, but the Inclusive Framework members are still targeting an ambitious timeline, whereby jurisdictions whose regimes are considered to have harmful features are expected to introduce amendments as soon as possible and generally no later than October 2018.

Following extensive negotiations to create a four-party coalition after the March 2017 general election, the new Dutch Government has published its policy for the next four years. The policy paper also includes proposed tax changes to ensure that the Netherlands continues to offer a competitive tax investment climate for companies, whilst addressing tax-avoidance opportunities.

The key proposals announced include:

• Lowering the main corporate income tax rate to 21% from 2021

• Eliminating the 15% withholding tax on dividend distributions (except where the distributions occur in ‘abusive’ situations)

• Introduction of a withholding tax on interest and royalties

• Introducing interest limitation rules, restricting interest deductions above €1 million to 30% of taxable EBITDA (a group ratio rule would not be introduced)

• Reducing the number of years for which tax losses can be carried forward

• Increasing the effective tax rate of the innovation box to 7%

Further details can be found in our global alert.

Following the recent decision by the French Constitutional Council, where it held that the French 3% contribution on distributed amounts goes against the French Constitution regardless of the source of the income distributed, it may be possible for companies to claim a refund for any contributions paid since 2015 if they have not already done so.

A number of challenges have previously been made in relation to the 3% contribution, with the Court of Justice of the EU finding that the tax was contrary to the EU Parent-Subsidiary Directive where it applies to profits redistributed from subsidiaries established in the EU and falling within the scope of the Directive. An announcement that the tax would be repealed was made in July 2017, but it was unclear how the repeal would impact outstanding claims.

The French Constitutional Council found that differences in the tax treatment depending upon the source of the income distributed was not sufficiently justified by the aim to provide a yield of revenues and, as such, must be declared contrary to the French Constitution with effect from the date of the publication of the decision, applying to all cases for which a final judgment has not yet been reached.

Given the lack of time limitation on the effects of the decision, it also opens up the possibility for companies to consider making a claim for a refund if they have not already done so.

For further information, please see our global alert.

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.

Ireland: As part of Ireland's 2018 Budget, the Irish Government has launched a public consultation on a number of international tax aspects, including the implementation of the EU Anti-Tax Avoidance Directive and BEPS measures relating to transfer pricing.

Japan: Japan has signed a revised treaty with Denmark for the avoidance of double taxation, incorporating the recommendations from the relevant BEPS Project Action Points relating to such treaties.

United States: A US District Court has found that the US Treasury violated a requirement to have a 30 day notice and comment period when issuing new anti-inversion rules with immediate effect, although the authority to issue such a rule was confirmed.

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.

Taxation of the digital economy – update on recent developments

Email Claire Hooper

+ 44 20 7951 2486

Country-by-country reporting actions in advance of filing reports

Email Henry Syrett

+ 44 20 7951 9172

Brexit impacts on people, World Trade Organisation issues and financial reporting

Email Mike Gibson

+ 44 20 7951 0568

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

Back to the top