International Tax, Taxation
The International Tax Round | Autumn 2019
Welcome to our autumn edition of The International Tax Round, edited by Sonal Shah.
This quarter’s topics include, ‘Off-shore bank accounts – HMRC are closing in’, ‘No-deal Brexit and witholding taxes’ and ‘New UK tax rules on property-rich companies’.
As I am writing this Autumn edition, my eyes wander to an article that is sitting on my desk – “Is the robotic tax adviser a virtual reality?” So much has been written of late about the impact of technology on business, and how embracing AI can enable businesses to deliver greater client value.
However, is it all good news? Regarding robots, or should I say innovation, Bill Gates floated an idea a couple of years ago. He suggested imposing a tax on robots, with the aim of saving jobs. An intriguing but perhaps an impractical idea? How do we define a robot? South Korea, the world’s most robotized nation, introduced the world’s first tax on robots amid fears that machines will replace humans. The country will be minimising tax incentives for investments in automated machines as part of its new proposals. I am travelling to South Korea and Japan in a few months and I will be sure to discuss this with some friendly locals. Please feel free to let me know what your take is.
As always, I hope you find this edition useful, for further advice on any of the articles discussed, please get in touch
Offshore bank accounts – HMRC are closing in
HMRC received data on 5.7m offshore bank accounts last year, more than treble the 1.63m accounts it received information on in 2017.
This data was collected from over 100 countries as part of a global transparency initiative called the Common Reporting Standard (CRS). HMRC recently confirmed the information it received so far indicates that one in ten taxpayers has an offshore financial interest.
The data HMRC has received means taxpayers can expect to see more investigations in this area.
A recent tactic HMRC has used is to send “nudge” letters to taxpayers with an offshore bank account asking them to confirm that the information HMRC has is correct. The letters are designed to create leads for investigations and may also prompt taxpayers to come forward for fear of being investigated.
As part of its ‘No Safe Havens’ report released in March 2019, HMRC stated that it will continue to use targeted communications with taxpayers, such as letters, and “the full range of powers provided by Parliament” to tackle non-compliance in the UK.
HMRC also confirmed that it will continue to work with tax authorities globally when conducting investigations to ensure that it recovers all the tax that is due. UK residents with offshore assets must ensure that they are correctly reporting their overseas income and gains in the UK.
No-deal Brexit and withholding taxes
The EU Interest and Royalties Directive allows EU companies to make most payments of interest and royalties to EU associated companies and permanent establishments, free of withholding tax (WHT). In a no-deal Brexit, the Directive will cease to apply to the UK.
This means that such payments may be subject to WHT from 1st November 2019. The relevant WHT will then be governed by the prevailing Double Tax Agreement (DTA). This may not be all bad news, as the UK does have an extensive DTA network, and many treaties with EU countries already specify no WHT on such payments. However, each country’s DTA with the UK will need to be checked in all cases.
WHT on dividends received by a UK entity from an EU entity will also be affected. Although, as the UK does not impose WHT on dividends paid out, Brexit will not have any adverse effect on such outward dividend payments.
New UK tax rules on property-rich companies
With effect from 6th April 2019, the scope of UK Capital Gains Tax (CGT) has been extended to catch gains on the sales of shares of companies whose assets consist of, to a substantial extent, UK real estate. Despite the introduction of the non-resident CGT on disposals of UK residential property in 2015, the disposals of shares in property holding companies remained a “safe haven”. This is no longer the case and the new rules apply if:
- the company is “property rich” (i.e. if 75% or more of its value derives from UK property). The disposal could be of shares in a company which directly owns the UK property, or a parent or holding company of a subsidiary holding UK property. Where more than one company is sold, complicated rules apply to work out whether, in aggregate, 75% of the value of the companies derives from UK property; and
- the non-resident (and related partners) hold, or at some point in the previous two years have held, at least a 25% interest in the equity.
However, there are exemptions available. For example, when UK land is used for the purposes of a qualifying trade, which has been carried out for at least a year prior to the disposal, and will continue after the disposal.
The intention of these new rules is to align the UK with other countries and remove the tax advantage that non-residents currently enjoy.
Protected settlements legislation – the great protection
There have been several recent developments in respect of changes to the taxation of non-doms and offshore trusts.
In particular, the new protected settlement’s legislation, which has been in effect since April 2017 – this piece of legislation affects all foreign settlor-interested trusts that were set up by non-dom individuals (whether deemed dom under the new rules or not). These protections make all non-resident trusts very attractive for many non-doms. This is because non-doms settlors are not personally assessed on the offshore gains or income of an offshore trust unless they receive a distribution or benefit from the trust; as such, income and gains may be rolled up in these trusts without the need to claim the remittance basis charge. These are known as “Protected Trusts”.
However, care needs to be taken in applying this legislation as there are a number of criteria that need to be satisfied. Furthermore, protection can be lost if the trust is tainted. For example, where property is added to a trust by the settlor or by another settlement connected to the settlor. It is therefore paramount that the rules are carefully observed.
Profit fragmentation rules affecting small UK companies, partnerships and even individuals
Profit fragmentation can occur when a UK taxpayer makes a payment to an overseas supplier, resulting in a “tax mismatch”. This is where the tax paid on the income received by the overseas taxpayer is less than 80% of the tax saved by the UK taxpayer on the payment as a result of an allowable deduction.
Other factors that must be considered include the ability/power of the UK taxpayer or someone connected to the taxpayer to enjoy the amount transferred, the payment not being at arm’s-length, the main or one of the main reasons for the transfer was to obtain a tax advantage, to name a few.
Where these apply, the UK taxpayer must self-assess a fair arms-length value for each such payment in their tax return and pay the additional tax. This of course is effectively transfer pricing for small and medium sized businesses, which were previously exempt from such rules.
The UK’s “no-deal” plan for VAT
We are now potentially only a few weeks away from the UK leaving the EU without an agreed deal. Businesses should be preparing for changes to the UK’s VAT system in case this happens.
With regards to trading with the EU, the government says that businesses will have to apply the same VAT and customs rules to goods moving between the UK and EU, as currently apply to trade between the UK and non-EU countries.
Postponed accounting for import VAT on goods brought into the UK would avoid the cash flow burden of paying import VAT on goods at the time of arrival. This would apply to both EU and non-EU imports – a very important reassurance to UK importers.
There will also be major changes for businesses making distance sales of goods, using the Tour Operators Margin Scheme, The Mini One Stop Shop for B2C supplies of digital services, or submitting refund claims for VAT incurred in EU member states.
Until a final agreement is reached on how Brexit will take effect, businesses should watch out for further developments.
For further information and advice on any of the topics discussed, contact Sonal Shah at email@example.com or learn more about our cross border tax services.