The International Tax Round | Autumn 2020
Welcome to the autumn edition of The International Tax Round, keeping you up-to-date with cross-border developments. This quarter, our International Tax Partner, Sonal Shah, delves into the EU Commission’s new tax package for fair and simple taxation, what the new process will be from 1 January 2021 for moving goods between Great Britain and the EU and IHT implications on offshore trusts.
Before I head to the rugged wilderness of Scotland, I gaze out of a hotel lounge overlooking the lush expanse of the Yorkshire Dales, reflecting on the year that is passing in perhaps the strangest way I could have ever conceived. Our lives at home and work have been overshadowed with the subject of COVID-19 and I fear this is unlikely to change for the next few months, or even years. It takes a while for this to sink in.
Billions of pounds have been thrown at salvaging our flailing economy, but who’s picking up the tab? Focus will surely shift soon to tackling the deficit. I recently participated in a panel discussion on probable tax changes that will arise as a result. There was much debate about potential measures – would the answer be a one-off or ongoing tax on personal wealth, an increase in income tax rates, or would the government look to minimise the tax advantages for non-domiciled individuals? I foresee a long-term approach will be used rather than a quick fix, but whatever the outcome, timing will be crucial.
There is much to think about, but for now, I have a more pressing decision to make – Kilchoman or Lagavulin. After this, I can only hope that it’s onwards and upwards for us all.
One step closer to DAC7 with anti-fraud package
On 15 July 2020, the EU Commission published its new tax package for fair and simple taxation to help EU member states secure tax revenues in the post COVID-19 environment. The three key components of the package are:
- The Action Plan for fair and simple taxation supporting the recovery
- A proposal to amend EU directive 2011/16 on administrative cooperation in the field of taxation in the EU (DAC) to include the exchange of information from online platforms (referred to as “DAC7”)
- A communication on good tax governance “in the EU and beyond”
The Commission also announced its intention to explore whether tax legislation could be introduced using the ordinary legislative procedure, requiring a qualified majority instead of unanimity.
In other areas of taxation, the plan includes measures to:
- Facilitate and promote tax compliance for businesses, together with member states, based on cooperation, trust, and transparency – the so-called cooperative tax compliance programs that are developing both across Europe and globally;
- Reduce tax barriers to cross-border investment, by exploring the possibility of a common, standardized system for withholding tax relief, as well as enhanced exchange of information and cooperation mechanisms; and
- Help tax authorities better exploit existing data and share new data more efficiently, in a manner that will improve the enforcement of tax rules and help combat tax fraud and evasion more effectively.
Moving goods between Great Britain and the EU from 1 January 2021
The UK government has published The Border with the EU: Importing and Exporting Goods, which outlines processes for moving goods between Great Britain (but not Northern Ireland) and the EU from 1 January 2021.
On 1 January, the transition period will end and the UK “will operate a full, external border as a sovereign nation,” meaning that there will be controls on the movement of goods between Great Britain and the EU. There will be a phased introduction for border controls, which will be fully in force from 1 July 2021.
The guidance in the 206-page document describes the core process of customs declarations, customs duty, import VAT, and safety and security declarations for imports and exports. It sets out actions that businesses should take immediately, as they will be required regardless of the outcome of continuing negotiations.
For its part, the European Commission is updating the stakeholder notices, which address the end of the transition period, including a new version of the notice on customs (including origin).
Taxation of the Digital Economy
Every effort is being made to tackle taxation of the digital economy. According to the OECD release, the OECD Secretary-General said:
“Addressing the tax challenges arising from the digitalisation of the economy is long overdue…. All members of the Inclusive Framework should remain engaged in the negotiation towards the goal of reaching a global solution by year end, drawing on all the technical work that has been done during the last three years, including throughout the COVID-19 crisis. Absent a multilateral solution, more countries will take unilateral measures and those that have them already may no longer continue to hold them back. This, in turn, would trigger tax disputes and, inevitably, heightened trade tensions. A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further. A multilateral solution based on the work of the 137 members of the Inclusive Framework at the OECD is clearly the best way forward….”
The OECD has been directed by the G20 to deliver a consensus-based solution by the end of 2020. To this end, it has gathered 137 countries “on an equal footing” for the negotiations and has developed a two-pillar approach, which will be discussed in the weeks leading up to a meeting of the Inclusive Framework in October 2020.
The OECD said it will maintain its schedule of meetings to offer all members of the Inclusive Framework a place in the design of a multilateral approach.
The US joins the disclosure party
On 21 July, the House passed the National Defence Authorisation Act, which includes an amendment to require companies to disclose their true owners. This disclosure must be made at the point of incorporation to the Financial Crimes Enforcement Network, effectively removing the obligation from the companies’ banks to report beneficial ownership.
US Representative for New York Carolyn Maloney, introducing the amendment, said: “Anonymous shell companies are the vehicles of choice for money launderers, criminals, and terrorists. Unfortunately, the United States is the world’s capital of anonymous shell companies”.
Amy McKinnon, reporting on the website FP (Foreign Policy), observed: “In every state, more personal details and proof of identity are required to get a library card than to form a company.”
The US will have caught up with the EU, the UK and many other countries where reporting of beneficial ownership of companies has been mandatory for some time. Unlike in Europe, the beneficial ownership will not be publicly accessible. However, it will be available to UK law enforcement.
IHT and Offshore Trusts
Recent changes to the treatment of UK residential property held by offshore trusts mean that many offshore trusts that were not exposed to UK Inheritance Tax (IHT) will now fall within the UK IHT regime. This regime has been effective since 6 April 2017. Prior to this date, it was common for non-UK domiciled settlors to hold UK residential property through an offshore company and trust structure and not be subject to UK IHT.
The rules have changed so that IHT does now apply to trusts holding UK residential property directly or indirectly, in the form of entry charges, 10-year anniversary charges and exit charges on outright distributions to beneficiaries. Additionally, depending on the values, there may be reporting requirements even if there is no IHT to pay.
The rules have also changed in relation to loans made to allow trusts’ beneficiaries to purchase, maintain or improve UK residential property which may bring the benefit of such loans within the UK IHT net. Furthermore, loans to UK resident beneficiaries are UK situs assets for the purposes of UK IHT.
Offshore trustees therefore need to be aware of the complexities involved in determining the UK IHT obligations and ensuring the required reporting has been done.