The International Tax Round Spring 2021

Spring is just around the corner and with it we bring you the next edition of The International Tax Round. With Covid-19 and Brexit still impacting businesses globally, this quarter, our International Tax Partner Sonal Shah delves into the unforeseen consequences for where companies are taxed, guidance on the tax residence status of stranded employees and whether the UK is now seen as a tax haven post-Brexit?

Editor’s message

Another day in lockdown. That is how the year began for most of us around the world. However, we are once again filled with hope after the announcements on Monday 22 February. As the road map out of Covid has been set out, can we feel ourselves reaching for the reigns again?

The Chancellor is set to announce the budget on Wednesday 3 March. Focus on tackling the deficit will certainly be on the agenda. I am co-incidentally chairing a tax focus group, on the same day, discussing the tax effects going forward for high net worth individuals. There are speculations that a wealth tax could be on the horizon. The Wealth Tax Commission finally issued its report and whilst it concludes that the UK could benefit from introducing a wealth tax this is very much unlikely in the short term. I am looking forward to hearing what other countries participating in the focus group are doing to tackle the deficit.

I hope you’ve all watched The Queen’s Gambit by now. Another one to watch is The Serpent – a twisting, real life yet remarkable story of how one of the world’s most wanted men was brought to justice – give it a go.

Covid-19 and corporate residence issues

Covid-19 has had a significant impact on where people work from. The Organisation for Economic Co-operation and Development (OECD) has published guidance relating to the possible consequences for companies. This puts forward ways that governments can best address Double Tax Agreement (DTA) issues through legislation, regulations, guidance, and best practices.

One effect is the possible creation of a Permanent Establishment (PE) for a company registered and operating in one jurisdiction, but where an employee who moved to another country during Covid-19 now can’t return. This employee’s presence in the other country could inadvertently create a PE there, with tax consequences in the other country for any profit apportioned to the PE.

Another impact on where a company may be taxed could arise if the individuals were board members or senior managers. This could in theory mean a change of the company’s place of effective management and consequently the company acquiring a new fiscal residence. In particular, many older DTA’s rely solely on “place of management” as the tiebreaker where a company is dual resident, in determining tax residence for DTA purposes. The OECD’s guidance, sensibly, is that this is unlikely to be affected by the fact that the decision-making individuals cannot travel due to the pandemic, if this is a temporary situation.

OECD guidance for tax residence status of stranded employees

We have previously commented on the fact that non-UK residents prevented from leaving the UK due to Covid-19 restrictions can rely on the “exceptional days” rule, whereby up to 60 days spent in the UK in a tax year may be ignored for UK tax residence purposes.

Commentary on Article 15 of the OECD model DTA states that days of sickness count towards tax residence under a 183-day test. However, it also stipulates an exception where the individual is prevented from leaving due to such sickness. Updated OECD guidance now states that the exception may cover situations where employees are prevented from travelling due to a requirement to isolate, where a government has banned travelling, or where it is impossible to travel due to, for example, the cancellation of flights.

Noting the OECD imposes no limit to the number of such discounted days, there is an apparent clash between the OECD’s guidance and the UK’s 60-day rule. In context here, the OECD’s guidance specifically mentions a 183-day residence rule, whereas in the UK it is possible to be a tax resident by spending far less than 183 days under certain circumstances. Moreover, there are countries which do not make any exception for such unavoidable days spent there.

The OECD further advocates that people so detained in their “new” country should check with their local tax authority to determine whether to disregard the additional days spent in the jurisdiction. The OECD appears to defer to the tax authority in which the employee is stranded. Which begs the question, why the guidance when it is effectively overridden in countries such as the UK?

Is the UK seen as a tax haven post Brexit?

Whilst the UK will be able to remain one of the most tax competitive jurisdictions in the world, previous speculations of turning the UK into Europe’s Singapore isn’t quite true.

Under the Agreement, the UK is still free to compete on tax rates, but many tax avoidance and anti-money laundering restrictions were imposed by the Trade and Cooperation Agreement on UK tax policies to secure a goods tariff-free deal, including:

• The UK will remain signed up to OECD measures.
• The EU can use retaliation tariff mechanisms within the Agreement should the UK give unfair tax subsidies to individual companies or sectors. For example, the UK had given reduced tax rates on patents registered in the UK, which was attracting significant investment from Germany. The UK eventually modified its tax subsidy in 2015.
• The option for the EU to impose anti-money laundering obligations on the UK if its much vaunted post-Brexit free port schemes act suspiciously.
• The EU has also held back on granting the UK’s financial services regulatory ‘equivalence’ in the EU and will likely use this as leverage to keep the UK in line with broad EU tax rules.
• A non-regression clause on EU country-by-country reporting standards, which aims to give transparency to multi-nationals using cross-border tax rules to gain unfair advantages.

Furthermore, as the Chancellor prepares for his March budget, the prospects are slim. Watch this space!

UK’s 2% online sales tax proposal

The UK is reported as considering a 2% online sales tax on ecommerce sellers and marketplaces to help support struggling high-street retailers. This could be considered as a potential new tax on consumer deliveries. The aim of the tax would be to raise £2 billion annually, which would help to alleviate some of the government deficit as a result of COVID-19. This new tax would run alongside the present digital sales tax (DST).

At present, the tax has not been officially announced, but I suspect there will be a lot of looking at the finer details and figuring out how businesses will be affected by the new rules.

There could be a significant change on the customer end of transactions, although the main fallout of the new tax will be in businesses that haven’t got the necessary infrastructure for implementation.

As we work in the international environment, it is wise to act quickly and early. The risk for businesses who aren’t prepared is that the tax will be implemented on an immediate basis.

EU appeals against Apple’s contradictory tax case victory

The EU has set out its grounds for appeal against Apple’s victory in its $12 billion euro tax dispute saying the judges used “contradictory reasoning” when they ruled that Apple’s business in Ireland was not liable for significant payments.

In July 2020, the EU’s general court sided with Apple – the appeal alleges that the court improperly conflated Apple’s numbers of employees at two of its Irish units and the company’s level of responsibility for IP in iPhone and iPad sales across Europe. The EU’s own analysis was claimed not to be looked at properly.

The argument centres around where value is created and in turn, where it should be taxed. Apple argues that all important company decisions are made in its Cupertino headquarters, so profits should be taxed in the US.

July’s ruling came as a surprise especially since in recent years focus has been on Base Erosion Profit Shifting (BEPS) and in trying to close tax loopholes that allow some MNC’s to lawfully pay less tax in Europe.

The final decision will now be made by the EU’s highest court, the Court of Justice of European Union (CJEU)