The International Tax Round | Summer 2019
Welcome to our summer edition of The International Tax Round, which is edited by Sonal Shah.
These quarterly updates are designed to keep you informed of the cross border developments taking place around the world.
Summer should hopefully be in the air when you read this publication. I have been travelling over the past few weeks for business and Brexit has been one of the focal points of conversation. With the prime minister’s pending resignation and Nigel Farage’s success in the European Parliamentary elections, it seems that we are in for yet more change.
I have also found that the digital economy and tax has been the flavour of the month with new initiatives being consulted on in various countries. Please be sure to read our article on what the UK has been doing to tackle the unfair and distortive market outcomes that may persist in the short-term until a global solution is reached.
Regarding digital currencies, these have evolved considerably. In just ten years, blockchain has evolved from a single network (Bitcoin) into hundreds of networks. There are now many thousands of crypto assets in circulation today. Tax professionals looking to position themselves to serve this new market need to understand the ways in which crypto-currencies and blockchain technology interact with the tax arrangements persisting in their individual countries. In conclusion, we should expect continued modernisation of tax law that can deal appropriately with a changing world.
We hope that you find this publication useful and welcome any feedback you may have.
Non-Cooperative Countries relates to countries defined as having inadequate tax governance arrangements with an unacceptable risk of facilitating tax avoidance.
The EU agreed the following non-cooperative jurisdictions in March 2019:
- American Samoa
- Marshall Islands
- Trinidad and Tobago
- United Arab Emirates
- US Virgin Islands
Mixed Bank Accounts for UK Resident Non-Domiciliaries
Those identified as domiciled outside of the UK, may avoid UK tax on their foreign income and gains by not remitting them to the UK. They can also avoid UK tax by remitting “clean capital” to the UK instead of income/gains.
Problems however, arise when there are “mixed funds”, i.e. bank accounts which have a historic mix of income or gains, and capital. Such accounts are tainted, in that remittances from these accounts are treated as first income, and then gains, to the extent that they ever had such income and gains credited to these accounts.
A window of opportunity was granted by HM Revenue and Customs (HMRC) and it was possible, under certain conditions, to cleanse such accounts, i.e. to extract the income/gains from the account by transferring them to a new account, and thereby leaving only clean capital in the account. This window has now closed.
It is vital that UK resident non-domiciliaries take great care not to have income or proceeds with gains credited to their clean capital account. Such accounts can no longer be cleansed by “unmixing”.
Change in Definition of a UK Permanent Establishment
If an overseas business has a UK Permanent Establishment (PE), the profits of the business that are attributable to that PE, either directly or indirectly, are chargeable to UK tax.
Certain preparatory or auxiliary activities, such as storing the company’s products, purchasing goods, or collecting information for the non-resident company, are classed as exempt activities and do not create a PE.
However, a change was deemed necessary to ensure that businesses cannot take advantage of the exemptions by splitting up their activities between different locations and related companies.
Therefore, since 1 January 2019, new legislation states that a non-UK resident company will be denied the PE exemption for certain preparatory or auxiliary activities if the company effectively splits their activities between different locations and related companies, and these activities together would create a PE if they were in a single company.
This is most likely to affect non-resident manufacturing and distribution businesses that structure their UK operations to minimise their UK tax footprint.
The Future of Digital Taxes on Tech Companies
During the first week of March 2019, the French government introduced a digital tax of 3% on French revenues generated by the internet companies. The so-called GAFA tax, which is an acronym of the companies: Google, Apple, Facebook and Amazon, targets digital companies with global annual sales of more than 750 million euros ($849 million) and sales in France of at least 25 million euros. However, it should be noted that if these two criteria are not met, the taxes will not be imposed.
We briefly touched on this in our previous publication, whereby the UK announced that from April 2020 the UK will introduce a 2% tax known as the Digital Services Tax (“DST”) on the revenues of certain digital businesses that derive value from their UK users. A draft consultation has now been released for views and comments.
The in-scope business activities that will be subject to DST are the provision of search engines, social media platforms and online marketplaces. Outside the scope of DST will be the provision of payment or financial services, sale of goods online, provision of online content and the provision of television and broadcasting services.
While the Organisation for Economic Co-operation and Development (OECD) is still in discussions to agree on a global solution on how to approach foreign tech giants, the aim of the DST is to serve as a temporary measure until such a global solution is reached. There will be a review in 2025.
The future of digital taxes is coming with Germany, Spain, Austria (among others) working on their own digital tax measures. With GDPR, anti-trust measures and the idea of a digital tax system, technology companies will slowly be held more accountable.
Global Forum on Tax Transparency
The Global Forum is the continuation of a forum which was created in the early 2000’s in the context of the Organisation for Economic Co-operation and Development’s (OECD’s) work to address the risks to tax compliance posed by non-cooperative jurisdictions.
One of the initiatives of the Global Forum reviews was to assess jurisdictions against the updated standard which incorporates beneficial ownership information of all relevant legal entities and arrangements, in line with the definition used by the Financial Action Task Force Recommendations.
The seven jurisdictions reviewed – Hong Kong (China), Liechtenstein, Luxembourg, the Netherlands, North Macedonia, Spain and the Turks and Caicos Islands were rated “Largely Compliant”.
These jurisdictions have demonstrated their progress on the deficiencies identified in the first round of reviews, including improving access to information, developing broader Exchange of Information (“EOI”) agreement networks and monitoring the handling of increasing incoming EOI requests. These new reports also issue recommendations to the seven jurisdictions, which concern improving the measures related to the availability of beneficial ownership of all relevant entities and arrangements, as required in the strengthened standard.
In addition, the first ever beneficial ownership toolkit was released on 20 March 2019 in the context of the OECD’s Global Integrity and Anti-Corruption Forum.
UK Launches Profit Diversion Compliance Facility for MNE’s
HM Revenue and Customs (HMRC) has announced plans and guidance for a new Profit Diversion Compliance Facility, which is intended to support multinational companies (MNEs) concerned about their transfer pricing arrangements to resolve any issues with the tax agency.
HMRC said it has found in its investigations that some MNEs have adopted cross-border pricing arrangements that are based on an incorrect fact pattern and/or are not consistent with the Organisation for Economic Co-operation and Development’s (OECD’s) Transfer Pricing Guidelines (TPG), as clarified through Actions Points 8-10 of the OECD Base Erosion and Profit Shifting Project.
HMRC said: “The new facility is designed to encourage the MNEs with arrangements that might fall within [the Diverted Profit Tax’s] scope to review both the design and implementation of their TP policies, change them if appropriate, and use the facility to put forward a report with proposals to pay any additional tax, interest and where applicable, penalties due.”
The extensive guidance sets out the scope of the Facility, the rules, and how to make a submission.
According to HMRC, the Facility will enable MNEs to:
- avoid an investigation by HMRC if a full and accurate disclosure is made
- achieve greater tax certainty
- access an accelerated process wherein HMRC will respond to a proposal within three months of a submission
- manage their own internal processes around what evidence to gather, who is interviewed, what comparables are used (if any), and how the analysis is presented
- access unprompted penalty treatment, if HMRC has not already started an investigation into profit diversion.
The deadline for obtaining reduced penalties is 31 December 2019.
VAT Registrations for a No-Deal Brexit
We have come across a change in policy from HM Revenue and Customs (HMRC) in respect of VAT registrations for non-UK businesses who are applying to register for VAT in anticipation of a no-deal Brexit.
HMRC has decided that any such registrations will not be fully processed until it becomes clear that a no deal Brexit will become a reality. While we see that there is some logic to this stance, it does mean that other aspects such as EORI status etc. are all also put on hold. In the event of a no-deal Brexit, HMRC could well be overloaded with such requests.
If a VAT registration is vital, then it may be worth amending intentions so that a VAT registration is required regardless of what happens. A good example of this would be selling goods in the UK from a current or near future date. Any business that decides to do this would need to demonstrate that intention to HMRC and that it is genuine.
Where there are construction services on land in the UK, the place of supply for VAT purposes is where the land is situated. The logical conclusion from this is that a non-UK business carrying out building services for a UK contractor on a building in the UK would need to register and charge UK VAT. In fact, this is not the case. Where the UK contractor is registered for VAT, they must account for VAT under the reverse charge mechanism. EU law allows member states to apply this rule. Although some states do not, the UK does. This can cause added complications however, even though it is meant to simplify those rules.
If the non-UK sub-contractor, subcontracts part of its work to a business in the country where it is based, that business cannot apply the reverse charge and so will have to charge UK VAT. The first non-UK sub-contractor would be able to recover this VAT, but unless it was VAT registered for other reasons, it would be a long process.
To add to the confusion in this area, the rules in the UK are changing for work in the construction industry from 1 October 2019. More about that in the next issue….