The International Tax Round | Summer 2020
Welcome to the summer edition of The International Tax Round, which offers concise updates and advice on international tax developments. In this edition, we provide updates for non-residents on ‘special treatment’ given by HMRC, SDLT surcharges, and potential opportunities for property owners.
There’s no doubt that life feels different right now.
Rewind a mere three months and many of us were rushing around, whether commuting to and from work or dashing to meet friends and family.
With normality suddenly halted, how would we cope? Oddly enough, some of us are coping with our “simpler” lifestyles better than imagined. I am increasingly hearing that people are feeling more connected with their friends, family and peers than ever before, and in a more meaningful way. I can’t help but wonder why. Are we, as humans, surprisingly adaptable, or is technology doing a good job at filling the voids inflicted upon us?
Governments around the world are scrambling to introduce measures to limit the impact of COVID-19. Simultaneously, people are relying on digital services for both work and leisure, highlighting the urgency to progress the OECD/G-20 digital tax project. Could this finally bolster international efforts to agree on a unified approach for taxing the digital economy?
Questions are overwhelming us and whilst I remain a traditionalist, longing for the warmth, positivity and inspiration that can only come from physical presence, the importance of adapting and speeding up new ways of working is undeniable.
On a separate note, I’d like to express my gratitude to each and every one of you who have supported GE and given feedback on these publications – we love hearing from you so please do continue sharing your thoughts.
Non-residents given ‘special-treatment’ by HMRC
One of the key impacts of the COVID-19 pandemic has been the disruption to travel, which has stranded individuals in the UK and put them at risk of losing their non-residence status.
The UK uses the Statutory Residence Test (SRT) to determine whether an individual is resident in the UK for tax purposes. The test is comprised of many components, one of which being the number of days that an individual is present in the UK.
UK rules grant an exclusion from an individual’s day count for days relating to exceptional circumstances. The number of days one can disregard due to exceptional circumstances is restricted to 60 days in any tax year. HMRC has recently updated its guidelines, allowing individuals that are unable to leave the UK or enter their country of residence because of COVID-19, the ability to apply for special treatment under the exceptional circumstances regulations.
The overriding concern here is whether the 60-day limit on disregarded days is sufficient should things continue for the foreseeable future.
Read more here: COVID 19: Impact on UK tax residency.
Non-resident SDLT surcharge confirmed
As of 1 April 2021, non-UK residents will face a 2% Stamp Duty Land Tax (SDLT) surcharge when purchasing residential property in England and Northern Ireland. The change will affect non-resident individuals, companies and trusts, and is being introduced to help control house price inflation and to support UK residents to get onto the property ladder.
It is important to note that this surcharge will be in addition to the 3% surcharge for second homes, taking the possible top rate of SDLT for overseas buyers to 17%.
We expect the surcharge to effect many more non-residents, especially after the consultation in 2019 also included a change in the definition of a non-resident. This means that the surcharge is likely to apply to people who have spent fewer than 183 days in the UK in the 12 months ending with the date of the purchase.
Opportunity for non-resident property owners
One expected consequence of COVID-19 is the almost certain, and substantial, fall in UK residential property values – probably short-term. This could create a window of opportunity for non UK resident property owners considering de-enveloping.
De-enveloping is the procedure whereby traditional property-owning structures are re-organised due to the relatively new and high taxes on offshore companies/trusts owning UK residential properties. This procedure often involves incurring taxes, such as Capital Gains Tax, Inheritance Tax and possibly SDLT, all based upon the property’s value at the date of restructuring. So, the lower the value, the lower the potential tax liabilities are. Given the expectation that prices will rise again soon, this could be a rare but short opportunity to restructure.
Corporate tax implications of COVID-19
There are potentially many hidden impacts of COVID-19 and it is important that businesses do not overlook these. These include:
- Tax implications of international travel restrictions. For example, employees and consultants with international roles who are stuck in a foreign jurisdiction could be subject to further tax liabilities, such as: additional social security, withholding taxes on earnings, etc. Furthermore, for companies, travel restrictions could prevent them from meeting the economic substance test and its tax resident status in a particular jurisdiction.
- Eligibility for claiming reliefs. Numerous reliefs available in the UK are based on the trading eligibility criteria. For instance, entrepreneurs’ relief. Therefore, due to the trade restrictions imposed, shareholders, especially in the hospitality and airlines industries, could be restricted on the level of reliefs they can claim on disposals of their shares.
- Loans and exempt distributions from overseas subsidiaries. Due to COVID-19, multiple group companies may re-assess their finances and consider further opportunities to restructure. However, in the short-term, liabilities could be funded via intra-group loans and distributions.
The above is just a flavour of what should be considered. Read more here: Corporate tax implications of COVID-19.
Russia overrides its Double Tax Agreements – who’s next?
President Vladimir Putin has announced a 15% withholding tax on dividends and interest paid from Russia to foreign jurisdictions.
The new tax is equal to the rate applied to dividends under current Russian law but is less than the standard rate of 20% applicable to interest. It is one of the emergency measures drafted as part of the country’s response to COVID-19.
The Russian government, acknowledging that they cannot do this without re-negotiating all relevant Double Tax Agreements (DTAs), will now attempt to do so.
Around a third of foreign investment into Russia comes from Cyprus, so it is clear who the Russian tax authorities are targeting. That said, it is not just “low tax” jurisdictions that this will apply to. Indeed, Russia doesn’t have DTAs with the traditional “tax haven” countries.
Lastly, President Putin said that if the countries did not agree to such amendments to their DTA with Russia, he would unilaterally terminate such DTAs.
The thin edge of the wedge for other countries to follow suit?
VAT payments deferred
The UK has introduced several measures to assist businesses during the pandemic. A welcome announcement was that from 20 March to the end of June 2020 VAT due on VAT returns will not have to be repaid until March 2021. Initially it appeared that non-UK businesses would not be able to take advantage of this deferment but later it was confirmed that all persons registered for VAT in the UK could. VAT returns still need to be submitted and any repayments of VAT will also be made.
In addition, any VAT compliance checks that are already underway are being suspended and routine checks that have not yet started will not begin until the crisis passes. However, any VAT returns which have large repayments of VAT due are still likely to be checked.
Read more here: Government defers VAT payments to help businesses manage cash flow during the COVID-19 crisis