The International Tax Round Summer 2022

The summer edition of The International Tax Round is here! In this edition, International Tax Partner Sonal Shah keeps you up to date with the latest global tax developments, including the Register of Overseas Entities, which is a new measure to tackle financial crime, the OECD consultation on a new framework to report crypto assets and further information on HMRC’s aggressive approach to transfer pricing investigations.

Editor’s message

As I soak in the natural hot springs of Italy, a deep sense of gratitude envelopes me. Having spent a few days in Rome before whizzing over to the charming Italian spa town, Saturnia, I can’t help but appreciate the return of easy travel and the pleasure of experiencing life in an entirely different setting. Better still, with the promise of summer in the air, bringing the joy of al fresco dining and lazy garden days with it, I’m not filled with the usual sense of reluctance of returning back home.

On the topic of reality, the cost of living crisis continues to present misery for millions. The global economy is facing what top economists are calling its biggest test since the second world war. A fractious mix of the fastest inflation rates in four decades, a nervous property market, soaring food prices, alongside prolonged uncertainty spurred by overseas disputes, all serve to paint a grim picture. We appear, yet again, to be heading into unchartered territory with a lot to be seen.

Looking ahead to the next quarter, and returning to positivity, my diary has certainly filled up. In the UK, after an incredible 70-year reign, the Queen will be celebrating a platinum jubilee. Our upcoming four-day weekend will no doubt help us all celebrate this amazing accomplishment and I suspect a street party is on the cards for most.

And, after what seems like a long pause, I will be attending an in-person conference with our international alliance, XLNC, where members will reunite in Brussels for the first time after the pandemic. I’m excited, not only to see familiar faces, but to begin my new role as Global Co-Chair of the Tax Focus Group. Sharing best practice and swapping knowledge is our biggest asset so I’m truly excited by the inevitable positive impact of getting together in person after the long hiatus.

Whether your diaries are bursting or blissfully blank, I hope you have a delightful summer!

In this edition, I’m pleased to bring you the latest information on:

• New measure to tackle financial crime
• OECD consultation on crypto assets reporting
• Transfer pricing investigations soar
• Tour Operator’s Margin Scheme
• Penalties for UK entities facilitating avoidance schemes involving non-resident promoters

New measure to tackle financial crime

It is perfectly legal for offshore entities to acquire UK properties and such schemes are generally structured for legitimate reasons. However, the Pandora papers, as well as recent events, have highlighted the vast misuse of illicit funds being invested in UK property, which are then effectively hidden behind corporate shells. For this reason, the Government pledged to introduce a register of overseas entities, which will increase transparency and powers to tackle financial crime by revealing the identities of beneficial owners of UK property.

The register has been in public discussion for a number of years, but in light of the Russian invasion of Ukraine, it has been fast-tracked and brought onto the UK statute books to assist with the UK sanctions regime in relation to Russia.

The long-awaited register represents one of the three components contained in the Economic Crime (Transparency and Enforcement) Act 2022 which received Royal Assent on 15 March 2022.

To find out more about the Register of Overseas Entities, the registration requirements, who they will be applicable to, the implications on non-UK trusts and consequences of not complying to the Act, read more.

OECD consultation on crypto assets reporting

At the request of the G20, the OECD has released a public consultation document on proposals concerning the exchange of information about crypto assets. At present, the framework in place for jurisdictions to exchange financial information on taxpayers automatically captures only limited information on crypto assets. The framework proposed by the OECD provides for the collection and exchange of tax-related information between tax administrations in respect of certain transactions. The proposals would apply to electronic money products, digital currencies, and indirect investments in crypto assets that can be held and transferred in a decentralised manner.

The rapidly growing use of crypto assets for a range of investment and financial activities has reduced tax administrations’ visibility on tax-relevant activities and thus increased the difficulty of verifying whether tax liabilities are appropriately reported and assessed. As crypto assets can be held and exchanged without the intervention of traditional financial intermediaries and without a central administrator having full visibility on transactions carried out, crypto assets could remain out of the scope of existing international tax transparency initiatives (such as the Common Reporting Standard (CRS).

The consultation, which closed on 29 April 2022, called for comments on proposals for a global framework for the automatic exchange of information on crypto assets. A public consultation meeting will be held at the end of May 2022. The OECD intends to report back to the G20 on the framework at its October 2022 meeting. Watch this space!

Transfer pricing investigations soar

HMRC has taken a more aggressive approach to what it deems as an acceptable transfer pricing arrangement. Consequently, HMRC has seen a 49% increase in the amount of extra tax collected from investigations into large companies shifting profits overseas.

New figures from the 2020/21 tax year reveal that the amount of extra tax collected from transfer pricing investigations into multinational corporates has increased from £1.45 billion to £2.16 billion, which is the highest yield on record for HMRC.

HMRC suspects that some large businesses are artificially reducing their tax liabilities in the UK through transfer pricing accounting. Hence why this increased scrutiny has made it very difficult for large companies to shift profits to lower tax jurisdictions, and requires due diligence when using such schemes.

HMRC has also said that it will now consider multinationals’ transfer pricing strategies for criminal investigation where appropriate.

Simon York, HMRC’s Fraud Investigation Services director, mentioned at the Hansuke Financial Services Tax Conference of November 2020, “We currently have live investigations involving some very large corporates where individuals within those companies have lied to us….then absolutely we would go down the criminal route there in relation to those individuals no matter how senior they are”.

Tour Operator’s Margin Scheme (TOMS)

TOMS is a mandatory scheme for businesses, acting as ‘principal’, that buy in and resell accommodation, passenger transport, car hire, day trips and so on to a consumer for holidays or excursions inside or outside the UK.

TOMS is designed as a simplification measure in the EU, which the UK could take advantage of by avoiding the need to register for VAT across the various EU countries to account for supplies made in those countries. HMRC has, so far, not announced any new measures now that the UK is not part of the EU, and as such, UK businesses can continue to account for VAT using TOMS for travel supplies to most EU countries where the margin is zero-rated. However, this means that VAT is not being accounted for in the EU. This is likely to change in the future and this is evidenced by the fact that UK tour operators making supplies in Croatia, Austria and Germany are now required to register for VAT in those countries. We therefore expect other member states to follow suit soon.

HMRC has been disappointingly quiet on the anticipated changes to TOMS, post-Brexit, but the EU is expected to announce an overhaul to the system next year. We eagerly await to hear further.

Penalties for UK entities facilitating avoidance schemes involving non-resident promoters

HMRC has introduced a penalty applicable to UK-based entities that facilitate tax avoidance schemes involving non-resident promoters. The penalty will be up to 100% of the total fees, or the economic equivalent of fees received by all entities involved in the promotion of the avoidance schemes. This is the next step instigated by HMRC on clamping down on promoters after having updated its promoters of tax avoidance schemes (POTAS) guidance a few months earlier.

The POTAS regime was introduced in the Finance Act 2014 with the aim of shifting the behaviour of promoters of tax avoidance schemes and deterring the use of such schemes. The rules mainly apply to promoters which might enable a person to obtain a tax advantage and where the tax advantage is the main or one of the main benefits.

As part of the POTAS regime, HMRC has the power to issue a conduct or a monitoring notice. A conduct notice imposes the conditions as to how the promoter must behave, which can last for up to two years. The monitoring notice can be issued with the permission of the First Tier Tribunal (FTT) if one of the conditions of the conduct notice has been breached by the promoter.

One of the notable sections of the added guidance on POTAS was the widened definition of a “promoter” to deter abusive structures and so that persons who are members of a promotion structure, whether or not they carry on a business are also included. In addition to this, HMRC now has the power to publish details of promoters and their schemes as well as present winding-up petitions for companies operating against the public interest.

Tackling promoters of mass-marketed tax avoidance schemes remains at the forefront of HMRC’s focus and the updated POTAS regime, together with the penalties, will act as a greater deterrent to UK entities from promoting such schemes.