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International Services, International Tax

The International Tax Round | Winter 2019

The International Tax Round | Winter 2019

Welcome to our winter edition of The International Tax Round, edited by Sonal Shah.

This quarter’s topics concern, “HMRC increases the tax it collects from offshore wealth”, “Economic substance and the BVI” and “New legislation on income from intangible property”.

Editor’s Message

My feet have barely touched the ground in the last few months. I’ve been on business trips to Zurich and South Africa, a holiday to Japan and a conference in Venice.

During my travels, what has struck me most is how interconnected the global tax system is and how the same issues affect taxpayers worldwide. Economic substance is one such issue, which is just as relevant to individuals as it is to multinationals. Measures agreed internationally for large corporations could possibly affect smaller companies at a later stage, if not immediately.

Another international issue is that of automatic exchange of information, and the appropriate use of such information. Do you think countries will be forced to come up with simplified regimes for companies not affected by the OECD measures? Ultimately, what is agreed and introduced in Germany could affect even the smallest business in the UK.

Let’s see what unfolds. In the meantime, I wish everyone a Merry Christmas and a Happy and prosperous New Year.

HMRC increases the tax it collects from offshore wealth

HM Revenue & Customs (HMRC) has increased the tax collected from taxpayers hiding money in overseas jurisdictions.

In the 2018-19 financial year, HMRC’s offshore, corporate and wealthy unit (OCW) collected £560 million from investigations into UK taxpayers with offshore assets and income, an increase of 14% from 2017-18. The data also revealed a 72% increase in tax collected since 2016-17 when £325 million was raised.

The figures were obtained from a Freedom of Information request by Access Financial, a payroll and tax compliance company.

It revealed that 827 investigations were launched in 2018-19 by the OCW unit. This unit was founded after the 2015 “Panama Papers”, which saw the leak of 11.5 million documents related to offshore entities in the Central American country. The unit, part of HMRC’s fraud investigation service, targets wealthy individuals and businesses with undeclared offshore interests.

The unit’s increased collection occurred despite a reduction in the number of investigations, from 839 in 2017-18 and 842 in 2016-17. Investigations are expected to increase over the coming years as HMRC’s systems become more sophisticated in gathering intelligence.

Refunds for EU businesses after Brexit

There are likely to be a lot of unforeseen consequences for VAT when the UK leaves the EU in January 2020, and these are starting to trickle through.

One of the changes relates to refunds for EU businesses with cross-border operations. Ten years ago, the system for refunds changed for the better, from a paper-based system to one carried out through an electronic refund claim via the businesses’ own national tax authority. Prior to this, paper claims needed to be made to each member state where the VAT was paid and in the language of the country.

When the UK leaves the EU, the clock will be turned back. This means that EU businesses from 1 February 2020 will need to submit claims on paper, in the same way that other businesses outside the EU are currently required to do.

Other changes include:

  • The repayment period will change to 1 July to 30 June, as opposed to a calendar year
  • The deadline for submitting the claim will be 31 December, not 30 June
  • A certificate confirming taxable status will need to be provided
  • All invoices will need to be attached to the form

Economic substance and the BVI

Economic substance is set to be a major issue in cross-border tax structuring, and the British Virgin Islands (BVI) has recently enacted new legislation in this regard. In brief, any BVI registered entity carrying on a relevant activity (there are nine such activities) must comply with the relevant economic substance requirements. These include:

  • BVI registered agents will be required to hold appropriate details and documentation on file
  • Non-resident entities are exempt but must be able to show tax residence elsewhere
  • Entities registered in a jurisdiction on the EU blacklist do not qualify for the exemption
  • Substance in the BVI is broadly directing and managing the entity’s activity and may require the entity to have employees and premises in the BVI
  • Pure holding companies have a reduced substance requirement, limited to complying with BVI statutory obligations and having a registered agent there

Urgent classification of BVI entities is now required, as the first relevant financial period commenced on 30 June 2019, and reporting commences in 2020.

OECD releases analytical database on Multinational Enterprises

Multinational Enterprises (MNEs) have been in the spotlight recently over the transparency of their operations. In late October, members of the European parliament urged member states to agree a position on the legislative proposal requiring public disclosure of taxes paid by MNEs.

What’s more, the OECD Analytical Database on Individual Multinationals and Affiliates (ADIMA) is a new data framework offering information on both the physical and digital presence of MNEs by country. Although it was released in July 2019, it already covers 100 of the world’s largest MNEs.

The OECD has explained that the main purpose of this database is to gain greater transparency as to how MNEs are operated and where the relevant taxes are paid. More importantly, the OECD highlighted that its statistical analysis was focused on four key components:

  1. Physical Register: Offering a comprehensive view of each MNE and its subsidiaries
  2. Digital Register: Showing all websites belonging to each MNE
  3. Indicators: Providing harmonised data at the global level for each MNE
  4. Monitor: Identifying events, such as large company restructurings, that can give early warnings of potential significant impacts on trade, GDP and FDI data

However, will this legislative proposal together with the OEDC database facility assist HMRC with their profit diversion compliance facility (PDCF)? The registration deadline for the PDCF will expire on 31 December 2019, however, we do expect these developments to encourage MNEs to bring their tax affairs up to date by making accurate disclosures.

New legislation on income from intangible property – is this another tax?

From 6 April 2019, there will be a UK Income Tax charge which will apply to amounts received by a company in a low tax jurisdiction in respect of intangible property (IP), to the extent that those amounts are referable to the sale of goods or services in the UK.

Large multinational groups that hold IP (such as trademarks or patents) are likely to be affected. The measure will not apply if the income is received in a country with which the UK has a full tax treaty. However, the UK does not generally have tax treaties with low tax countries, so if intangible assets are held in a tax haven, such as the British Virgin Islands, the Bahamas or the Cayman Islands, the legislation is likely to apply.

There is a targeted anti-abuse rule which will apply if there are arrangements designed to avoid the charge.

The draft regulations were made final on 14 October 2019, followed by approval from Parliament on 4 November 2019.

For further information and advice on any of the topics discussed, contact Sonal Shah at