The International Tax Round Winter 2020

The winter edition of The International Tax Round is here, keeping you up to date with cross-border developments. This quarter, our International Tax Partner Sonal Shah delves into the latest tax changes affecting individuals and businesses around the globe.

Editor’s message

In a year seemingly defined by doom and gloom, it’s an understatement to say that news of a COVID-19 vaccine has injected some much-needed hope. A blur of lockdowns, changing rules and prolonged separation has disorientated even the strongest of minds, but the promise of a consolidatory Christmas may provide some with an important dose of familiarity as we end the year.

With far more hours at home than usual, and like so many locked down in the world, it’s safe to say I’ve mastered the skill of binge-watching Netflix, a company that happens to be garnering attention in the world of tax. The Queen’s Gambit tops my list of recommendations, crushing preconceptions with an unconventional topic. Premised on chess, the show focuses on a female genius which makes for a fascinating, inspiring watch – give it a go!

Looking back at a year of restrictions, many of us felt the year was simply out of our control. With more freedom expected in 2021, can we feel ourselves reaching for the reigns again?

Whether it’s been a challenge, eye-opener or a blessing in disguise, it’s important to remember how strong we have been and how far we have come. We can only learn and grow – here’s to a better, stronger, happier year ahead!

Proposed new tax treatment of software payments

The UN’s Committee of Experts on International Co-operation in Tax Matters has issued a discussion draft proposing to include a reference to software payments in the current definition of royalties in Article 12 (Royalties) of its model treaty. This would make such payments subject to a withholding tax in the paying country, depending on relevant Double Tax Agreements. Currently, software payments generally fall under Article 7 (Business Profits) of the treaty, which are generally not subject to a withholding tax (although some treaties do impose a withholding tax).

Supporters of the proposal maintain that the definition of royalties should be broadened to apply to payments for the use or right to use software itself to adapt to the realities of the digital age. It is thought that this would promote tax certainty and reduction of disputes.

Opponents claim that payments for software should not be treated differently from payments for other goods. For example, shrink-wrap software that is not customised for a particular customer, but are the same standardised products sold to all potential customers alike, are essentially a sale of a product.

The Committee has received comments from interested parties and continues to discuss.

Netflix in the news again

In August this year, regulators from the National Tax Service (NTS) of Korea began a tax audit at the offices of Netflix Services Korea in central Seoul. This relates to an investigation for possible tax avoidance.

The NTS apparently believes that Netflix Services Korea paid its US headquarters an inflated sum of management consulting fees, resulting in its Seoul office reporting a tax deficit. Clearly, transfer pricing/profit shifting issues will be considered here.

The investigation may focus on whether the company has a fixed physical presence in the country. Some global tech companies have avoided paying taxes in Korea by arguing that they run a “liaison office” and not a proper business entity in the country as their servers are located overseas.

The gloves are off between the NTS on the one side, and Netflix (and quite possibly the IRS) on the other side.

Statutory residence test update

HMRC has issued new guidance on how the Statutory Residence Test (SRT) will operate as a result of the COVID-19 pandemic.

In terms of day counting for SRT purposes, HMRC updated its guidelines on exceptional circumstances earlier this year. This means that individuals who are unable to leave the UK or enter their country of residence because of COVID-19, can apply for special treatment under the exceptional circumstances regulations.

These rules still apply. However, despite the scale of the pandemic and many countries entering a second lockdown, the maximum number of days which can be disregarded remains at 60.

Other updates include:

• HMRC has confirmed that rules surrounding a “significant break” from overseas work, will not be relaxed.
• Regarding days worked in the UK due to COVID-19 restrictions. HMRC has confirmed that they will not seek to tax any days worked in the UK by a non-resident due to COVID-19 imposed restrictions.
• For those present in the UK to work on COVID-19 related activities, these activities will not count towards the residence test.

Read more here: COVID 19: Impact on UK tax residency.

Overseas owners of land in the UK – new requirements

The government intends to introduce a register of beneficial owners of overseas entities which own land in the UK, effective from 2021. This means that overseas entities which own land in the UK, or wish to acquire land, will need to register at Companies House and failure to do so will mean that such entities will not acquire land legal title.

Transparency remains the key driver for the government to introduce the register, whilst at the same time increasing consistency between the requirements placed on UK companies and those imposed on overseas entities.

“Overseas entity” is broadly defined to include foreign companies, partnerships and other legal entities which are legal persons governed by the law of a country or territory outside the UK. Concerns over the fact that offshore trusts could be used to circumvent the requirements were addressed and it was felt that the expansion of the UK’s Trust Registration Service under the Fifth Money Laundering Directive would sufficiently meet the disclosure requirements.

These developments are significant for overseas clients holding or acquiring property in the UK.

Wealth taxes in the spotlight

With countries around the globe incurring a huge COVID deficit, wealth tax is in the news again. In the UK, a recent poll showed 61% of pollsters backed the idea of a tax on assets above £750,000 (near on €850,000, or US$1m), excluding pensions and their home.

But why did so many countries ditch their versions of a wealth tax over the past few decades? Short answer – too many difficulties. The downsides include valuation and design issues, feared flight of capital by wealthy individuals moving their mobile wealth to another country coupled with significant international competition to attract such individuals, and issues of paying the tax. Wealth tax is a dry tax, i.e. there is no underlying transaction generating the liquidity to pay it. Policing the tax would also be a major issue.

Frankly, most countries already effectively tax wealth in some form, either by taxing the income derived from the wealth, or upon transfers of high value assets (capital gains tax, property transfer taxes, death and gift taxes). That said, it is the un-transacted assets of the wealthy that presently escape tax (at least until death, and in many countries not even then).

But would another tax really be justified? It appears that the appetite for a wealth tax, both in Britain and abroad, is not there. Hopefully that statement will not come back to bite me!

What next for capital gains tax?

The Office of Tax Simplification (OTS) has now published its first report with recommendations on the simplification of the Capital Gains Tax (CGT) regime as requested by the Chancellor Rishi Sunak. The key suggestions in the report are:

• Closely align income tax and CGT rates
• Reintroduce an indexation allowance
• Retained earnings in a company to be taxed at dividend rates upon liquidation or sale
• Tax gains on employee shares as income rather than capital
• The current annual exempt amount for CGT should be reduced
• Removing CGT re-basing upon death but to re-introduce re-basing to 2000
• Reshape Business Asset Disposal Relief and Investors’ Relief
• Reintroduce a retirement relief

Whilst more detailed thought and consideration would be welcomed, this potentially offers more questions rather than answers. Is 2021 the right moment to introduce these changes when COVID-19 and Brexit are still impacting businesses?

Read more here: Be prepared for a change to Capital Gains Tax.