The International Tax Round | Winter Edition 2021
I am writing this message as I sit in my lounge overlooking my garden. A garden that is surprisingly busy. Cats, foxes, squirrels, and birds hang out in mine and provide endless entertainment. Songs are sung, wings flap, and fluffy tails swoosh about in a space they call their own. I’m delighted by this and I look forward to the days when I can spend hours gazing out my window, in awe of how nature comes together so beautifully.
But for now, what’s new in the busy world of tax? I talked about Crypto in my last edition. HMRC have now announced that they are preparing to send “nudge” letters to holders of crypto assets to remind them to pay the correct tax. UK-based cryptocurrency exchanges will be obliged to provide data to HMRC on who is invested in crypto. For better or worse, transparency continues to gain momentum. As you will read in this edition, “nudge” letters, seems to be a theme for HMRC currently. This brings us to the end of the year – so quickly for me!
This year has been yet another challenging year but I’m also amazed at how far we have come after all the uncertainties and surprises thrown our way. Let’s see how 2022 unfolds – here’s to a better, stronger, and happier year ahead.
In this Winter edition of the International Tax Round, I have handpicked a selection of the latest tax news, insights, and updates that we hope will be of great interest. These include:
- European countries to keep digital services taxes
- Country by country reporting adopted in more than 100 jurisdictions
- HMRC issues ‘nudge’ letters for remittance basis users
- Changes in VAT and construction
- Re-domiciliation of foreign incorporated companies
Wishing everyone a restful Christmas break and a Happy New Year!
In 2019 the “Fighting Five” European countries, France, Italy, Spain the UK and Austria lost patience with the OECD over their failure to agree a universal digital tax regime and imposed their own digital taxes. This put them in direct and bitter conflict with the US as it was by and large the American tech giants who were adversely affected. A war of words, not to mention trade duties, ensued in a series of tit-for-tat reactions.
However, with the progress made on the pending Pillar 1 of the OECD’s tax deal, there has been a cooling off of emotions between the countries concerned. The result is that the US has agreed that the Five can retain their digital services tax spoils for an interim period. This period will run from 1st January 2022, until a multilateral convention implementing Pillar 1 enters into force or until 31st December 2023, whichever is earlier. As a quid pro quo, the MNE’s paying these taxes will receive a partial credit against their future tax liabilities under Pillar 1. It is estimated that the taxes paid during the interim period will roughly equal the amount of digital services taxes that the companies pay during the transition period in excess of what they would owe under Pillar 1.
The US has for its part agreed to drop the retaliatory tariffs it had adopted, although temporarily suspended, against the Five.
UK Chancellor Rishi Sunak has lauded the protection of its digital services tax revenues as he, like many other countries, seeks to rebuild the domestic economy.
More than 100 jurisdictions have in place a domestic legal framework for requiring country-by-country reporting by large multinational enterprises, according to an OECD report released on 18th October 2021.
Of those jurisdictions with country-by-country reporting, 83 jurisdictions have in place multilateral or bilateral competent authority agreements for the related exchange of information. In addition, a total of 89 of the jurisdictions have had their related confidentiality safeguards reviewed without further recommendations, and 84 have provided sufficient information to establish appropriate use of the country-by-country reports.
Generally, the ultimate parent entity of the group prepares and files the country-by-country report with the tax administration in its jurisdiction of residence. Under international agreements, the tax administration of the parent entity jurisdiction exchanges the report with other jurisdictions in which the group has constituent entities.
HMRC has in recent years adopted a strategy of sending targeted letters to taxpayers whose tax affairs it suspects may not be fully in order. These have ranged from multinational organisations receiving letters where the tax in question was the diverted profits tax, to individuals receiving letters where there is suspicion of undisclosed foreign income and gains. The nudge letters offer the recipients an opportunity to engage with HMRC and bring their affairs up to speed outside of the normal enquiry process.
The most recent batch of HMRC “nudge” letters is in relation to individuals with a non-UK domiciled status whom it believes may not have declared the correct income/gains on their tax returns or failed to pay the remittance basis charge if opting for the remittance basis of taxation.
The nudge letters are giving individuals a chance to amend their 2019/20 tax returns and HMRC is imposing a deadline of 60 days from receipt of the letter for action to be taken.
The remittance basis is an alternative tax treatment available to individuals resident, but not domiciled in the UK, who have the opportunity to pay UK income tax only on UK source income and gains and on foreign income and gains only to the extent that they are remitted to the UK.
The ability to access this remittance basis is subject to a remittance basis charge of £30,000 once an individual has been resident in the UK for 7 years out of 9 and increases to £60,000 once an individual has been resident in the UK for 12 years out of 14. The nudge letters will therefore affect non-domiciled individuals who have lived in the UK for 7 or more years.
If you have received a nudge letter and would like advice, please do contact us.
For several years, it has been the case that businesses that are non-UK established carrying out construction work for UK VAT registered business should not be charging UK VAT, but instead UK business should apply the reverse charge. This wasn’t something that was widely known and created problems for a chain of established and non-established businesses working on land in the UK.
The introduction of a domestic reverse charge for all construction services has made the issue a little simpler. Apart from supplies to the end-user, all other construction services default to being caught by the reverse charge i.e. the customer accounts for VAT on behalf of the supplier regardless of where the various businesses are located. The change in rules hasn’t seemed to cause too many difficulties although of course, the UK VAT world has become familiar with change as a result of the fundamental changes caused by Brexit with most of the UK leaving the single market.
Finally, on the subject of the single market, there are likely to be major changes to the UK VAT system which no longer has to follow principles defined within the EU VAT Directives. HMRC are already considering changing rules on UK land and property where the default will change from land being exempt to attracting VAT at 20%. Watch this space!!
The government published a consultation on the possibility of introducing a UK re-domiciliation regime that would make it possible for companies to move their domicile to and relocate to the UK. The consultation is seeking comments until 7 January 2022.
Currently, a foreign-incorporated company is not able to re-domicile and change its place of incorporation to the UK while maintaining its legal identity as a corporate body. The government intends to change this and believes that the proposals would increase the attractiveness of the UK as a destination for relocating business and investing. The consultation asks about the advantages of the regime, what types of companies and sectors would have interest in the regime and what jurisdictions companies would be likely to re-domicile from amongst other things.
In addition to the corporate law and regulatory requirements, a number of tax considerations would have to be worked through as part of any change. For example:
- A company is UK tax resident if it is incorporated in the UK or its central management and control is in the UK, subject to being treated as non-UK tax resident by virtue of a double tax agreement. Would re-domiciling a foreign company to the UK automatically make the company UK tax resident or would the central management and control of the company also need to be moved to the UK?
- If the UK tax residence of a company is migrated to the UK, from re-domiciliation, what would be the capital gains and intangible tax base of the company’s assets?
- Currently, when a company migrates its tax residence to the UK from an EU jurisdiction, assets are brought in at their market value. Should this be expanded to non-EU jurisdictions?
The consultation does raise other questions around personal taxation for the owners of the companies, stamp duty, VAT and on the whole, is there is a need to bring in any other additional anti-avoidance provision rules. To access the consultation, please click here.