Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, has published revised guidance on the Mutual Agreement Procedure (MAP) in its International Manual (INTM). DLA Piper’s detailed publication is referenced herein.
The revised guidance, together with the supplementary Statement of Practice, provides detailed information on the following:
- Eligibility for MAP
- Access to MAP
- Submitting a MAP request
- Time limits
- Protective MAP requests
- MAP and domestic relief
- Mutual agreement
- Methods of relief and
Multinationals ought to consider more proactive use of the improved MAP, taken together with similar developments in other countries around the BEPS minimum standards, as a viable compliance risk management tool. Although double taxation is often a precondition in transfer pricing cases that end up in MAP, it is important to note that all issues concerning taxation not in accordance with tax treaties are eligible for MAP.
HMRC is now reviewing diverted profit tax cases in round 2: citing the following EY’s link referenced herein:
There are already 100+ DPT cases ongoing and hundreds more “Large” and “Mid-Sized” cases will now be reviewed and enquiries launched in the next 12 to 18 months. Market intelligence suggests a particular focus on Mid-Sized cases, and on sectors including life sciences, oil and gas, and mining and metals. HMRC is also investigating a number of captive insurance arrangements within large groups.
As a reminder, DPT is aimed at groups that use what HMRC sees as contrived arrangements to circumvent rules on permanent establishment (PE) and transfer pricing. DPT is intended to address two broad situations:
- A UK company (or UK PE of a foreign company) uses entities or transactions that lack economic substance to exploit tax mismatches to reduce effective taxation to below 80% of rate otherwise payable in the UK.
- A person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a PE in the UK.
Note, the UK DPT is not arguable on a tax treaty basis, and it is based on the concept of pay now, to be resolved later. It was also enacted as a deterrent for taxpayers to start paying regular tax, vs. no tax, as a DPT was seen as an avenue to avoid the additional tax and controversy. Thus, it is prudent to review any potential instances of DPT.
The UK government has updated its October 2015 interest expense consultation paper as of 12 May 2016, and is seeking comments by 4 August, 2016. The paper outlines the intent of OECD’s BEPS interest guidelines and provides questions for further consideration of limitations re: interest expense going forward.
The UK previously legislated hybrid mismatch arrangements that will be effective 1/1/2017, and the new rules are not expected to be effective until April 2017. In the interim, taxpayers will not have certainty re: current arrangements and new rules going forward.
Although following the footsteps of the OECD, UK is not afraid to take an aggressive stance as evidenced by its Diverted Profits Tax legislation, intention to adopt BEPS Actions 8-10 re: transfer pricing at an early stage and inserting risk rules in its Manual with a UK tax strategy governance. This paper is intended to be a future roadmap for UK tax, thus it should be read by all interested parties.
A reference to the paper is provided for reference, and a summary of the questions.
- What are your views on when a general interest restriction should be introduced in the UK?
- Should an interest restriction only apply to multinational groups or should it also be applied to domestic groups and stand-alone companies?
- Are there any other amounts which should be included or excluded in the definition of interest?
- How could the rules identify the foreign exchange gains and losses to be included?
- If the rules operate at the UK sub-group level, how should any restriction be allocated to individual companies?
- Are there items which should be excluded from both the definition of interest and from “tax EBITDA”, as referred to in the section on a fixed ratio rule?
- What do you consider would be an appropriate percentage for a fixed ratio rule within the proposed corridor of 10% to 30% bearing in mind the recommended linkages to some of the optional rules described below?
- What are your views on including in any new rules an option for businesses to use a group ratio rule in addition to a fixed ratio rule?
- What form of de minimis threshold would be most effective at minimising the compliance burden without introducing discrimination or undermining the effectiveness of any rules?
- What level should the de minimis threshold be set at, balancing fairness, BEPS risks and compliance burdens?
- Should SMEs as defined by the EU criteria be exempted from the rules, in addition or as an alternative to a de minimis threshold?
- What is the best way of ensuring that the rules remain effective and proportionate even when earnings are volatile?
- In what situations would businesses choose to use the PBP exclusion? How would this differ if no group ratio rule was implemented?
- Do you have any suggestions regarding the design of a PBP exclusion, taking account of the OECD recommendations?
- Do you have any views on the specific risks that might sensibly be dealt with through targeted rules?
- Do you have any suggestions as to how to address BEPS issues involving interest raised by the banking and insurance sectors?
- What are the types of arrangement for which transitional rules would be particularly necessary to prevent any rules having unfair or unintended consequences, and what scope would these rules need to be effective?
- To what extent do you believe that the new general interest restriction rule should replace existing rules?
The public transparency of a company’s tax strategies is nearing reality with the advancement of recent updates to the UK’s Finance Bill.
The UK is continuing its leadership objectives in adopting BEPS initiatives, as shown in this latest initiative.
EY’s Global Tax Alert is provided for reference:
The legislation stipulates that the published tax strategy must cover in relevant, up-to-date detail regarding the:
• Approach of the UK group to risk management and governance arrangements in relation to UK taxation
•Attitude of the group to tax planning (so far as affecting UK taxation)
•Level of risk in relation to UK taxation that the group is prepared to accept
• Approach toward dealings with HMRC
The process of developing the public UK tax strategy should be aligned with the global policy and tax risk framework, especially as other countries look to follow the UK’s lead. Transparency is the key driver that continues to drive post-BEPS legislation, with no apparent slowdown envisaged.
Tax Executives Institute (TEI) has provided practical and insightful comments in response to UK’s Large Business Compliance Consultation by HMRC, which is far-reaching. A link to TEI’s comments is provided for reference:
- The Consultation is focused on UK HQ companies, although the proposals also apply to non-UK based multinationals (MNE’s).
- The underlying principle is unclear, especially for non-UK based MNE’s, and should be amended accordingly.
- A separate UK tax strategy is an unrealistic expectation for most MNE’s, and will provide little relevance if enacted.
- A UK Code of Practice is also unrealistic for MNE’s.
- UK taxes, paid or accrued, generally bears little relevance to the global effective tax rate and is not relevant.
- UK’s current tools of general anti-avoidance rules (GAAR), Senior Accounting Officer (SAO) tax framework, newly enacted Diverted Profits Tax, a Customer Relationship Manager (CRM) and other anti-abuse rules are already in place and would seem to remedy HMRC’s concerns.
- Special measures are subjective and not subject to a formal independent panel for review prior to execution.
- Board-level accountability may not be practical, while the SAO framework may accommodate this proposal.
- Signing, or not signing, the Code of Practice should not be a trigger for public disclosure or risk assessment.
- The Code of Practice includes determinations that transactions meet the intent of Parliament, an inherently subjective test that may be applied at will regardless of the law.
The tax transparency see-saw has now tilted to a dangerous level, in that transparency objectives no longer seem to meet the needs of tax authorities.
Information is being requested to satisfy presumed needs of the public and tax administrations, although similar efforts are not being made to have discussions with taxpayers to better understand tax risk and the relevant functions, assets and risks for which transfer pricing should be based in the relevant jurisdiction.
The UK proposal, and similar initiatives, may indeed erode the trust for which the tax authorities are seeking. It would be a novel concept to include the business community in discussions around these proposals prior to drafting, a welcome initiative that would better represent a win-win opportunity. Additionally, all audits should begin with a formal understanding of the transfer pricing practices of the MNE in that jurisdiction to focus tax queries accordingly and efficiently.
As the UK Diverted Profits Tax model has strayed from the OECD’s intent re: the BEPS Action Items, it has nonetheless been followed by other countries. This proposal may have a similar result, magnifying the concern of MNE’s and merits a detailed review by all MNE’s irrespective of UK business presence.
HMRC has provided a technical consultation and explanatory memorandum for new regulations of UK’s country-by-country (CbC) reporting. Comments are due by 16 Nov. 2015. A link is provided for reference:
An interesting, and debatable, provision is Section 9 of the technical consultation, Provision for information, which is copied herein. To the extent that a company is considered a “reporting entity,” the provision provides for a request of information, that may reasonably be required, (within 14 days in a form specified by HMRC) to substantiate the accuracy of the CbC report.
On the heels of the OECD release of the Action Items, including Action 13 CbC reporting, HMRC has released this documentation for consultation. However, Section 9 may be far-reaching in that there is no transparency into the intent of HMRC or purpose of such potential request.
For example, does this exercise include the accuracy of all entities included in the CbC report? What type of documentation would be requested, and in what form? Should the request be limited to UK entities only? If there are potential inaccuracies in countries other than the UK, what happens then? What transparency is provided for this process? Will this request be reviewed prior to informing the taxpayer? Will such review be shared with other countries?
This provision seems to be far-reaching, and could be followed by other countries. Therefore, it is paramount that all multinationals monitor such developments, as this will significantly increase complexity.
Provision of information
9.—(1) An officer of Revenue and Customs may, by notice in writing, require a reporting entity to provide the officer with such information (including copies of any relevant books, documents or other records) as the officer may reasonably require for the purposes of determining whether information contained in a country-by-country report filed by that entity is accurate.
(2) A notice under paragraph (1) may specify or describe the information to be provided.
(3) Where a person is required to provide information under paragraph (1), the person must do so—
- (a) within such period, being no less than 14 days; and
- (b) at such time, by such means and in such form (if any),
as is reasonably specified or described by Revenue and Customs.
HMRC has issued consultation documents proposing requirements to publish a “tax strategy,”, voluntary Code of Practice corporate tax processes and creation of a “special measures” regime. Comments are due by 14 October 2015 for each Consultation document.
These proposals follow closely upon the heels of the ATO issuance of Best Practice methodologies addressing a taxpayer’s tax risk.
Three documents are provided for reference: (1) A Clifford Chance Briefing note, (ii) HMRC’s Consultation document for Improving Large Business Tax Compliance and (iii) HMRC’s Consultation document on Strengthening Sanctions for Tax Avoidance.
- Public availability of a company’s tax strategy (financial penalty for non-disclosure) including:
- Tax internal governance arrangements
- Risk management approach
- Tax planning attitude and tax risk appetite, including affirmation that it aims to satisfy the spirit, as well as the letter of the law
- Attitude to relationship with HMRC
- Target UK effective tax rate (if applicable), and what measures are being taken to achieve it
- Voluntary Code of Practice, including affirmations that:
- Tax planning is consistent with the economic consequences
- Transactions provide a tax result that is in accordance with the intentions of Parliament: “HMRC will consider a purposive construction of the legislation, and will also consider whether Parliament can realistically have intended to give the proposed result in circumstances that are very different from those that prevailed at the time”
- Transparent relationship is maintained with HMRC
- Tax obligations are met
- Early dialogues for engagement with HMRC to discuss tax planning, strategy, risk, significant transactions and full disclosure of areas providing significant uncertainty
- Objective evidence is provided to HMRC that decisions with tax implications have been approved by a senior decision maker
- Special Measures for companies entering into aggressive tax planning / failing to transparently engage withHMRC, including:
- Providing all documentation (including third party tax advice) related to tax
- Refusal to provide non-statutory clearances
- Public naming
- Automatic 100% tax penalties
Observations in the Documents:
- Attitudes to tax avoidance and aggressive tax planning have altered significantly, including political interest
- Intention is to create Best Practices
- The Government is awaiting the EU Tax Transparency Package consultation, and will consider its findings carefully
- Proposal is separate from the current SAO regime, as well as the OECD’s country-by-country reporting guidelines
- A company could be required to state in their tax strategy whether they are a signatory to the Voluntary Code of Practice
- Non-publication of a tax strategy will be a consideration of HMRC’s tax risk reviews
- Evidence of “governance in action” to be provided
- Voluntary Code of Practice is aimed at tax planning that crosses over into tax avoidance
- The company should reasonably believe that transactions give a tax result which is not contrary to Parliament’s intentions
- Special measures will remain for a minimum of 2 years
A higher standard of tax excellence is being demanded by public pressures and tax administrations in the form of an objective tax risk framework overseen at the Board level and subject to internal control testing. HMRC’s proposals are being followed by other countries worldwide, and similar measures would not be unexpected in other jurisdictions. Accordingly, all interested parties should review the documents, and provide comments thereto.