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 EU exit bill has been introduced in Parliament, paving the way for suggested interpretations of:
- Existing EU law
- Loss of EU Directives
- New customs regime
- Transitional EU VAT case law
- Social security contributions/benefits
- Corporation tax impact of UK vs. EU law/Directives
- Employee mobility
- Employment law
This document portrays a glimpse into the thoughts behind the complex and myriad evolutions that will take place with the Brexit negotiations. Tax, supply chains, individual changes, VAT, etc. and related unknown implications are still to be discovered; the EY Global Tax Alert provides a primer into the brave new world of a country exiting the EU. Note, this is also a valuable reference for other countries considering this option.
The recent election, resulting in the Conservative Party losing a majority, introduces additional uncertainty into the Brexit process and also affects the Finance Act.
What will happen to the tabled Finance Act proposals that were deleted by the fast-track changes in the last amendment? Additionally, what will be the effective dates, if they are formally introduced at a later date, April 2017, upon introduction or possible extending into 2018 or not at all based on the political uncertainty.
The normally routine Finance Act process, with no amendments and straightforward measures that can be planned for upon announcement, is no longer true. At this moment, the tabled measures should not be considered probable to happen due to the new political nightmare that was self-created although not envisioned.
It is hopeful the UK Parliament will stabilize this process going forward, although in the near future there is no definitive certainty.
EY’s Global Tax Alert provides additional details:
The latest BEPS updates are detailed in EY’s Global Tax Report, with the underlying premise of transparency.
OECD: On 5 December 2016, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting, providing flexibility for notification filing dates for countries not requiring a country-by-country (CbC) report for 2016.
Belgium: New innovation deduction covering patent and other IP rights.
EU: Proposal for hybrid mismatch rules with non-EU countries
Norway: Adoption and regulations for CbC reporting
UK: Interest limitation rules, among other provisions
US: CbC Form 8975 released
From a MNE perspective, it is increasingly apparent that deductions to, and benefits from, tax haven countries are under attack and substance is the key to business and tax decisions.
As everyone knows, there is alot of uncertainty and doubt about what lies ahead for the UK as they will be leaving the EU, final timeline yet to be determined.
From a tax perspective, the linked EY Global Tax Alert summarily describes foreign exchange issues, alignment with EU court cases and Directives (including country-by-country reporting), ongoing BEPS alignment and conformity, treaty / immigration issues, EU State Aid, VAT and the need for transitional review.
Apart from BEPS, this change will compound the tax (un)certainty of the UK for the near future.
This is an excellent time for legal and operational review of UK operations, ensuring old structures and loans are dissolved, if possible, to mitigate future risks. All multinationals should align with all stakeholders to face this radical change.
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 published a discussion document on 2 February addressing the role and imposition of penalties, with a closing date for comments 11 May 2015. A link to the document is included:
- HMRC’s compliance strategy is based on three principles: Promote good compliance via systems/processes, prevent non-compliance and respond to risks.
- Questions for comment address concerns about current penalties and suggestions for changing the penalties process.
- The process and next steps are developed in 5 stages: (1) Setting out objectives, (2) Developing options and a framework for implementation, (3) Drafting legislation, (4) Implementing/monitoring the change, and (5) Reviewing/evaluation the change.
- Annex A provides an overview of the main penalty regimes, with a matrix of penalty percentages dependent on careless, deliberate, or deliberate and concealed behavior.
The document represents a willingness and “good faith” effort on behalf of HMRC to address the current state and request comments for Best Practice processes. Interested parties should review the document and provide comments accordingly.
As the Diverted Profits Tax option seems to be moving forward quickly to be potentially effective in April, 2015, relevant processes for imposition of a 5% “tax penalty” and accelerated payments should be weighed against the five principles of HMRC’s penalty process. The five principles state: The penalty regime should be designed from the customer perspective, they should be proportionate, penalties must be applied fairly ensuring that compliant customers are in a better position, penalties must provide a credible threat and customers should see a consistent and standardized approach. Does the Diverted Profits tax process and objectives meet the principles expressed in the Discussion Document?