Midweek Tax News

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A weekly update on tax matters to 23 May 2017

Midweek Tax News provides you with a succinct overview of the key tax developments that have occurred each week to allow you to stay up-to-date on tax issues that may have an impact on your business. If you would like to discuss an article in more detail, please speak to the relevant contact listed at the end of this issue or to your usual EY contact.

The three main political parties have now published their manifestos ahead of the general election, which is less than three weeks away. Several parties are still to launch their official manifestos, including the SNP, which was originally scheduled to launch its manifesto on 23 May, before campaigning was suspended in the wake of the Manchester terror attack.

Whilst Brexit was stated as being a main driver behind the decision to call an election, the main parties' manifestos demonstrate that the traditional battle areas, such as tax and the economy, health and social welfare and education, are still key areas where the parties seek to differentiate themselves.

In contrast to the manifestos of Labour and the Liberal Democrats, the Conservative manifesto contains limited detail on tax, although it recognises that taxpayers require a stable tax system and commits to maintaining low taxes to stimulate investment whilst also seeking to tackle tax avoidance. Whilst the manifesto itself does not contain significant details relating to tax, we can identify likely tax policies based upon the recent Conservative Government's Budget.

The position of some of the key tax policies across the three main parties are as follows:

• Corporation tax rates: The Conservatives have pledged to maintain the enacted reduction of corporation tax to 17% to help stimulate investment in the UK. In contrast, both Labour and the Liberal Democrats have stated an intention to reverse cuts to corporation tax. The Liberal Democrats are seeking to restore a corporation tax rate of 20% (and would consult on shifting away from a profits-based tax to one that takes account of a wider range of economic activity indicators, such as sales and turnover) whilst Labour proposes increasing corporation tax to 26% for large businesses by 1 April 2020.

• Income tax rates: Both Labour and the Liberal Democrats have proposed increases to income tax, albeit in different ways. The Liberal Democrats propose increasing income tax by 1p in every £1 across all tax bands, whilst Labour proposes the introduction of a new 45% tax band starting at £80,000 and reintroducing a 50% tax rate. In contrast, the Conservatives have not indicated any changes to income tax rates and are committed to increasing both the personal allowance and the higher rate threshold.

• Tax avoidance: Both Labour and the Liberal Democrats advocate a tough stance against avoidance, including the introduction of a new General Anti-Avoidance Rule to replace the existing General Anti-Abuse Rule. Labour's Tax Transparency and Enforcement Programme indicates that such a rule would target transactions lacking economic substance and ignore them for tax purposes. The Conservatives have indicated an intention to continue to take a tough stance on avoidance, including legislating for tougher regulation of tax advisory firms and taking a more proactive approach to transparency and the misuse of trusts. However, the party is not expected to make any changes to the existing General Anti-Abuse Rule.

• Tackling the ‘gig’ economy: All three parties have pledged to tackle discrepancies between workers being treated as employed or self-employed. The Liberal Democrats and the Conservatives have not ruled out the ability to reform or amend national insurance contributions (NIC), although Labour has given a guarantee that it will not raise personal NIC.

It is still expected that that the packages of BEPS-related reforms that the UK begun to implement will continue, with the corporate interest restriction rules expected to be reintroduced after the election whichever party is victorious.

On 22 May, the General Affairs Council adopted the draft negotiating directives of 3 May and authorised the opening of negotiations with the UK. The first formal meeting between the EU and the UK negotiators will take place after the UK general election. It is understood that the EU is expecting meetings to commence in the week beginning 19 June.

The Commission's negotiating mandate notes that the first phase of negotiations will tackle three main areas:

• Safeguarding the status and rights of citizens – EU27 citizens in the UK and UK citizens in the EU27 – and their families

• Reaching an agreement on the principles of the financial settlement of the UK's obligations as an EU member

• Providing for the new external borders of the EU, including the protection of the Good Friday Agreement, and finding imaginative solutions in order to avoid a hard border in Ireland

Other issues noted include arrangements regarding dispute settlement and the governance of the withdrawal agreement.

Separate negotiating guidelines will be issued for the possible framework covering the future relationship between the EU and UK, but only once the European Council decides that sufficient progress has been achieved on the first phase of negotiations. Matters that should be subject to transitional arrangements (ie, bridges towards the foreseeable framework for the future relationship) will be included in those future negotiating guidelines.

The recent ruling of the Court of Justice of the EU (CJEU) on the status of the EU/Singapore Free Trade Agreement provides some guidance as to the mechanics of reaching any such agreement between the UK and the EU (though not the withdrawal agreement, for which the procedure is set out in Article 50). The CJEU decision sets out what issues have shared competency between the EU and the Member States and which fall with the competency of the EU alone. The key areas of shared competency relate to portfolio investment and dispute settlement. An agreement that covers issues that are shared competencies and issues that are EU competencies is a ‘mixed’ agreement (meaning that each relevant Member State Parliament must ratify the agreement as well as the European Council and the European Parliament).

It is worth noting that the European Council, with approval from the European Parliament, can provisionally apply mixed Free Trade Agreements (as it has done with the EU/Canada treaty). Although there is, theoretically, no legal limit on how long this interim period can go on for, we would expect the ratification procedure then to be followed, as it was with the EU/Canada treaty.

Finally, the Commission has also published its transparency policy for the negotiations, which aims to ensure full transparency during the whole negotiating process. Commission negotiating documents will be released to the public.

The next EY Indirect Tax Perspectives seminar will be held on Tuesday, 4 July 2017 at our More London offices. The seminar will include an update on current and future indirect tax developments as well as covering three important indirect tax topics in detail. These are:

• The implications of the new Corporate Criminal Offence for businesses that fail to prevent the facilitation of tax evasion which are potentially wide ranging for many entities

• A post general election discussion looking at the latest position and implications of Brexit from an indirect tax perspective

• The Office of Tax Simplification (OTS) – a look at the current developments and recommendations arising from the OTS review of Value Added Tax

Please click here for further details or to register for the event.

In the UK and across the EU a VAT ‘margin scheme’ applies for the sale of many second hand goods (including cars) where certain conditions are met. One of those conditions is that VAT has not been charged by the supplier of the goods. If this condition is met, along with the other requirements, then VAT need only be accounted for on the profit element made from the selling second hand goods.

In a CJEU decision released last week (the Lithuanian case of Litdana), Litdana sold second hand vehicles it had acquired from a Danish supplier. The Danish supplier's invoices referred to the margin scheme and indicated that the vehicles being sold were exempt from VAT. Litdana applied the margin scheme when it subsequently resold the vehicles but the Lithuanian tax authorities denied the use of the margin scheme after it was identified that the Danish supplier had not applied the scheme to its supply of the vehicles.

The CJEU held that a taxable person who has acted in good faith and taken reasonable steps to satisfy himself that a transaction which he carries out does not result in tax evasion should not be penalised for the actions of a party higher up the chain.

Margin schemes can be complex to administer and this case highlights the importance of businesses evidencing a strong tax risk framework and implementing appropriate processes and controls in respect of all contracts entered into.

International developments

On 23 May 2017, the OECD released a public discussion document in respect of the implementation guidance for tax administrations on the approach to hard-to-value intangibles (HTVI) that was developed as part of Action 8 of the G20/OECD's BEPS Action Plan.

The discussion draft, which does not yet represent a consensus opinion, sets out the principles that should underline the implementation of the approach to HTVI, together with examples illustrating the application of the approach. It also addresses the interaction of the approach to HTVI and the mutual agreement procedures under an applicable treaty.

The principles set out include:

• Where the HTVI approach applies, tax administrations should be able to consider actual outcomes as presumptive evidence about the appropriateness of the pre-transaction pricing arrangements.

• The actual outcomes inform the determination of the valuation that would have been made at the time of the transaction; however, it would be incorrect to base the valuation on the actual income or cash flows without taking into account the probability of achieving such income or cash flows at the time of the transfer of the HTVI.

• Where a revised valuation shows that the intangible has been transferred at undervalue or overvalue compared to the arm's length price, appropriate adjustments can be made by tax administrations to reflect an alternative pricing structure that may be different from that adopted by the taxpayer (eg, milestone payments and running royalties).

• Tax administrations should apply audit practices to ensure that presumptive evidence based on actual outcomes is identified and acted upon as early as possible.

The public consultation on the discussion draft runs to 30 June 2017.

On 23 May 2017, the ECOFIN Council reached agreement on the proposals for achieving binding resolution of double taxation disputes amongst EU Member States within clear timelines. The proposals were originally introduced as part of the EU's corporate tax reform package in October 2016, alongside proposals for a Common (Consolidated) Corporate Tax Base and amendments to the Anti-Tax Avoidance Directive to deal with hybrid mismatches with third countries.

There had previously been concerns by some Member States that the proposals would lead to too many arbitration cases and those Member States had been seeking to incorporate a threshold below which the dispute mechanism would not be applicable.

The ECOFIN Council endorsed a compromise reached on the following issues:

• The directive should have a broad scope, but with the possibility, on a case-by-case basis, of excluding disputes that do not involve double taxation

• The arbitrators must not be employees of tax advisory firms or have given tax advice on a professional basis. Unless agreed otherwise, the panel chair must be a judge;

• A permanent structure to deal with dispute resolution cases could be set up if Member States so agree.

The European Parliament still needs to give its opinion on the draft directive proposed by the European Commission, after which Council will adopt the directive agreed in the ECOFIN meeting. Member States will then have until 30 June 2019 to transpose the directive into national laws, with the new mechanisms applying to complaints submitted after that date on questions relating to tax years starting on or after 1 January 2018. The Member States may however agree to apply the directive to complaints related to earlier tax years.

The ECOFIN Council also held a preliminary discussion on the proposals for a Common Corporate Tax Base, receiving an update on progress made since October 2016. The Maltese Presidency has confirmed its intentions to continue discussions on the proposals, and that an appropriate degree of flexibility should be provided for, which was one of the concerns of a number of Member States.

The CJEU released its decision last week in the case of Berlioz Investment Fund SA (Berlioz), which considered whether a taxpayer was entitled to refuse to provide information requested under an exchange of information request. The CJEU ruled that a request for information has to be ‘foreseeably relevant’ in order for an obligation to arise to provide information to another Member State under the Directive on Administrative Cooperation (DAC).

A French subsidiary of Berlioz had paid a dividend without withholding tax and the French tax authorities had sought to verify that the relevant conditions for an exemption had been complied with, requesting information from Berlioz via the Luxembourg tax authorities in order to do so. Berlioz only partially complied with the request, arguing the remaining information was not ‘foreseeably relevant’. Berlioz was subsequently issued with a penalty for failure to comply.

As the CJEU agreed that information must be foreseeably relevant under the DAC, it was also relevant in determining the obligation of the taxpayer to provide the information requested, as well as any penalties levied for failure to comply. The foreseeable relevance of information may be verified by the administrative and judicial bodies of the Member State to which the information request has been directed, however they can only check whether a request is not “manifestly devoid of any foreseeable relevance having regard, on the one hand, to the taxpayer concerned and to any third party who is being asked to provide the information and, on the other hand, to the tax purpose being pursued.” The CJEU considered that the Member State making the request, should be given a certain level of discretion in assessing the foreseeable relevance of the information it has requested.

This case is an important decision in light of the expansion of exchange of information agreements and the increasing use of them by tax authorities.

For more information, please see our global tax alert.

On 17 May 2017, the European Commission issued a reasoned opinion requesting that France abolishes a withholding tax imposed on dividends received in France by non-resident companies in a structural deficit or temporary loss-making phase. By applying a withholding tax on such dividends, according to the European Commission the French authorities are failing to fulfil their obligations regarding the free movement of capital. The withholding tax leads to immediate taxation, without the possibility of a refund of the dividends paid to an EU and EEA company in certain situations.

In the absence of a satisfactory response within two months, the European Commission may refer France to the CJEU.

Please see links to a selection of our tax alerts in respect of the following developments. Additional articles are available in our global tax alert library.

G7: G7 Finance Ministers and Central Bank Governors pledge to make global growth more inclusive, including through strengthening the fight against BEPS.

Belgium: The Belgian fairness tax, which taxes distributions that have not been effectively taxed due to the notional interest deduction or the deduction of tax losses carried forward, has been ruled incompatible with EU law as it can violate both the Parent-Subsidiary Directive and the freedom of establishment.

Germany: Germany has issued draft guidance on the classification of cross-border software and database use payments for withholding tax purposes.

Netherlands: The Dutch Government has launched an internet consultation on dividend withholding tax, proposing a broader domestic exemption to corporate shareholders in treaty territories and treating cooperatives in the same way as companies.

Other publications

2017 Worldwide R&D Incentives Reference Guide: The 2017 Worldwide R&D Incentives Reference Guide is now available. The guide summarises the key R&D incentives in 44 jurisdictions, as well as providing an overview of the EU's Horizon 2020 programme.

Please speak to your usual EY contact, or email us at eytaxnews@uk.ey.com, if you would like to receive a copy of our regular indirect tax newsletter or our employment, reward and mobility newsletter, as well as information about our other publications.

Further information

If you would like to discuss any of the articles in this week's edition of Midweek Tax News, please contact the individuals listed below, Claire Hooper (+ 44 20 7951 2486), or your usual EY contact.

Tax policies set out for the main parties ahead of the general election

Email Claire Hooper

+ 44 20 7951 2486

European Commission given mandate for Article 50 negotiations with the UK

Email Mike Gibson

+ 44 20 7951 0568

EY Indirect Tax Perspectives seminar on 4 July 2017

Email Olivia D'Silva

+ 44 20 7951 0769

European Court decision on VAT margin schemes

Email Andy Bradford

+ 44 20 7951 4963

For other queries or comments please email eytaxnews@uk.ey.com.

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