Midweek Tax News

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A weekly update on tax matters to 18 April 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.

Yesterday, 18 April 2017, the Prime Minister announced her intention to seek a vote in the House of Commons later today, to call an early general election on 8 June 2017.

If the vote is passed with the required majority, as seems likely, then Parliament will be dissolved around the beginning of May (3 May seems to be the latest date possible for this). Parliamentary business may in fact cease a few days before this, possibly by the end of April 2017.

One significant impact of dissolution is that any Budget resolutions made under the Provisional Collection of Taxes Act 1968, to temporarily collect tax due before the 2017 Finance Bill is enacted, will cease to have effect. A Finance Act will therefore need to be enacted prior to Parliament's dissolution.

It is possible that this Finance Act will contain most, if not all, of the measures of the current Bill due to the large number of provisions that have already taken statutory effect from April, including the power to collect income tax from 6 April 2017, as well as new tax measures such as the corporate interest restrictions, the corporation tax loss reforms and the reform of the Substantial Shareholdings Exemption.

In order for the Finance Act to receive Royal Assent before Parliament's dissolution, the various parliamentary stages of the Bill would need to be completed in a matter of days. It is possible that the Committee Stage of the Finance Bill would be undertaken as a Committee of the Whole House (possibly on the day originally set aside of 24 April), with no Public Bill Committee. This accelerated timetable is not impossible, as evidenced by the progress of the Finance Bill 2015, which was enacted prior to Parliament dissolving for the 2015 General Election. Whilst the Finance Bill 2015 was not insubstantial in length, it was less than half the size of the current Bill. However, the Government may have no alternative. Whether the Government will attempt to enact the whole of the current Bill prior to dissolution remains to be seen. The Chancellor has noted that there will be the usual end-of-Parliament process of negotiation with the Opposition on measures that are currently before Parliament, with a view to passing them in whatever form is appropriate before prorogation.

A truncated timetable would mean that a number of complex pieces of legislation may be enacted as they currently stand, regardless of any identified anomalies that might be under consideration, as there would be limited ability to introduce such changes.

The accelerated timetable would also mean earlier substantive enactment for accounting purposes, which may impact the disclosures and reporting requirements of companies preparing financial statements for periods due to end shortly, while also being relevant for any upcoming interim accounts.

The announcement of an early general election (once it is approved by Parliament) will also mean that Government departments such as HMRC and HM Treasury will enter a state of purdah. From the commencement of purdah, it is likely that HMRC and HM Treasury will cease any external communications on policy positions (though routine matters will still continue). In relation to Brexit, this may mean that, although civil servants may continue to engage with the EU on matters relating to Brexit, no major decisions or announcements are likely.

Finally, we would expect the Criminal Finances Bill to be passed during the legislative ‘wash-up’ that the Chancellor referred to. We then expect the necessary Statutory Instrument in relation to the tax evasion facilitation offence included in the Bill to be made once Parliament returns and before the Summer recess (which starts on 21 July). It seems likely that September will remain as the ‘start’ date for the new offence.

Other UK developments

Jane Ellison, the Financial Secretary to the Treasury, has provided a written response to the letter of Andrew Tyrie, chairman of the Treasury Select Committee, in which he set out possible ways to strengthen the scrutiny of Finance Bills. Mr Tyrie's suggestions had included providing oral evidence from tax experts to the Finance Bill Committee before the commencement of a line-by-line scrutiny, as well as allowing the Committee to have access to a draftsman and reinstatement of HM Treasury’s tax consultation tracker.

In her response published on 11 April, the Financial Secretary noted that she was not persuaded that oral evidence sessions for the Finance Bill Committee would be beneficial to the process, since the Committee only considers the less contentious issues contained within the Bill, with the more contentious issues covered at Committee of the Whole House.

The Financial Secretary did agree that the consultation tracker was a key tool that could increase transparency in the policy making process and would look into this in more detail.

Following the Financial Secretary's response, the Treasury Committee announced that it will hold four evidence sessions focused on taxation in addition to the two evidence sessions held with the Office of Budget Responsibility and the Institute for Fiscal Studies and the scheduled session with the Chancellor.

The Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland have now published TECH 02/17, which provides updated guidance on realised and distributable profits in accordance with the Companies Act 2006. The purpose of the technical release is to identify, interpret and apply the principles relating to the determination of realised profits and losses for the purposes of making distributions under CA 2006. It is based on the guidance previously issued as TECH 02/10 in October 2010 but has been updated as proposed in TECH 05/16 which was issued for comment in March 2016.

The technical release represents generally accepted practice at 31 December 2016 in relation to the meaning of realised profits. Whilst many of the revisions to TECH 02/10 represent principles that were generally accepted prior to that date, the release makes the point that revisions introduced now should not be used to question the lawfulness of distributions made at an earlier date. However, balances on reserves will need to be re-examined before a distribution is made. Furthermore, there is additional guidance about the definition of a distribution which is based on legal advice and which could apply to earlier transactions.

The High Court has now released its judgment in Jazztel plc, a leading case in the stamp taxes group litigation order covering restitution claims against HMRC. The case relates to stamp duty and stamp duty reserve tax (SDRT) levied at 1.5% on the transfer of securities to a depositary receipt issuer or a clearance service, which was subsequently found to be contrary to EU law.

The Jazztel plc case considers the validity of retrospective limitation periods under EU law and the proper approach to determine whether tax had been paid under a mistake of law, which could potentially allow an extended period in which claims could be made. Finance Act 2004 had sought to introduce a restriction of this extended period, aiming to prevent its application for all claims brought after 8 September 2003.

The High Court held that Jazztel made the payments under a mistake of law and was therefore entitled to recover amounts paid before the introduction of the changes to the limitation period by Finance Act 2004. This is consistent with the findings of the Supreme Court in relation to direct taxes. Claims in respect of payments made after the changes to the limitation period were only valid if they were made within six years.

International developments

The United Nations has published the second edition of its manual on transfer pricing for developing countries. The revised edition takes into consideration the outputs of the G20/OECD BEPS project, including providing revised guidance on documentation.

The latest edition has been split into four parts for better clarity and these cover:

• Transfer pricing in a global environment

• Guidance on the design principles and policy considerations for transfer pricing rules, including guidance on the arm's length principle

• Practical implementation of a transfer pricing regime in developing countries

• Individual country practices

Apart from the presentational changes, the manual also includes new chapters on intra-group services, cost contribution arrangements and the treatment of intangible assets. A new section on commodity transactions has also been included in the ‘Methods’ chapter.

On 12 April 2017, the OECD released its International VAT/GST Guidelines. The Guidelines present a set of internationally agreed standards and recommended approaches to address the issues that arise from the uncoordinated application of national VAT systems in the context of international trade, which can lead to double taxation or non-taxation. The Guidelines were adopted as a recommendation by the Council of the OECD in September 2016.

The Guidelines focus in particular on trade involving services and intangibles, areas which pose challenges for the design and operation of VAT systems worldwide. The Guidelines also include recommended principles and mechanisms to address the challenges for the collection of VAT on cross-border sales of digital products which were identified in the context of the G20/OECD BEPS project.

Although the Guidelines are not legally binding, the OECD hopes that their publication will result in positive changes in national VAT legislation and ultimately a better harmonisation of VAT rules worldwide.

The European Commission has issued a VAT Committee working paper on the possible VAT implications of the transfer pricing rules laid down for the purposes of direct taxation. The purpose of the paper is to allow a first exchange of views on whether transfer pricing rules could have VAT implications.

Whilst delegations are requested to provide their opinion on the issues raised, the paper does conclude that there is a potential tension between transfer pricing rules which seek to arrive at an arm's length valuation of a transaction and VAT rules. Transfer pricing adjustments might have VAT implications, for instance, where an adjustment might be seen as an adjustment to consideration given in exchange for a taxable supply of goods or services. For there to be any VAT implications, however, it is necessary for there not only to be a supply for consideration but also for the consideration to be directly linked to that supply. This should be assessed on a case-by-case basis and the paper considers a number of aspects which should be taken into account.

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.

India: The new Social Security Agreement between India and Germany will come into effect on 1 May 2017, replacing the existing limited agreement.

Nigeria: Nigerian tax authorities commence the tax audit process for stamp duty to confirm compliance and identify any defaulting companies.

Saudi Arabia: The Saudi Arabian Monetary Authority issues guidance on the financial accounting treatment of zakat and income tax for financial institutions.

Korea: Korea introduces limits on the permissible business activities allowed under short term visas or the visa-waiver programme.

Other publications

Tax transparency's new normal: Our new report, ‘Coming into focus: tax transparency's new normal’ reflects upon where businesses stand in relation to tax transparency and data disclosure, following the introduction of rules by a number of countries around the world as the international tax environment adapts to reflect modern business practices. From page 12 onwards, the report also considers some of the key global developments in tax transparency over recent months.

2017 Worldwide VAT, GST and Sales Tax Guide: The 2017 edition of EY's Worldwide VAT, GST and Sales Tax Guide summarises the consumption tax systems in 122 jurisdictions. Each chapter provides at-a-glance information, as well as details such as the scope of the tax, persons liable, tax rates, time of supply, the recovery of the tax by taxable persons and non-established businesses, invoicing, tax filing, payments and penalties. This year, the six Gulf Cooperation Council Countries (Bahrain, Kuwait, Oman, Qatar, United Arab Emirates, and Saudi Arabia) have been included for the first time in advance of the introduction of VAT on 1 January 2018.

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.

Prime Minister announces intention to call an early general election

Email Chris Sanger

+ 44 20 7951 0150

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

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