Midweek Tax News

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A weekly update on tax matters to 18 July 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.

In a written ministerial statement issued on 13 July 2017, the Financial Secretary to the Treasury, Mel Stride, has indicated that the Government will seek to reintroduce the provisions previously withdrawn from the pre-election Finance Bill in a new Bill as soon as possible after Parliament's summer recess. The Financial Secretary's statement also confirms the Government's intention that measures previously announced as applying from April 2017 or another point before the introduction of the forthcoming Finance Bill will continue to apply from the previously announced commencement date.

Whilst it is expected that the majority of the measures will be reintroduced as previously drafted, there are some instances where the Government intends to make some amendments. In these cases, the Government has issued updated draft legislation in order to give taxpayers as much certainty as possible prior to enactment of the new Bill. The revised draft legislation published on 13 July includes:

• Corporate interest restrictions

• Corporation tax loss relief reform

• Amendments to the anti-hybrid rules

• The ‘non-dom’ tax reform

• Inheritance tax on overseas property representing UK residential property

• Employment income provided through third parties

Although the updated provisions give an indication of what is intended to be achieved by the Government, it is noted that there is still an opportunity for changes to be made in both the Committee and Report stages of the Bill as it passes through the House of Commons. These remain some weeks away, as Parliament will not return from summer recess until 5 September, which is therefore the earliest that the Bill could be introduced based upon the written statement.

As Parliament rises for the party conference recess on 14 September 2017 for three weeks, this leaves limited time for the new Bill to progress during September, particularly given the introduction of the Repeal Bill, which is expected to be debated fully. It is unlikely, but not impossible, for the new Finance Bill to undergo its final stages in October, but a more realistic timetable could suggest that the Bill might receive Royal Assent in November, just prior to the Autumn Budget.

For further details of the revised draft legislation and the measures expected to be included in the forthcoming Finance Bill, including the Government's amended timetable on Making Tax Digital, please see our alert of last week which is available here.

We will be covering the revised draft legislation in our next Tax Focus webcast on Thursday, 20 July 2017 at 10:00 am. If you have not already registered to attend you can do so here.

The Government published the long-awaited Repeal Bill, officially known as the European Union (Withdrawal) Bill, on 13 July 2017, although it is understood that there will be no debate on this until Parliament returns from the summer recess. The Bill, whilst a major piece of constitutional legislation, is relatively short at just 19 clauses (with associated schedules). The Bill will repeal the European Communities Act 1972 and also provide the necessary framework to deal with existing EU and EU-derived law (including European case law) following the UK's departure from the Union, although the exact date for the transposition of EU law into domestic law has been left open at this stage.

Whilst the Bill provides the framework, the detailed operation will be provided by a number of statutory instruments that will be made under powers granted by the Bill. These will allow the necessary adaptations of existing law to reflect the UK's departure, as well as making provision to implement the outcome of the withdrawal agreement once negotiations are complete.

The Department for Exiting the European Union has also published a position paper outlining the Government's position on proceedings before the Court of Justice of the EU (CJEU) that are ongoing at the point of exit from the EU. The position paper recognises that, beyond a certain point in CJEU proceedings, it may well be right that such cases continue to a CJEU decision. It sets out the approach that the UK will seek to agree with the EU, which includes the types of case that would be in scope for an agreement on pending cases, along with how to define what is a pending case. The paper also reiterates the Government's view on the status of CJEU judgments after Brexit, namely that historic CJEU decisions will have the same precedent status in the UK as decisions of the UK Supreme Court.

The second round of formal negotiations on Brexit commenced on Monday, 17 July 2017, with the Secretary of State for Exiting the EU, David Davis, and his team meeting with their EU counterparts, headed by Michel Barnier. The week's negotiations will continue to address the issues covering citizen's rights, the financial settlement and the issues related to Northern Ireland and the governance of the withdrawal agreement.

For further information on the Repeal Bill, including a summary of the areas that businesses should be considering over the coming months in preparation for the UK's departure from the EU, please see our alert from last week, which is available here.

As a reminder, we will also be hosting a Tax Focus webcast on Tuesday, 25 July 2017 at 2:00 pm which will consider what businesses should be thinking about now in order to be prepared for Brexit. The webcast, entitled Brexit – keeping trade flowing, will consider the following areas:

• Supply chain business continuity risks and potential mitigating actions

• Transactional drivers of cost – direct and indirect – and potential mitigating actions

• The relevance of any service charges, eg, royalty flows associated with the supply chain

• What work can be done now to assess the current state and plan ‘March 2019 Readiness’

If you have not already done so, please click here to register.

Under the UK's implementation of the country-by-country reporting requirements, a UK ultimate parent entity or the top UK company within a subgroup will need to provide a notification to HMRC. This notification must be made by the end of the period to which the report relates or, if later, 1 September 2017. For many groups, this means that the first notification deadline is approaching and companies should make sure that they have gathered together the relevant information, particularly bearing in mind the approaching holiday season.

The UK has not yet published its full guidance on country-by-country reporting, which was delayed as a result of the general election. The full guidance is expected to be published in the next couple of weeks. Meanwhile, on 18 July 2017, the OECD's Inclusive Framework on BEPS released additional guidance on the implementation of country-by-country reporting under BEPS Action 13. The additional guidance addresses how to treat joint ventures owned and/or operated by two or more unrelated groups, as well as whether aggregated or consolidated data for each jurisdiction is to be reported in Table 1 of the country-by-country report.

The guidance confirms that the treatment of an entity should follow the accounting treatment. Where a joint venture entity would be required to be consolidated into one group, the entity should be considered as a constituent entity of that group and the financial data reported in the country-by-country report of that group. On the other hand, if an entity is not required to be consolidated under applicable accounting rules (eg, it is included under the equity accounting method), the financial data would not be included in the report for these purposes.

The guidance also confirms that reporting should occur on an aggregate basis at a jurisdictional level. Accordingly, data should be reported on an aggregated basis, regardless of whether the transactions occurred cross-border or intra-jurisdiction, or between related or unrelated parties. However, groups may use the notes section in Table 3 of the country-by-country report to explain the data if it wishes to do so.

Where the jurisdiction of the ultimate parent has consolidated reporting for tax purposes, the guidance notes that the jurisdiction may allow taxpayers an option to complete the country-by-country report using consolidated data at the jurisdictional level, as long as consolidated data is reported for each jurisdiction in Table 1 of the report and consolidation is used consistently across the years. A note must also be included in Table 3 stating that consolidated data has been used and specifying the columns in Table 1 in which the consolidated data is different to what it would have been if aggregated data had been used.

The Inclusive Framework members are expected to implement the guidance as soon as possible, however it is recognised that time may be needed for groups to make the necessary adjustments, for example, in situations where territories have already issued guidance permitting the reporting of consolidated data for intra-jurisdiction transactions. Jurisdictions may therefore allow some flexibility during a short transitional period (ie, for fiscal years starting in 2016), with taxpayers providing the same information in Table 3 as indicated above.

On 12 July 2017, the Criminal Finances Act 2017 (Commencement No.1) Regulations 2017 were made. The Regulations confirm that the new corporate criminal offences of failing to prevent the facilitation of tax evasion (for both UK and foreign taxes) will come into force from 30 September 2017.

Whilst the new legislation focuses on the failure to prevent the facilitation of tax evasion, the approach taken mirrors that taken in the 2010 Bribery Act and places greater responsibility on businesses to prevent criminal activities undertaken on their behalf, making businesses criminally liable if they fail to do so.

The line of defence for businesses rests on whether their preventative procedures are deemed sufficient compared to the potential risks. By September 2017, businesses seeking to ensure that they have a defence of having reasonable procedures in place should have identified, documented and categorised the specific risks across their organisation, identified the controls already in place to mitigate the risks and devised a plan to address any control shortcomings or other necessary actions to address risks.

For further information, including the view from HMRC as to how businesses should be responding to the new rules, please see our alert here.

International developments

On 12 July 2017, the Polish Ministry of Finance published proposals to revise Poland's corporate income tax law. The proposals include the introduction of a new interest limitation rule, as well as rules to limit the deductions claimed for certain intangible asset payments based upon the adjusted tax base of companies.

The key changes set out in the proposals include:

• The introduction of a separate income category for capital gains, as well as preventing the offset of capital losses against other sources of income

• The limitation of deductions for financing costs (including financing provided by unrelated parties) to 30% of the adjusted tax basis. A safe harbour is proposed for annual financing costs up to PLN120k (approximately US$32k), with non-deductible financing costs being carried forward to future periods where they may become deductible. Loans granted before the new law comes into force are expected to be grandfathered until the end of 2018. The new rules would not apply to certain financial institutions

• The implementation of a ‘minimum levy’ on the owners of shopping malls, large shops and office buildings worth more than PLN10m (US$2.7m), which would equate to approximately 0.5% of the initial tax value of the building per year

• The introduction of changes to the controlled foreign company legislation which may broaden the scope of foreign subsidiaries meeting the criteria

• The limitation of deductions for fees for intangible services (including legal, accounting, advisory and insurance) and payments for the use of licences, trademarks and certain other rights. Payments exceeding in total 5% of the adjusted tax base would not be deductible, subject to a safe harbour for costs up to PLN1.2m (approximately US$324k) per annum. Disallowed amounts would not be carried forward

It is proposed that, in general, the new rules should enter into force from 1 January 2018, although there may be certain exceptions.

On 13 July 2017, the European Commission published its monthly infringements package, which sets out where the Commission is pursuing legal action against Member States for failing to comply with obligations under EU law. Within this, the Commission notes that it has decided to send reasoned opinions to Bulgaria, Cyprus and Portugal on the basis that they have failed to transpose the new measures on the automatic exchange of tax rulings between EU tax authorities. These measures should have been transposed by 31 December 2016, with the first exchange of information due to take place by this September.

The Commission has given the Member States two months to respond before it decides whether the matter should be referred to the CJEU. Four other territories (Czech Republic, Greece, Hungary and Poland) that were potentially subject to proceedings have since transposed the required measures and their infringement cases have consequently been closed.

Advocate General (AG) Tanchev has released his opinion in the German case of Boehringer Ingelheim Pharma. The case asks whether a pharmaceutical company supplying products to pharmacies via wholesalers, where the pharmacies supply those goods on to persons with private health insurance, is entitled to reduce the VAT declared on a rebate paid direct to the insurer. The rebate is mandatory under domestic German law.

The German Tax Authorities accept that, for VAT purposes, rebates required under domestic law relating to the supply of products to individuals with statutory public health insurance are discounts. However, they did not accept that those paid to private health insurers qualified on the basis that the insurer was not the customer of the product but merely a third party reimbursing the costs incurred by the insured persons.

In line with the European Court decision in the Elida Gibbs case, the AG has opined that the VAT treatment of pharmaceutical supplies to publicly and privately insured persons are comparable situations and should not be treated differently. Therefore, Boehringer is entitled to reduce the VAT amounts relating to the rebate paid to private health insurers.

Businesses which have been denied the opportunity to reduce the VAT paid in relation to rebates may wish to review the current VAT treatment in the event that the European Court follows the AG's opinion.

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.

Australia: Following the one year postponement of the introduction of the Goods and Services Tax on low value imports, Australia has launched a consultation into models for the collection of this tax.

Morocco: Morocco has enacted Finance Law 2017, which aims to encourage investment and to clarify existing regimes.

Netherlands: The Netherlands has opened a consultation on the implementation of the EU Anti-Tax Avoidance Directive for measures needing to be transposed by 2019 (which excludes the anti-hybrid rules).

Pakistan: Pakistan has enacted Finance Act 2017, which includes a reduction of the corporate income tax rate as well as changes to the minimum tax and an increase in withholding tax rates.

OECD: The OECD has released a draft 2017 update to the OECD Model Tax Convention, including four areas that have not previously been released and upon which comments have been requested.

Other publications

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.

UK Government announces previously withdrawn Finance Bill provisions will be reintroduced after summer recess

Email Claire Hooper

+ 44 20 7951 2486

Publication of the Repeal Bill and Tax Focus webcast on keeping trade flowing post-Brexit

Email Claire Hooper

+ 44 20 7951 2486

UK country-by-country reporting notification deadline and further guidance issued by the OECD

Email Ben Regan

+ 44 20 7951 4584

Commencement date set for the corporate criminal offences of failing to prevent the facilitation of tax evasion

Email Paul Dennis

+ 44 12 1535 2611

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

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