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Practical points 2019 - International taxes

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in practice, policy and legislation related to international taxes, including: base erosion profit shifting (BEPS), common reporting standard; double tax agreements; FATCA and transfer pricing. These brief practical points are published each month in the faculty's magazine TAXline.

  Practical points
109 State aid: EU decision on the UK CFC regime
  On 2 April 2019 the Competition Directorate of the European Commission announced its conclusion that one part of the group financing exemption (GFE) within the UK controlled foreign company (CFC) rules breached state aid rules until the law was changed in Finance Act (FA) 2019.

The UK CFC rules broadly allow the UK to tax the income of overseas subsidiaries, controlled by a UK parent company, where that income is regarded as artificially diverted from the UK.

The Commission’s press release notes that: “CFC rules in general are an effective and important feature of many tax systems to address tax avoidance.”

It says that UK CFC rules establish two tests to determine how much of the financing profits from loans granted by an offshore subsidiary are to be reallocated to the UK parent company and, hence, taxed in the UK (the CFC charge), namely:
1. The extent to which lending activities, which are most relevant to managing the financing activities and thus generating the financing income, are located in the UK (the ‘UK activities test’).
2. The extent to which loans are financed with funds or assets that derive from capital contributions from the UK (the ‘UK connected capital test’).

The Commission states that the second of the two routes to exemption did not, in its view, comply with the state aid rules until there was a change in UK law in FA 2019 to comply with the EC Anti-Tax Avoidance Directive.

The press release does not mention the European Court of Justice (CJEU) case of Cadbury Schweppes (C-196/04) which decided that the EU treaty freedoms allow a company to set up in any EU member country as long as the arrangements are not wholly artificial. Experts have commented that the Commission seems currently to be thinking that it is only permissible to earn financing income in a multinational group’s home jurisdiction, which seems to undermine the EU concept of treaty freedoms.

We will have to await the detailed judgement to determine how the Competition Directorate has felt able to justify its decision in the light of Cadbury Schweppes.

Press reports have suggested that if the decision of the Commission is upheld by the CJEU it will cost UK business as much as £1bn.

Contributed by Ian Young
087 New French digital tax
  There is a risk that the rushed implementation of a new digital tax in France, without the agreement of other EU members, will result in a law which will not be compatible with the EU principles of freedom of establishment and free competition.

The French government introduced a bill on 6 March 2019 to impose a 3% tax on revenues deemed to have been generated in France by digital companies where the user is essential for the creation of value. The tax was announced in December last year, although at that stage it was not clear what the rate of the tax would be.

The French government has decided to take unilateral action in the face of slow progress from the EU and following other unilateral action from the UK, Spain and Austria. EU proposals for a wide-ranging tax on the revenues of digital companies stalled last year in the face of opposition from countries including Ireland, Sweden and Denmark. In March 2019, EU finance ministers agreed to abandon the proposal and to focus on international discussions at the OECD and G20 level. Romanian minister Eugen Teodorovici said that if progress is not made by the end of 2020 on global efforts to revise the international tax system, the EU will revisit the issue at that time.

The new French tax has been nicknamed ‘GAFA tax’ as it is thought that it could catch around 30 companies including Google, Apple, Facebook and Amazon. It will apply to advertising revenues from services that rely on data collected from internet users, revenues from the provision of a linking service between internet users and the sale of user data for advertising purposes. Online sales and the digital provision of digital content for buying and selling would be expressly excluded.

The tax will catch businesses, wherever they are established, that make annual supplies of taxable services of more than €25m in France and €750m worldwide. The double threshold is designed to limit the impact of the new tax for most French digital start-ups, but it will not help all start-ups.

It will apply to income from 1 January 2019 and the first instalment of the tax will be due in October 2019. The digital tax will be deductible from the taxable profit for corporate income tax purposes. The bill will be examined by the National Assembly under an expedited procedure.

From Out-law, published by Pinsent Masons LLP
086 Latest EU list of non-co-operative jurisdictions
  Three years ago the European Commission carried out a review of 160 third – ie, non-EU – countries against a scorecard of indicators to determine the potential risk level of each country’s tax system in facilitating tax avoidance.

The first step of the review was published in September 2016. The EU Code of Conduct group was then involved evaluating the evidence and a report was made to the European Council of Ministers meeting in December 2017.

The European Commission published at the same time, December 2017, a factsheet explaining the process that had been followed to identify jurisdictions with inadequate tax governance arrangements and the criteria that had been applied. The fact sheet can be accessed here.

At that December 2017 meeting the conclusion was that there were 17 non-cooperative jurisdictions, the Black List, as well as other jurisdictions which required improvements to their regimes, the Grey List. At that stage, there was a total of 64 jurisdictions listed, with nine further jurisdictions for which the review would take place in 2018: a grand total of 73 jurisdictions.

At the ECOFIN meeting on 12 March 2019 a full list of 15 non-co-operative jurisdictions was agreed. The non-co-operative jurisdictions are:

American Samoa
Marshall Islands
Trinidad and Tobago
United Arab Emirates
the US Virgin Islands

The reasons why the various jurisdictions have been included in the current, March 2019, list are set out in the annex to the document reporting this part of the March 2019 ECOFIN meeting.

Contributed by Ian Young
067 New treaties with Jersey, Guernsey and Isle of Man
  The UK has introduced new tax treaties with the three Crown Dependencies. The treaties came into force on 19 December 2018 for the Jersey and Isle of Man treaties and 9 January for the Guernsey treaty. 

The predecessor treaties date back to the 1950s and they have now been brought up to date and are broadly drafted in line with the OECD’s 2017 edition of the Income and Capital Model Convention and Commentary.

Under the new treaties, full relief is provided for withholding tax suffered on qualifying interest and royalties, subject to the application of a new principal purpose test for treaty benefits (in line with Action 6 of the OECD’s BEPS project). Companies looking to rely on this relief will therefore need to assess whether the principal purpose test is satisfied, based on their existing or proposed arrangements. 

The new treaties also all now include a non-discrimination clause (Article 24) and should in principle be considered ‘full treaty countries’ for UK tax purposes going forward. Multinational enterprises should therefore look to consider the impact of this change in respect of double taxation relief claims, application of the branch exemption election, and the new legislation for offshore receipts in respect of intangible property (Sch 3, FA 2019). 

Contributed by Ian Young
043 BEPS harmful tax practices and minimum standards

When the OECD published its final BEPS reports at the end of 2015, it identified four minimum standards under the 15-part Action Plan:

  • Action 5 – Preferential tax regimes;
  • Action 6 – Treaty abuse;
  • Action 13 – Country-by-country reporting; and
  • Action 14 – Mutual agreement procedures and dispute resolution

The OECD has now published an update on its Action 5 work dealing with harmful tax practices: Harmful Tax Practices – 2018 Progress Report on Preferential Regimes. The other part of its Action 5 work is in relation to tax rulings.

The latest assessment by the OECD Forum on Harmful Tax Practices, which is responsible for this part of the work, has yielded new conclusions on 57 regimes, namely:

  • 44 regimes where jurisdictions have delivered on their commitment to make legislative changes to abolish or amend the regime (Antigua and Barbuda, Barbados, Belize, Botswana, Costa Rica, Curaçao, France, Jordan, Macau (China), Malaysia, Panama, Saint Lucia, Saint Vincent and the Grenadines, the Seychelles, Spain, Thailand and Uruguay).
  • As a result, all intellectual property regimes that were identified in 2015 BEPS Action 5 report are now “not harmful” and consistent with the nexus approach, following the recent legislative amendments passed by France and Spain.
  • Three new or replacement regimes were found “not harmful” as they have been specifically designed to meet Action 5 standard (Barbados, Curaçao and Panama).
  • Four other regimes have been found to be out of scope or not operational (Malaysia, the Seychelles and two regimes of Thailand), and two further commitments were given to make legislative changes to abolish or amend a regime (Malaysia and Trinidad and Tobago).
  • One regime has been found potentially hamful but not actually harmful (Montserrat).
  • Three regimes have been found potentially harmful (Thailand).

Contributed by Ian Young

042 Measurement of BEPS

Action 11 of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan was designed to work out how much tax was being lost as a result of base erosion and profit shifting. The answer, not surprisingly, in the final BEPS Action 11 report, was quite a lot: the range in the estimates was from $100bn to $240bn annually. It would have undermined the validity of the BEPS Action Plan if the conclusion had been that it was a minor problem! 

OECD has now published a new data set with information from more than 100 countries which covers four main categories of data: corporate tax revenues, statutory corporate income tax rates, corporate effective tax rates and tax incentives relative to innovation. 

The new database is intended to assist in the study of corporate tax policy and expand the quality and range of statistical information available for analysis as part of the continuing BEPS work. 

The overall project is summarised in a 40 page booklet Corporate Tax Statistics (first edition).

The new OECD analysis shows that corporate income tax remains a significant source of tax revenues for governments across the globe. In 2016, corporate tax revenues accounted for 13.3% of total tax revenues on average across the 88 jurisdictions for which data is available. This figure has increased from 12% in 2000.

Corporate taxation is even more important in developing countries, comprising on average 15.3% of all tax revenues in Africa and 15.4% in Latin America and the Caribbean, compared to 9% in the OECD.

Some of the other key insights identified in the booklet are: 

  • In five jurisdictions – Egypt, Kazakhstan, Malaysia, Papua New Guinea and the Philippines – corporate tax revenues made up more than one-quarter of total tax revenues in 2016.
  • Corporate tax revenues are driven by the economic cycle. For the period 2000-16, average corporate tax revenues as a percentage of GDP reached their peak in 2007 (3.6%) and declined in 2009 and 2010 (3.2% and 3.1% respectively), reflecting the impact of the global financial and economic crisis.
  • For jurisdictions where the exploitation of natural resources is a significant part of the economy, changes in commodity prices can have a significant effect on corporate tax revenues. From 2015 to 2016, the share of corporate tax in total tax decreased by more than five percentage points in two jurisdictions, the Democratic Republic of Congo (from 20.6% to 14.5%) and Trinidad and Tobago (from 44.0% to 23.4%). In both of these jurisdictions, the drop was driven by a decline in commodity prices.

The data set is now going to be published on an annual basis and the next edition will include aggregated and anonymised statistics of data collected under country by country reporting, now being provided to tax authorities under BEPS Action 13. This will allow backward-looking assessment of effective tax rates actually paid by companies. 

Contributed by Ian Young