BEPS: OECD proposes “special measures” to shore up the arm’s length principle

Ofsted can make a school subject to “special measures” if it considers that the school is failing to give pupils an acceptable standard of education. I was reminded of this when an OECD paper published on 19 December proposed “special measures” to shore up the “arm’s length” principle underpinning the current, outdated international tax system. More on that below.

The OECD now has nine open consultations on proposed reforms to tackle base erosion and profit shifting (BEPS), following publication of six discussion papers in the week before Christmas.

The content is highly technical and will be virtually inaccessible to all but those with a professional interest in international tax. But the OECD’s action plan published in July 2013 and the earlier publication “Addressing Base Erosion and Profit Shifting” provide some useful context. The OECD said in February 2013:

“Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for many countries. While there are many ways in which domestic tax bases can be eroded, a significant source of base erosion is profit shifting … [Current] rules provide opportunities to associate more profits with legal constructs and intangible rights and obligations, and to legally shift risk intra-group, with the result of reducing the share of profits associated with substantive operations.”

As the BEPS project has progressed the discussions have become more technical, and inevitably the media coverage has been largely confined to trade journals and financial press. But as Sol Picciotto, co-ordinator of the BEPS Monitoring Group, has told Tax Analysts, these issues are “too important to be left simply to tax advisers”.

‘Information asymmetries’

The discussion paper published on 19 December, dealing with the application of the arm’s length principle notes that BEPS actions 8, 9 and 10 are intended to “assure that transfer pricing outcomes are in line with value creation”. The paper runs to 45 pages, and part I (34 pages) proposes changes to section D of chapter I of the OECD’s transfer pricing guidelines. Continue reading


The mansion tax – good policy, or a tax on the south east?

“Labour faces legal wrangle to tackle mansion tax avoiders”, said a headline on page 2 of yesterday’s Times. The article discussed the incentive, created by the £2m threshold, to turn a home into more than one property. It quoted a lawyer as saying that the “obvious route” of attempting to break up properties will be caught by anti-avoidance rules.

Of course – for “Labour faces legal wrangle”, read “Labour will need anti-avoidance rules”. No surprise there.

The “unpopular” window tax, repealed in 1851, is a reminder that tax avoidance is nothing new. Nor is anti-avoidance legislation. There are long-established rules preventing owners of companies splitting a business into two to save corporation tax, and preventing the artificial splitting of a business to avoid having to register for VAT.

Is the mansion tax good policy? Last week Philip Collins argued that it was “taxation as pure political calculation”. It was “not a tax on property so much as a tax on the southeast of England”. A “more durable” plan would be to adjust council tax bands.

“What counts as a mansion outside London?” asked The Economist. It reported that:

According to analysis by Knight Frank, a London estate agent, 2.5% of all residential properties in Greater London would breach the £2m threshold. Two-fifths of these properties are flats and roughly the same proportion again are terraced houses. If the same top 2.5% calculation were applied to prices outside London, the point at which a house becomes a ‘mansion’ would vary enormously around the country.

Knight Frank’s analysis is here. As the Evening Standard reported last June:

Agents condemned the tax as “completely unfair” claiming that it will catch thousands of modest family homes in central London while the owners of large country houses in cheaper areas of the country will pay nothing.

The argument for some form of wealth tax to fund public services may be strong, but shouldn’t politicians grasp the nettle of the outdated council tax bands first?


Tax devolution: Draft Scotland Bill published

The UK government has published draft legislation to deliver more powers, including tax powers, to the Scottish parliament.

“Further work” is required and the new Scotland Bill will not be presented to parliament until after the general election. The draft legislation is in line with the Smith Commission recommendations, but some of the tax measures – for example, those required to deal with pension tax relief and gift aid – will be dealt with in secondary legislation.

The Corporation Tax (Northern Ireland) Bill will receive its second reading next Tuesday, 27 January.

My latest article for Taxation, published today (registration required) and written before today’s announcement, summarises recent developments in relation to devolution of tax powers to Scotland, Northern Ireland and Wales, and discusses some of the implications for tax advisers and their clients.

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Tax consultations galore

There are almost 70 live tax-related consultations, if you count each draft Finance Bill measure on which comments have been invited as a separate consultation. I’ve prepared a summary for Tax Journal (subscription required), with links to the consultation documents.

In the last couple of days the Treasury has posted an online survey on Budget 2015, set for 18 March, and invited representations.

And HMRC has launched a consultation on R&D tax credits – a package of measures, announced at autumn statement 2014, to streamline the application process for smaller companies.

Many of the consultations are of particular interest to smaller businesses and employers. In addition, the UK government is aiming to fast-track legislation granting further tax powers to Scotland and a corporation tax rate-setting power to Northern Ireland. I’ll share a thought on some of these.


Luxleaks tax disclosures serve the public interest – prosecuting the source does not

More than 70 politicians and tax transparency campaigners have signed a letter to the Guardian deploring Luxembourg’s decision to bring criminal charges against a former PwC employee believed to have passed to the media confidential rulings awarded by Luxembourg tax authorities.

As The Guardian noted last night, 20 news organisations around the world have published detailed investigations into the tax affairs of several multinationals based on leaked tax rulings that PwC obtained in Luxembourg for some of its clients.

The reports were timely. The G20/OECD project to tackle base erosion and profit shifting (BEPS) among multinational groups of companies has gained widespread, if qualified, support among tax authorities, business and campaigners. There is an ambitious timetable but the rate of progress to date reflects a sense of urgency, and there is a real chance to close at least some of the gaps in the international tax system.

The current, outdated system rewards “tax competition” and big business, but it fails governments and smaller businesses who complain of an unlevel playing field. There is a real sense of injustice, four years after a Financial Times editorial spoke of “the scandalous tax treatment of multinationals in the rich world”. Continue reading


Autumn statement: Tax competition in the UK and ‘jumping the gun’ on BEPS

This week’s autumn statement was more like a budget than this year’s budget, according to EY, with 59 policy measures listed in the full report compared to 56 in March.

We can now expect dozens of draft Finance Bill 2015 measures to be published on 10 December for consultation.

These will include the new “diverted profits tax”, which has had some commentators observing that the UK government may be jumping the gun as international efforts to reform the outdated corporate income tax system continue.

The IFS has suggested that while the UK is proposing a unilateral measure, the idea does fit with the OECD’s base erosion and profit shifting (BEPS) agenda. Australia is reported to be considering following in the UK’s footsteps.

Devolution

We can expect further significant changes to UK taxation to be introduced in January, with draft legislation implementing further devolution of tax powers to Scotland.

The Smith Commission recommended last week that the Scottish parliament should have almost complete control over income tax, but said control of corporation tax should remain with the UK parliament. Continue reading


The autumn statement, and five tax-related bills already before the UK parliament

Nowadays the last weekend in November feels like the run-up to the annual budget. All eyes are on the autumn statement to be delivered on 3 December and “legislation day”, set for 10 December. This time, when the chancellor speaks, there will be five tax-related bills already before parliament – some of which will introduce complex and far-reaching changes – and that does not include draft legislation to be published in January for further devolution of income tax to Scotland.

Childcare Payments Bill

This bill’s second reading in the House of Lords will take place on 9 December. It introduces the “tax-free childcare” scheme to provide help with childcare costs. Tax experts have warned that the interaction with other forms of childcare support will be complex and difficult for claimants to understand.

National Insurance Contributions Bill

The House of Lords committee stage is set for 15 December. This bill is intended to simplify NICs paid by the self-employed; allow for accelerated payment notices and follower notices in relation to NIC avoidance; and introduce a targeted anti-avoidance rule.

Small Business, Enterprise and Employment Bill

This bill is set for its second reading in the House of Lords on 2 December. The stated aim of amendments to UK company law is to “increase transparency around who owns and controls UK companies and to deter and sanction those who hide their interest in UK companies to facilitate illegal activities or who otherwise fall short of expected standards of behaviour”. The measures include

“requiring every company to keep a register of people with significant control over the company, the abolition of bearer shares and corporate directors and the imposition of directors’ duties to shadow directors”.

Taxation of Pensions Bill

The House of Commons reports stage and third reading are scheduled for 3 December. A Treasury briefing note said this bill would implement “the most radical change to the way people take their private pensions for nearly a century”.

Wales Bill

The House of Lords has returned the bill to the Commons with amendments, some of which

“would amend the power of the National Assembly for Wales to set a single Welsh rate to be used for the purposes of calculating the Welsh basic, higher and additional rates of income tax to be paid by Welsh taxpayers. The amendments would enable the Assembly to set separate Welsh rates for the purpose of calculating each of those rates of income tax.”

I can’t mention Wales without mentioning Scotland, of course. And the Smith Commission’s recommendations, including measures to allow the Scottish Parliament almost complete control over income tax, are going to be turned into draft legislation by 25 January. It all seems a bit hasty.


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