Tax Under the Spotlight

Global legislation will continue to be priority

DAMON AMBROSINI and SALLY JONES, DELOITTE LLP

As we move into the new year, interest in tax has reached an all-time high amongst governments, the press and the general public. Our view is that this enhanced focus on taxation will continue for the foreseeable future. As a result, there are two key tax issues currently affecting multinational businesses, including fund managers, and aspects of the funds themselves:

  • The reshaping of the international tax framework, led by the Organisation for Economic Co-operation and Development (OECD) through its Base Erosion and Profit Shifting project (BEPS); and
  • Public transparency through increased financial and narrative disclosures, where the European Union is at the fore.

International tax framework and BEPS
In July 2013, the OECD delivered its 15-point Action Plan to the G20 Finance Ministers. The G20 has the lead role in taking forward BEPS, although the G8 has expressed its support at its June 2013 summit. All G20 governments and OECD Members have signed up to the Action Plan; it is not something that simply involves a small number of countries.

The Action Plan covers four main areas:

  • Addressing challenges of the digital economy;
  • Establishing international coherence;
  • Restoring international standards; and
  • Transparency and instruments.

There are fifteen Actions, which will be covered by some of the OECD’s existing Working Parties, a new Working Party, and taskforces. While many of the Actions may not currently be focus points for fund managers, some Actions are due to be reported on by September 2014 and others have a further 12-15 months (see Fig.1). This is a rapid process for an international body made up of 42 governments, plus the UN and the EU.

The OECD has published an updated schedule for the release of Discussion Documents. The transfer pricing documentation paper will be out in February, which may be of particular interest to the fund management community, followed by digital, hybrids and treaty abuse in March. Public consultation meetings will be a month later. Currently there’s no word on the updated guidance on the transfer pricing of intangibles, which was due in May 2014.

BEPS enjoys considerable political support, so we can be assured that changes will take place. Business has a key role to play in helping the OECD and home country tax authorities to frame the new international tax accord in such a manner as supports global trade and avoids double taxation, but equally is more attuned to modern business activities.

The outcome of the project will be a series of proposals. Some will involve changing the Model Tax Treaty; others will involve changes to the transfer pricing guidelines; yet others will involve changing national law. In all cases, governments remain in control of change and will need to reach agreement on broad outcomes. Implementing changes to international treaties will be challenging in practice; the OECD notes that there are over 3,000 tax treaties. Some form of multilateral instrument is the proposed solution.

The review of interest relief is one area that might lead to change in the UK. An increasing number of countries have general restrictions on interest. The review should ideally support some ways of taking action here, whilst ruling out other less helpful approaches. As a supporter of working towards international consensus, it is thought unlikely that the UK would wish to consider unilateral action – and the current regime is the result of a clear choice bythe coalition government and its predecessors.

The permanent establishment definitions in double tax treaties set out when a business has a taxable presence in a country – and when it does not. It is fair to say that the current definitions do not adequately reflect the transformation in communications and business practice that has taken place over the last decade. We should expect greater restrictions on when a place of business is truly preliminary or auxiliary (and thus not taxable), the removal of benefits from commissionaire structures, and perhaps less emphasis on contracts.

The final area worth noting in particular is increased transfer pricing transparency to tax authorities. The aim is to improve risk assessment by tax authorities.

Public transparency
The public transparency debate is largely a European one. The European Parliament is keen on country-by-country reporting, and led the move to introduce it for banks (strictly for financial institutions and credit firms) via the late inclusion of Article 89 of the recent Capital Requirements Directive IV (CRD IV).

Financial institutions
Article 89 requires institutions within its scope to report annually, for each jurisdiction in which they have an establishment: the name and nature of its activities; turnover; employees; profit or loss before tax; corporation taxes paid; and public subsidies received. This is ‘full’ country-by-country reporting.

HM Treasury had until 1 January 2014 to transpose CRD IV into UK law. There have been two brief consultations, and it is clear that the Treasury has done its best to draw coherent and sensible conclusions from what can be a confusing Article utilising undefined terms. The draft legislation and accompanying guidance was published on 19 November. Limited first disclosures will be made on 1 July 2014, with full public disclosure from 2015. The new disclosures will be scrutinised by campaigners, the media and other interested parties to evaluate the contribution made to host countries and communities. Some companies may consider that additional, voluntary disclosures may be needed to ensure that interested parties have sufficient context to form an informed view.

Extractive industry
After debate over several years, a new EU Accounting Directive (2013/34/EU) includes provisions requiring extractive/forestry companies to disclose payments made to governments in the countries in which they operate. The Transparency Directive applies similar rules to non-EU companies listed on EU stock exchanges. Reporting takes effect in 2016, but is not ‘full’ country-by-country reporting as defined by campaigners. The Commission will review progress in 2018 and may recommend extending the provisions to other sectors, perhaps to the construction industry due to the huge infrastructure programme in Africa.

What does the future hold?
There has been some discussion among the Council of Ministers about extending country-by-country reporting beyond banks. For example, Lithuania (which held the Presidency of the EU until 1 January) has proposed the country-by-country reporting should be expanded to include all large companies, of which there are around 18,000 in Europe. Any such plans would need majority approval by the Council of Ministers; it seems that there isn’t the requisite majority currently.

Partnership consultation
On 5 December, the Chancellor confirmed as part of his Autumn Statement the UK government’s intent to legislate against perceived abuse of partnership structures, and specifically the manipulation of profit and loss allocations to partners that suffer different tax rates and ‘disguised employment’ of junior members to avoid PAYE and NIC. It was affirmed that these anti-avoidance rules would generally apply to the hedge fund industry for profits from 6 April 2014 where certain conditions were met. It would appear this will be an area of interest for government and the industry for the foreseeable future.

As stated previously, we expect the increased focus on tax to continue generally as a trend in the public interest and governments at large. Potential developments in legislation as a result of this heightened attention will undoubtedly have an impact on the hedge fund community.