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UK 2016 Budget: Measures Affecting Businesses and Savers

March 31, 2016

Given the lack of room for manoeuvre amid the global economic slowdown, Chancellor of the Exchequer George Osborne’s latest UK budget contained a surprising number of tax measures.

Business tax roadmap

- Corporate income tax and losses

Alongside the budget, the UK government has published a business tax roadmap. This sets out cuts in business rates (an annual commercial property tax), cuts in the rate of corporate income tax from 20% to 17% by 2020, and cuts in the petroleum revenue tax paid by oil and gas companies.

The roadmap also reforms the relief for corporate income losses. Companies will, in future, be able to carry forward such losses against all types of income, and surrender them for use by other companies in the same group. However, if profits exceed £5 million (presumably group not company profits), only 50% of profits can be offset by losses. These two measures should take effect from 1 April 2017, but a restriction on banks only being able to offset 25% of profits against pre-April 2015 losses will be introduced one year earlier.

- Stamp duty land tax

Also included in the business tax roadmap are changes to the system of stamp duty land tax (SDLT), which businesses pay when they acquire commercial properties. The changes follow the principles adopted by the Chancellor last year for residential property, and will take effect for transactions entered into after 17 March 2016.

Prior to the budget, purchasers paid nothing if the property cost under £150,000, 1% of the total value if it cost between £150,000 and £250,000, 3% if it cost between £250,000 and £500,000 and 4% if it cost more than that. Now purchasers will pay 0% on the first £150,000, 2% on the next £100,000 and 5% on the balance. So, for a business premises costing £200,000, the SDLT will now be £1,000 ((£200,000-£150,000) x 2%) rather than £2,000 (1% of £200,000).

- Interest deductions on taxable profits

The business tax roadmap also includes restrictions on the amount of interest that can be deducted from taxable profits. From 1 January 2017 this will be set at 30% of EBITDA (earnings before interest, tax, depreciation and amortisation) for groups of companies with interest deductions over £2m. There will be a group ratio rule based on net interest to EBITDA for worldwide groups, and the existing worldwide debt cap will be abolished.

There are other anti-avoidance measures in the business tax roadmap, including increasing the chances of a withholding tax applying to royalty payments, and measures to tax offshore property developers on their UK developments. Businesses have been asking for another roadmap and therefore should welcome this document; however the general theme is one of relief for small businesses that is to be paid for by larger enterprises.

Personal tax

From a personal tax perspective, the Chancellor announced the abolition of Class 2 national insurance contributions (currently £2.80 per week for the self-employed) with effect from 6 April 2018. He also announced that individuals will be able to earn £1,000 from trading and £1,000 from renting property without paying income tax. Those with incomes in excess of these sums can either return income less expenses or income less the £1,000 allowance. These allowances take effect from 6 April 2017 and are welcome simplification measures.

Mr Osborne also announced a personal allowance increase for the year ending 5 April 2018. The amount of income that can be earned before any tax is paid will rise to £11,500, and the amount of income on which basic rate tax (broadly 20%) is paid, will increase to £33,500.

- Individual savings accounts

The annual amount that can be saved into an Individual Savings Account (ISA), in which income and gains are tax-free, will increase to £20,000 from 6 April 2017. Few working basic-rate taxpayers can afford to save £20,000 a year, so this is of benefit to higher earners, and to those with pre-existing savings who can move funds from their taxed accounts into ISAs. The Chancellor is also planning to introduce a Lifetime ISA. This will allow persons between 18 and 40 years of age to save up to £4,000 per annum, and the government will top up the fund by £1 for every £4 saved. This measure will be subject to consultation.

Capital gains tax

The Chancellor also announced reductions in the rates of capital gains tax (CGT) from 28% to 18% for higher rate taxpayers and trusts and from 18% to 10% for basic rate taxpayers, although in practice extremely few basic rate taxpayers pay CGT. These changes take effect from 6 April 2016 and may reduce share trading volumes between now and then. The old rates continue to apply to gains on let residential property and second homes, and to “carried interest” for private equity managers. With the previously announced increases in dividend tax rates (to over 38% for the wealthiest taxpayers) taking effect at the same time, investors are likely to be looking for capital returns in future rather than yield, whilst holding their high-yielding investments in the increasingly generous ISAs.

From a stand-alone tax perspective, this was a good budget for savers, and investment managers will now focus on rebalancing their clients’ portfolios.

Newsletter

India Budget 2016 – Transfer Pricing Amendments

March 31, 2016

Background

The fiscal budget was announced in India on 29 February 2016. Like every year the government released several measures to accelerate growth and development in the country. One of the most important developments from a Transfer Pricing (TP) regulations perspective was introduction of Country-by-Country (CbyC) reporting norms for TP documentation with effect from Assessment Year (AY) 2017-18. These norms are based on recommendations issued by the Organisation of Economic and Commercial Development (OECD) and G20’s – Base Erosion and Profit Shifting (BEPS) action plan 13.

Many countries that are members of OECD and the G20 member countries have already introduced these TP documentation norms in their local regulations. These norms are based on one of the most important objective of transparency impressed upon by the OECD for prevention of BEPS.

OECD had recommended three-tier TP documentation including:

Master file – requirement to provide an overview of the Multinational Enterprises (MNEs) business and explain the MNE’s TP policies in the context of its global economic, legal, financial and tax profile.
Local file – to demonstrate that the taxpayer has complied with the arm’s length principle in its material intragroup transactions. Entities need to

– Demonstrate arm’s length nature of transactions;

– Contains the comparable analysis.

Country by Country (CbyC) report –to provide information to a tax authority to enable it to undertake a TP risk assessment, data may also be used to assess wider BEPS related risks. It is required to:

– provide jurisdiction-wise information on global allocation of income, taxes paid/accrued, the stated capital, accumulated earnings, number of employees and tangible assets

– provide entity-wise details of main business activities which will portray the value chain of inter-company transactions.

Based on the above OECD recommendations India has proposed to introduce CbyC reporting norms in their local tax and TP regulations.

Master file and local file

The Memorandum to the Finance Bill states that a master file will have to be maintained and the detailed rules regarding the same will be notified at a later date. However, no threshold for preparation of master file has been prescribed.

Local file related regulations that already exist in the law may continue or may be aligned to the recommendations of the OECD, however the same can be clear only once the detailed Rules in this regards are issued.

CbyC reporting

A new section or provision (proposed Section 286 of the Income-tax Act, 1961) on CbyC reporting has been introduced. The CbyC provisions in the budget require the Indian Parent entity of an international multinational group or any other designated group entity in India (referred to as alternate reporting entity) to file a CbyC report for financial year 2016-17 before the due date of filing of Return of Income i.e. 30 November 2017.The threshold for filing the CbyC report has been maintained at EUR750 million and the format shall be notified in the Rules at a later date. However, it is proposed in the memorandum that the OECD prescribed template will be adopted.

1. The CbyC report will be required to furnish the following:

the aggregate information in respect of the amount of revenue, profit or loss before income-tax, amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated earnings, number of employees and tangible assets not being cash or cash equivalents, with regard to each country or territory in which the group operates;
the details of each constituent entity of the group including the country or territory in which such constituent entity is incorporated or organised or established and the country or territory where it is resident;
the nature and details of the main business activity or activities of each constituent entity.
any other information as may be prescribed

2. Responsibility of the local constituent entity: The CbyC report will have to be furnished by the local constituent Indian entity if the parent entity is resident of a country:

with which India does not have an agreement providing for exchange of information under the CbyC report; or
there has been a systemic failure of that country and the said failure has been intimated by the prescribed authority to such constituent entity.

‘Systemic failure’ with respect to a country means that the country has an agreement with India providing for exchange of CbyC report, but:

in violation of the said agreement, it has suspended automatic exchange; or
has persistently failed to automatically provide to India the report in its possession in respect of any international group having a constituent entity resident in India.

3. A ’constituent entity’ means:

any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or is included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange;
any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or
any permanent establishment of any separate business entity of the international group included in (a) or (b) above, if such business unit prepares a separate financial statement

4. An ‘international group’ means any group that includes:

two or more enterprises which are resident of different countries; or
an enterprise, being a resident of one country, which carries on any business through a permanent establishment in other countries.

5.Where there are more than one constituent entities of the international group, resident in India, the CbyC report shall be furnished by any one constituent entity, if:

the international group has designated such entity to furnish the CbyC report on behalf of all the constituent entities resident in India; and
the information has been conveyed in writing on behalf of the international group to the prescribed Indian tax authorities.

6. If any other alternate reporting entity of the international group has furnished the CbyC report with the tax authority of their country, there will be no need for the local constituent entity to furnish the same again locally if the following conditions are satisfied:

the CbyC report is required to be furnished under the local law of that country;
that country has entered into an agreement with India providing for exchange of the CbyC report in respect of the international group;
that country’s prescribed authority has not conveyed any systemic failure in respect of the said country to any constituent entity resident in India;
the said country or territory has been informed in writing by the constituent entity that it is the alternate reporting entity on behalf of the international group.

7. The Indian revenue authorities may, for the purpose of determining accuracy of the information furnished under the CbyC report, ask the reporting entity to furnish such information or documents as may be deemed necessary, after giving a 30-60 days’ notice.

8. Annual accounting period, for which data has to be furnished will be an accounting period with respect to which the parent entity of the international group prepares its financial statements under their local laws and local accounting standards.

9. Penalty provisions relating to TP documentation

Failure to furnish information and documentation under the proposed three-tier documentation structure by the due date will be INR500,000 (approximately USD7,500).
Pursuant to a transfer pricing adjustment, following specific penalty provisions have been proposed in situations wherein the tax payer has failed to maintain appropriate documentation or failed to disclose international transaction:

-Penalty at 50 percent of the tax payable on under-reported transaction

-Penalty at 200 percent of the tax payable on misreporting of transaction

Failure on account of CbyC reporting:

-Failure to furnish CbyC report by the due date of filing of return of income

1. Delay upto one month – INR 5,000 (USD75) per day

2. Delay beyond one month – INR 15,000 (USD230) per day

3. Delay payment of penalty after receipt instructions to pay – INR 50,000 (USD750) per day

Failure to furnish additional information and documents sought by the Revenue authorities

1. Delay upto one month – INR 5,000 (USD75) per day from the day on which the period for furnishing the information and document expires

2. Delay beyond one month – INR 5,000 (USD75) per day from the day on which the period for furnishing the information and document expires

3. Delay payment of penalty after receipt instructions to pay – INR 50,000 (USD750) per day

Inaccurate information filed under the CbyC report*

1. Delay upto one month – INR 500,000 (USD7500)

2. Delay beyond one month – INR 500,000 (USD7500)

3. Delay payment of penalty after receipt instructions to pay – INR 500,000 (USD7500)

*Where the information filed under the CbyC report is inaccurate, a penalty of INR500,000 (approximately USD7,500) will be levied if:

– the entity has knowledge of the inaccuracy at the time of furnishing the CbyC report but fails to inform the prescribed authority; or

– the entity discovers the inaccuracy after the CbyC report is furnished and fails to inform the prescribed authority and furnish a correct report within a period of fifteen days of such discovery; or

– the entity furnishes inaccurate information or document in response to request for additional information and documents.

Administrative TP proposals

There are a few administrative amendments proposed by the budget from a TP perspective:

– Since time limit for completion of regular income tax audits proposed to be reduced to three months, the time limit for completion of TP audits will also consequentially be reduced by three months

– The Revenue authorities will have no right to appeal against the instructions issued by the Dispute Resolution Panel.

– In the circumstances wherein the time limit for completion of assessment proceedings is stayed (i) by an order or injunction of any court or (ii) for a period to obtain information under the agreement referred in Section 90 or 90 A of the Act, the period for completion of assessment proceedings by the Transfer Pricing officer, subsequent to such stay shall be minimum 60 days.

Newsletter

UAE To Implement VAT On 1 January 2018

March 31, 2016

The UAE Minister of State for Financial Affairs, His Excellency Obaid Humaid Al Tayer, has stated that the UAE will implement VAT at the rate of 5% on 1 January 2018.

The minister was speaking in Dubai on 24 February after a joint press conference with Christine Lagarde, Managing Director of the International Monetary Fund (IMF).

VAT is expected to be introduced at a rate of 5% with some limited exceptions including basic food items, healthcare and education. The UAE are planning to implement on 1 January 2018 – other GCC countries may do so at the same time or by 1 January 2019 at the latest.

Background

The GCC Member States are in the process of approving the long anticipated common framework for the introduction of a Value Added Tax (VAT) system in the GCC. The common VAT framework will form the basis for the introduction of a national VAT system by each Member State.

While there are a number of challenges that still need to be addressed before it is introduced, VAT will help governments to deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programmes. The exact details of the VAT regime which will need to be set out in the common framework and national legislation are yet to be made available.

Takeaway

From our experience in other markets, the establishment of clear regulations and efficient administrative processes is vital for VAT introduction to be a success. Businesses in the UAE (and GCC) should start planning now how the changes could impact their business, to ensure a smooth transition.

Businesses will have to adapt to the changes by identifying the impact of VAT on their business, and key immediate considerations are to:

Assess capability of existing systems
Identify VAT implementation strategy
Identify contracts that need a VAT action
Identify intercompany transactions
Undertake training / awareness

A potential VAT implementation will also have immediate effects on consumer behaviour which gives opportunities for companies to assess their business direction and to plan strategically.

Newsletter

31 Countries Have Now signed A Multilateral Competent Authority Agreement (MCAA) Enabling The Automatic Exchange Of Country-By-Country Reports (CbC reports) And Addressing BEPS Action 13.

February 26, 2016

31 countries have now signed a MCAA enabling the automatic exchange of CbC reports from each reporting entity between the competent authorities.

The agreement handles the exchange of CbC reports as stated in BEPS action plan 13. This action plan has amended Chapter V of the transfer pricing guidelines of the OECD. The guidelines are soft law and as such, OECD member countries are encouraged to follow these guidelines in their domestic transfer pricing practices.

CbC reporting is also part of the EU anti-tax avoidance package, which was proposed by the European Commission on 27 January 2016 and is tabled for political agreement by ECOFIN on 25 May 2016.

CbC reporting only applies for MNE Groups with a total consolidated income greater than €750,000,000. A CbC report is only required to be exchanged if both competent authorities have the MCAA in effect and their respective jurisdictions have legislation in effect that requires the filing of CbC reports with respect to the fiscal year to which the CbC report relates.

Countries that have currently implemented CbC reporting are Switzerland, Australia, China, Ireland, Mexico, South Africa, Denmark, Spain, Poland, USA (the IRS), United Kingdom, Norway, the Netherlands and Luxembourg. More countries are expected to follow this year. Some domestic law imposes the reporting obligation for book years as of 1 January 2016 and others from 1 January 2017.

In addition to current transfer pricing documentation, the ultimate parent entity or a surrogate parent entity of an MNE group must annually report the information as in Annex III to Chapter V for the CbC reports to their tax administration. Filing needs to be done in relation to fiscal years beginning 1 January 2016, 12 months after the closing of the fiscal year. The exchange between the competent authorities needs to take place within 15 months of the closing of the fiscal year.

Newsletter

Cyprus: Proposed Tax Legislative Changes

February 26, 2016

Intellectual Property (IP) Box alignment with the OECD’s BEPS Action 5 conclusions announced, with maximum transitional arrangements

The Cyprus Ministry of Finance (MoF) announced on December 30, 2015 that it will propose amendments to the current Cyprus intellectual property (IP) Box in order to introduce a new IP Box as from July 1, 2016 which will be fully aligned with the conclusions of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 5 conclusions.

As Per the MoF announcement, Cyprus intends to provide from the maximum possible transitional arrangements. It is therefore expected that IP already benefitting from the current Cyprus IP Box by June 30, 2016 will continue to receive the current benefits for a further 5 years, i.e. until June 30, 2021. A much shorter transitional period to December 31, 2016, however, is expected in the case of IP which is acquired, directly or indirectly, from related parties at any time in the first six months of 2016, unless at the time of acquisition such IP was already benefitting from an IP Box.

The current Cyprus IP Box leads to a competitive effective corporate tax rate of 2.5% (or lower) for qualifying incomes earned on qualifying IP assets. Qualifying income currently includes royalties, gains on disposal of IP and IP infringement compensation. Qualifying assets are currently broadly defined and include, for example, copyrights (which may take any of the following forms: literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes), patented inventions, trademarks (and service marks), as well as designs, and models that are used or applied on products. A narrower range of IP assets will qualify under the new IP Box as compared to the current IP Box, expected to include patents and computer software.

Although not referred to in the MoF announcement, it is expected that the planned new Cyprus IP Box will retain the benefit of the competitive effective corporate tax rate of 2.5% (or lower) but only a portion of income may qualify. The qualifying portion of the income is expected to reflect the research and development (R&D) expenditure undertaken by the IP owner itself (or outsourced to unrelated parties) as compared to the total R&D expenditure required to develop the asset.

In line with BEPS Action 5 recommendations it is expected that Cyprus will spontaneously exchange information (under existing international agreements) on taxpayers who benefit from the transitional arrangements of the current IP Box if the IP entered the current IP Box in the period February 7, 2015 to June 30, 2016.

Newsletter

Korea Tax Law Changes For 2016

February 26, 2016

The Korean National Assembly has approved amendments to tax laws for 2016 which include some changes to the proposals announced in August 2015. Supporting details related to the tax law changes have also been released in amendments to relevant Enforcement Decrees. The main corporate tax law changes that may have impact on Korean inbound investors include:

- The introduction of a limit on the amount of carried forward net operating losses that can be offset against taxable profits. Companies will only be able to utilise carried forward net operating losses of up to 80% of their taxable profits each year. Prior to this amendment, net operating losses could be carried forward for 10 years and be used to offset against a company’s taxable profits without any limitation. Small and medium sized enterprises (SMEs) are exempt from the restriction.
- The introduction of new transfer pricing reporting requirements applicable to Korean corporations and foreign corporations with Korean permanent establishments (PEs) that have annual gross sales exceeding 100 billion South Korean won (KRW) and international related party transactions exceeding KRW 50 billion per year. Where these thresholds are exceeded, additional information relating to international related party transactions must be submitted to the authorities including a transfer pricing master file and local file by the corporate tax return filing deadline.
- New tax credits worth KRW 5 million (KRW 2 million for large corporations) for the increase in employment of young regular workers aged between 15 to 29 years old, subject to certain restrictions. The new tax credit is available for fiscal years that include December 31, 2015.
- Korean capital gains tax may be applicable when a foreign company disposes of shares held in a domestic company if the domestic company is regarded as being ‘property rich’, subject to the provisions of any applicable double tax treaty (DTT). For the purposes of testing whether a domestic company is property rich, the value of shares in property rich subsidiaries owned by the domestic company will now also be taken into account as real property when calculating whether greater than 50% of the company’s assets consist of real property

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