Four of JHA's partners have been selected as highly regarded individuals in the latest edition of Tax Controversy Leaders. This guide by Euromoney's International Tax Review, in association with World Tax, selects the leading Tax Controversy lawyers worldwide based on independent research, including client and peer interviews. Graham Aaronson QC, Michael Anderson, Paul Farmer and Simon Whitehead from JHA's tax disputes team have all been included in the guide. In recent weeks, JHA's contentious tax team has once again achieved top tier rankings in both The Legal 500 UK and Chambers and Partners UK 2020 guides. JHA remains the only law firm to have achieved such rankings in both guides every year since its inception. These continued successes by the firms' tax team demonstrate its market-leading position, which is the result of JHA's unique model of employing expert solicitors, barristers and forensic accountants to offer clients unparalleled service, combined with its experts close working relationships with clients. You can find the Tax Controversy Leaders list for the UK here.
JHA's contentious tax team has contributed to the recently published fourth edition of The Legal 500: Tax Country Comparative Guide. This go-to guide provides readers with a pragmatic overview of the Tax laws and regulations across a variety of jurisdictions worldwide. Each chapter covers a different jurisdiction and contains information on withholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities. The template for each chapter was provided by JHA's Michael Anderson and Simon Whitehead, who also wrote the UK chapter for the guide. In the past two weeks, JHA's contentious tax team has once again achieved top tier rankings in both The Legal 500 UK and Chambers and Partners UK 2020 guides. JHA remains the only law firm to have achieved such rankings in both guides every year since its inception. Being chosen as a key contributor to this guide, combined with our directory rankings, demonstrates the marketing leading position of JHA's tax team. This has been achieved through the firm's unique combination of expert solicitors, barristers and forensic accountants, as well as its close working relationships with its clients. This approach enables our continued success in dealing with complex, high value and often ground-breaking tax disputes. Read JHA's chapter in the guide here and view the whole guide here.
JHAs senior associate Helen McGhee has contributed five chapters to the latest edition of Revenue Law: Principles and Practice. This book is considered a go-to guide and key reference source for business and finance students, professionals and others operating in these sectors. The book is published annually at the end of September by Bloomsbury Professionals as part of their Tax Annuals and provides readers with an up-to-date understanding of the law relating to all areas of UK taxation with extensive cross-references to HMRC guidance, tax legislation and relevant case summaries. Helen has completed her annual contribution which covers updates for two chapters to the section on Income Tax General principles and taxation of individuals, and The overseas dimension. She also writes the chapter on companies and shareholders for the guides section on Capital Gains Tax, as well as two chapters for the business tax section. These cover Choice of business medium and Incorporations, acquisitions and demergers. Helen joined JHA in 2016. She is a qualified solicitor, a Charted Tax Adviser, a member of the Society of Trusts and Estates Practitioners, and a CEDR Accredited Mediator. She acts on behalf of corporates as well as individuals; she specialises in the taxation of UK residents and non-UK domiciled high net worth individuals. She also advises on Employee Benefit Trusts, Film Schemes and the disclosure of non-compliant offshore structures. You read a free preview chapter or buy a copy of the book here.
JHAs contentious tax team has once again achieved a band one ranking in the Chambers & Partners UK guide to the legal profession, and with more highly ranked individuals than any other law firm. JHA remains the only law firm to be ranked in the top tiers of both the Chambers & Partners and the Legal 500 guides for each year since it was founded in 2013.
Graham Aaronson QC is described as a fantastic advocate with very deep technical knowledge. Michael Anderson is considered super impressive with good, strategic tax knowledge. Paul Farmer is regarded as very clever, very personable and very impressive. While clients say of Simon Whitehead that his in-depth knowledge of the subject matter is second to none.
The top-ranking of JHAs contentious tax team is testament to its unique integrated model, which brings together expert solicitors, barristers and forensic accountants, as well as to its close working relationship with clients, and which together account for its continuing success in dealing with complex, high value and often ground-breaking tax disputes.
View the Chambers UK contentious tax rankings here and the firm ranking here.
The government is consulting on draft regulations to implement Directive (EU) 2011/16 which requires taxpayers and their advisers, from 1 July 2020, to report details of certain cross-border arrangements that could be used to avoid or evade tax to HMRC. Ray McCann, partner at Joseph Hage Aaronson LLP, discusses, among other things, the background to the draft regulations and the type of arrangements covered.
What is the background to the publication of these draft regulations? What type of arrangements are covered?
The UK has been one of the leading countries in introducing measures intended to deter and counteract, in particular, high-value and sophisticated tax avoidance arrangements. The UK scheme, disclosure of tax avoidance schemes (DOTAS), was introduced in 2004 and has since been revised and expanded over the years. Other countries have followed suit with a very similar DOTAS arrangement in Ireland, although both the UK and Irish DOTAS schemes were developed from the Abusive Tax Shelter' rules introduced in the US. DOTAS is restricted to arrangements that have an avoidance impact in the UK albeit that transactions involving an offshore jurisdiction or marketed from offshore could still be caught. More widely, over the past decade, the European Parliament and European Commission together with the Organisation for Economic Co-operation and Development (OECD) and the EU Member States, in particular, the UK, have worked to develop a coordinated approach to cross-border tax avoidance. In 2011, Directive fEU) 2011/16, the EU Directive on Administrative Cooperation (DAC) was agreed and has been amended on many occasions thereafter. On 25 May 2018, the European Commission again amended DAC by Directive (EU) 2018/822 and Member States have until 31 December 2019 to implement the terms of the most recent amendment, commonly referred to as DAC 6. Overall, it is fair to say that anyone familiar with DOTAS will recognise a great deal of what is within the scope of the draft regulations, and while the DAC 6 scheme largely follows DOTAS, reflecting the UK's input to the drafting of the arrangements, there are important differences. An arrangement will be within the scope of the draft regulations where it is a cross-border arrangement (CBA). This is an arrangement that involves more than one EU Member State or an EU Member State and a 'third country. In addition, the participants to the arrangement must be resident in different countries or have a presence in more than one jurisdiction. To be a CBA for these purposes, there must be two or more jurisdictions that are relevant to the operation of the arrangements. So it would be unlikely that an intermediary based in the Isle of Man, for example, who designs tax schemes effective only in France would be caught as an intermediary for that reason alone where the Isle of Man was otherwise irrelevant to the arrangements. HMRC uses an example that would make clear that a tax scheme used, by say, a UK permanent establishment of a US corporation (or other Member State company), would be outside the draft regulations where the scheme had no implications for the US or any other jurisdiction (assuming that was the case or indeed possible). Like DOTAS, a number of hallmarks are proposed in categories A to E and these will determine whether a CBA is reportable. These broadly follow a similar approach to DOTAS and include a main benefit test, confidentiality, fees related to the tax advantage and so on. The categories also include specific types of arrangements that must be reported, such as loss buying, for example. In all cases, there must be a main benefit tax advantage which is worded on similar lines to DOTAS.
Who will need to make returns under the draft regulations?
DAC 6 imposes two obligations on who must disclose. The primary obligation falls on a very broadly defined intermediary (promoter in UK terms) that may also include those assisting or advising on the CBA. There is a secondary obligation on a relevant taxpayer but special rules apply where legal privilege is involved. An intermediary for these purposes is any person concerned with the design, marketing, and organisation or making available of the CBAso again familiar. But it also includes any person who is not within the specific category of intermediary but who nevertheless provides such services so as to assist an intermediary or should reasonably know that they are providing such services these are referred to as service providers. They are excluded from a reporting obligation where it is reasonable that they did not know or could not reasonably be expected to know that they were assisting or advising on a CBA in which a reporting obligation could fall on them. Those actually involved in the design or marketing, etc are not able to claim that they did not know or could not reasonably have known. There are other conditions, the most important of which is that an intermediary must be resident in a Member State. But it is clear that both qualified and unqualified tax advisers will be within the scope where they are so resident. It is important to note that simply because you are aware (or later become aware) of a CBA does not mean that you will assume a reporting requirement as a service provider for that reason alone. Legal privilege was a hotly debated issue in 2004 in the context of DOTAS and it is somewhat odd that the consultation envisages the possibility of a similar reporting requirement on lawyers as was initially suggested by the Inland Revenue (as it then was) at the time of DOTAS, ie that lawyers could report factual information. However, in the draft regulations as drafted, where legal privilege is in point, lawyers will be able to pass any reporting obligation onto any non-lawyer intermediary. Where legal privileged information is in point but there is no intermediary within the scope of the reporting requirement at all, the obligation will then fall on a relevant taxpayer. This basically means the person able to benefit from the arrangements. Again, familiar terms are used here such as made available and it is intended to catch any person to whom a CBA has been marketed whether it has been implemented at that point or not.
What is provided about the practicalities of making a return?
Perhaps inevitably, the reporting triggers and requirements are more complex than is the case with DOTAS. Where the intermediary, etc, is UK-based, the disclosure must be made to HMRC. No disclosure to HMRC will be required where the UK intermediary or service provider has made a disclosure to another Member State. Where there is more than one intermediary, no report is required where a disclosure has been made in respect of the same CBAs by another intermediary, provided that evidence is held that this is the case. In terms of the disclosure, the DAC sets out the main requirements. These include;
This information will be shared by HMRC with the other relevant Member State(s). Disclosure reports are required to be sent to HMRC within 30 days, at the earliest, from when the CBA is made available, ready to be implemented or the first step is taken. Service providers will have a separate additional deadline of 30 days from the point they provide the assistance or advice. There is a special transitional reporting date where the first step in a CBA is taken after 25 June 2018 but before 1 July 2020. In this case, the report must be made by 31 August 2020. Where the CBA is marketable, there will be a further ongoing reporting requirement that will mean that intermediaries must notify HMRC every three months of, in effect, new sales. As with DOTAS, HMRC will issue a reference number to each intermediary who must, in turn, provide that number to each relevant taxpayer within a 30-day period. Relevant taxpayers must report annually for each accounting period or year of assessment that they participate in the CBA. This is likely to be an accounting period or year of assessment in which a tax advantage is derived from the CBA. It should be noted that these are the suggested timings by HMRC, the rules may be different in other Member States. HMRC has not, as yet, suggested any specific form of report but this will no doubt emerge in due course. In the meantime, HMRC has said that taxpayer disclosure should be included in the white space on a self-assessment return. This is oddly informal for such an important measure and from a tax administration perspective it will prove unacceptable and risky for HMRCs compliance efforts. It differs significantly from the way in which DOTAS Scheme Reference Numbers (SRN) operate. HMRC should reflect on the fact that even with the SRN arrangements, HMRC has still missed aggressive tax schemes, see for example the case of Revenue and Customs Commissioners v Charlton and others [2012] UKFTT 770.
Are there any pitfalls?
It is inevitable that while DAC 6 is very similar to DOTAS, there are potential traps. DOTAS and DAC 6 will run in parallel and the disclosure requirements are not wholly aligned. Perhaps at this stage, the most problematic aspects will relate to service provider intermediaries. The potential requirement here is not entirely aligned with DOTAS and the broad nature of intermediary is likely to require some time to settle down fully, especially for those on the periphery of a CBA. It is possible, however, that difficulties may be encountered in determining whether an arrangement is in fact a CBA, especially for service providers.
What are the penalties for non-compliance?
The penalties are modelled on DOTAS and are similar in structure to the penalties applicable to late returns in the UK generally. There is thus an initial period of failure that will attract a £600 daily penalty where there is a failure to comply with the main disclosure and reporting obligations. Where the failure continues after the initial penalty is imposed, further £600 daily penalties can be imposed. Failing to meet any other obligation will incur a penalty of £5,000. Relevant taxpayers face a £5,000 penalty for failing to make an annual report, rising to £10,000 where there is a habitual failure.
How would the draft regulations interact with the rules on DOTAS? Might the same arrangements need to be disclosed under both sets of rules?
The rules will run parallel to DOTAS, but they will not be mutually exclusive. In some cases, a disclosure may be required in accordance with both DOTAS and DAC 6. It is, of course, possible that as time goes on there will be some streamlining, but the development of DOTAS would suggest that further tightening of the rules and not relaxation is likely to be the direction of travel.
How would the draft regulations be affected by a no-deal Brexit?
DAC 6 is due to come into effect in July 2020 at which point the UK is, on current government pronouncements, likely to have left the EU. Irrespective of whether the UK leaves with a deal, transactions involving the UK will be within scope of DAC 6 but only so far as intermediaries based in continuing Member States are concerned. DAC is a hugely important EU project that is supported by the OECD and has had significant support from the UK. It is also a key aspect of our commitment to the wider base erosion project (BEPS), It is difficult to imagine that the UK would simply walk away, so even under a no-deal scenario, it is possible that the UK will look to adhere to some or all of the DAC or indeed the UK could introduce its own rules on cross-border tax avoidance arrangements. It should be remembered that the UK is part of the Joint International Tax Shelter Information Centre arrangements whereby the UK shares, on a reciprocal basis, intelligence with a number of countries including the US, Canada and Australia. This does not require any formal reporting by intermediaries or taxpayers. We will also remain party to a large number of double tax agreements, including those with most or all EU Member States and these typically provide for mutual assistance and under which the UK already exchanges significant amounts of information with other jurisdictions. Whatever happens, it is unlikely that the UK will allow UK-based intermediaries to enjoy a free for all approach to overseas jurisdictions.
What should law firms be doing to prepare?
Law firms will need to be familiar with the provisions to ensure that they are able to comply with any obligations imposed on them to notify other intermediaries or relevant taxpayers. It is unclear precisely how many taxpayers reports made to HMRC under DOTAS were necessary due to legal privilege. It is possible, though perhaps unlikely, that clients of law firms may prefer the lawyer to make any necessary disclosure to avoid the risk of any such disclosure being incorrect. In any event, where legal privilege is in point, clients of law firms will no doubt need advice on how to comply with any intermediary obligation that they have assumed.
What are the commencement provisions? What are the next steps in the consultation process?
DAC 6 comes into force on 1 July 2020, but the reporting obligation will apply to a CBA where the first step occurred after 25 June 2018, so care will be required. HMRC is currently consulting on the detail so it is possible that the draft regulations may be subject to change. Consultation responses must be in by 11 October 2019. Guidance is also promised in due course but Brexit uncertainty may encourage some to wait and see. Since the precise date, HMRC will publish any promised guidance is uncertain, that could in the long-term cause difficulties.
Partner Ray McCann was interviewed by Susan Ghaiwal for LexisNexis and be found here on their website.
For the sixth consecutive year, JHA has achieved a top-tier ranking in the Legal 500 UK for Tax Litigation & Investigations. Furthermore, partner Graham Aaronson QC is selected once again for their exclusive Leading Individuals list. Associate Shofiqur Miah has been chosen as one of six Rising Stars; associates who make a material difference to the practice and who are considered ones to watch. Partner Michael Anderson is also highlighted for his key role in the teams' success. Client and peer testimonials for the guides 2020 research describe JHAs contentious tax team as technically very able and praise its ability to explain issues in an understandable manner'. They also single out its depth of knowledge and experience in EU law based tax litigation', and say that it is the common sense approach and ability to explain the issues which makes them stand out'. JHA was founded in 2013 and the firms' tax disputes team has been ranked as top-tier by both the Legal 500 and Chambers & Partners guides for tax litigation and contentious tax respectively every year since its inception. This continued success is testament to the firms' dominance in this space, which is enabled by its uniquely integrated approach that brings together the most relevant and experienced solicitors, barristers and accountants, and its close client relationships. View the full commentary on our team and lawyers by the Legal 500 UK here.
On 16 August 2019, ICSID released its latest proposals for amendment of its procedural rules for the resolution of international investment disputes. The key changes are:
ICSID Member States are meeting in November 2019 to consult on the latest draft proposals. Amendments to the ICSID Convention Rules require the approval of two-thirds of Member States, and a simple majority in the case of the Additional Facility Rules, Fact-Finding, and Mediation Rules.
The Court of Appeal recently gave its decision in Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1002. The case concerned the interpretation of an exceptions or force majeure clause and provides guidance on how correctly to apply the compensatory principle of damages.
BACKGROUND
The ship-owner, Classic Maritime, was engaged in a long contract of affreightment (“COA”) for the carriage of iron ore pellets from Brazil to Malaysia with Limbungan, the charterer. An addendum to the COA in 2014 stated that Limbungan agreed to ship iron ore pellets from either the ports of Tubarao or Ponta Ubu in Brazil to either Kelang or Labuan in Malaysia. Iron ore, supplied by Samarco, was shipped through Ponta Ubu and iron ore supplied by Vale through Tubarao.
On 5 November 2015, Samarco suspended its mining operations and ceased to supply iron ore given the bursting of a dam. Alternative and/or additional supplies from Vale were unavailable. As a result, Limbungan was unable to fulfil its shipment obligations. Limbungan claimed to be excused from these obligations citing that the dam burst fell under the exceptions clause of the contract. Classic Maritime sued for damages for breach of the COA.
FIRST INSTANCE DECISION
The trial judge found that while the dam burst made it impossible for Limbungan to perform the contract, even if it had not burst, the charterer would have defaulted anyway as there had been a collapse in the Malaysian iron ore market. Limbungan was unable to prove that ‘but for’ the dam bursting, it could and would have fulfilled the COA, and as such the judge held that it could not therefore rely on the exceptions clause.
The judge accepted that the applicable principle for assessing damages was the compensatory principle. In doing so, he took into account the reasons why the charterer was in breach of its obligations based on his previous finding. He assessed damages by comparing Classic Maritime’s position as a result of the breach, with the position it would have been in had Limbungan been able and willing, but for the dam burst, to fulfil its shipment obligations. As Limbungan would not have been able and willing to supply the cargoes regardless of the dam burst, the judge found that Classic Maritime was only entitled to nominal damages of $1 per shipment.
Following this judgement, Limbungan appealed on liability and Classic Maritime appealed the damages awarded.
COURT OF APPEAL DECISION
Regarding liability, the Court of Appeal decision upheld the interpretation of the exceptions clause and the first trial judge's finding on liability. It said there was no basis for approaching the clause as though it were a force majeure clause, and that Limbungan’s failure to perform did not ‘result from’ the dam burst: the dam burst could not fairly be said to have ‘directly affected’ the performance of Limbungan’s obligations.
The Court of Appeal also noted that the parties could have included a clause in the COA that excluded the ‘but for’ test, but that they had chosen not to. The original decision at first instance was therefore upheld.
Regarding the damages awarded, the Court of Appeal held that the correct approach required a comparison in financial terms between Classic Maritime’s actual position as a result of the breach and the position it would have been in had the contract been fulfilled. In assessing the value to Classic Maritime of the performance of the COA (regardless of why it was not carried out), the Court of Appeal held that Classic Maritime was in fact entitled to almost US$20 million in damages.
IMPACT OF THIS DECISION
This decision demonstrates that although the doctrine of frustration, force majeure and exceptions clauses share many similarities, where a provision is clearly intended as an exceptions clause, it must be interpreted on its own terms in accordance with the usual rules of contractual construction.
It also shows that although in cases of anticipatory breach it may be appropriate to take into account a party’s willingness to perform and whether, even if willing, it would have been excused from performance by particular events, in cases of an actual breach of an absolute obligation, the reason for failure to perform or subsequent impossibility are irrelevant when calculating damages.
Overall, this case is a clear warning of the need for clarity when drafting contractual clauses; parties need to ensure that the clauses that they agree and include in their contracts make their intentions explicit and cover the eventualities they require.
Limbungan is making an application for permission to appeal to the Supreme Court.
On Wednesday, 46 countries signed the Singapore Convention on Mediation at a ceremony attended by over 1,500 delegates at the Shangri-La Hotel in Singapore. As reported earlier this month, the Convention, which is officially titled The United Nations Convention on International Settlement Agreements Resulting from Mediation, aims to address the lack of harmonised framework for cross-border enforcement of settlements procured by mediation.
The full text of the Convention, which can be found here, was approved by the UN Commission on International Trade Law in June last year and was adopted by the UN General Assembly in December.
Among the Convention’s signatories are the USA, China, and Singapore, and the complete list of signatories can be found here. Notably, neither the UK nor any members of the European Union are among them. Despite this, there is something to be said for the enthusiasm of countries in Asia-Pacific (being the majority of the signatories) and their engagement with the project. This, along with various other initiatives being taken by such countries, in particular, Singapore’s commitment to investing in its dispute resolution infrastructure, could pose a serious threat to London’s dominant position in the world of international commercial dispute resolution.
Despite this, it is hoped by many across the globe that the Convention will be as much as a success for cross-border mediation as the New York Convention was for arbitration. Given that (a) the Convention will only come into force six months after it has been ratified by three signatories, and (b) each state must then adopt it into their domestic laws before it can be applicable, it will be some time before the impact of the Convention can be accurately determined.
Last week, the Serious Fraud Office (SFO) published a handbook on what it expects from organisations seeking cooperation credit in an investigation. This is the first time the SFO has formally set out written guidance to clarify how they will assess cooperation and, as such, is a key reference source for any company navigating its way through an investigation or seeking to negotiate a settlement with the SFO.
Cooperation is defined as “providing assistance to the SFO that goes above and beyond what the law requires”. Examples of this include:
· identifying suspected wrongdoing and criminal conduct together with the people responsible;
· reporting to the SFO within a reasonable time of the suspicions coming to light; and
· preserving available evidence and providing it promptly in an evidentially sound format.
Extensive guidance is given in the handbook on preserving and providing material to the SFO, the SFO’s aim being to ensure corporations collect all relevant evidence, maintain its integrity, and present it a way that facilitates the SFO’s ability to review it. Additionally, the SFO also encourages corporations to alert them to, and even provide them with, ‘material that the organisation cannot reach’ such as private or third-party emails and bank accounts. If corporations have such information and it is relevant, then they should, as a matter of course, seek legal advice on the sharing of personal data and data privacy.
Regarding industry and background information, the handbook suggests that corporations who ‘identify potential defences that are particular to the market or industry at issue’ would be deemed cooperative. However, the SFO’s appeal for the provision of information on ‘other actors in the relevant market’ could violate confidentiality clauses or result in questions as to how and why such data was obtained. Again, legal advice should be sought as a matter of course before providing disclosure on third-parties.
The guidance strongly encourages companies to consult the SFO before any individuals are interviewed or any action taken. Depending on the size and nature of the corporation and the issue at hand, this approach could prove difficult for companies to do while maintaining their business operations. This is only guidance; there is scope to discuss and negotiate with the SFO to ensure that commercial operations can continue as uninterrupted as possible.
Finally, the guidance emphasises that corporations should waive legal privilege on notes and transcripts of witness interviews to be deemed genuinely cooperative, with the handbook stating that if a corporation does not waive privilege, it could impact their eligibility for a Deferred Prosecution Agreement. However, corporations and their counsel will no doubt continue to battle with the SFO over access to such materials on the basis of legal privilege.
Despite all the examples of cooperation provided in the handbook, there is no guarantee that if a company follows them that this conduct will be taken into account in an investigation. Indeed, the handbook provides no examples of any actual benefits that cooperation could bring to a corporation. As such, while the report is useful in making clear what the SFO expects, it is not necessarily incentivising to ensure these expectations are met.
