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Cantina Levorato SRL v. HMRC

[2021] UKFTT 461 (TC)

This decision of the FTT is interesting because:

1. The Appellant was an Italian company that was assessed to a UK tax on the basis of HMRC’s allegation that certain “irregularities” for the purposes of excise duty legislation had occurred in the UK element of the supply chain.  HMRC had issued a “Uniform Instrument Permitting Enforcement”, which was received by the Appellant from the Italian tax authorities.  HMRC conceded (and the FTT ruled) that this did not constitute a notification for the purposes of s 12 FA 1994.
2. The conclusion is different from several cases following  Honig v Sarsfield,¹ a Court of Appeal judgment that decided that the statutory time limit did not apply to the notice of the assessment.  For example, in Cirko v HMRC,² the FTT had upheld the assessment, concluding that the delay of the notification (two years after the assessment had been raised) had “no bearing on the validity of that assessment”.  Here, the FTT reached the opposite conclusion.
3. It is the first time that (as far as the authors are aware) the FTT has followed the test created by the Supreme Court in FMX Limited v HMRC³ to quash assessments.  Based on EU law, the principle states that legal certainty requires that assessments are communicated within a “reasonable time”.  Although the FTT had previously applied the test,⁴ it had (as far as the authors are aware) never invalidated an assessment based on it.  In this case the FTT found that the four-year delay between the raising (2013) and notification (2017) of the assessment did not represent a “reasonable time”.

¹ [1986] STC 246.
² [2019] UKFTT 0482 (TC).
³ [2020] UKSC 1.
⁴ Mr Stephen J Mullens v HMRC [2021] UKFTT 131 (TC).

The invasion of Ukraine has prompted the UK government to speedily publish the draft legislation for the Economic Crime (Transparency and Enforcement) Bill 2022 which requires foreign entities that acquire UK property (freehold interests or leases granted for more than 7 years) to register with Companies House and declare details of their beneficial ownership. Implementation will proceed at record pace following royal assent and ultimately the register could be open for public inspection (albeit with restricted access to date of birth and residential addresses of beneficial owners).

The objective of the Bill is to crack down on foreign criminals using UK property to launder proceeds of corruption.

Any non-UK entity that already owns (and indeed acquired at any time in the previous 20 years) or going forward buys UK land will be required by the new rules to disclose to Companies House details of its beneficial owners/individuals with significant control (broadly those owning more than 25% of the shares/voting rights or otherwise exercising significant control) in exchange for the issue of an ID number necessary to complete title registration. Information provided will need to be verified and updated annually. Sanctions for non-compliance of course will include restrictions on an ability to create charges over or dispose of the land as well as daily fines of £500 and/or criminal sanctions including prison sentences of up to 5 years.  At present those who already own land will have a grace period of 18 months to register.

The effects of the new legislation will be felt not only by the Russian oligarchs and kleptocrats it is aimed at but also by those families who have historically favoured holding UK land through offshore entities as a means of asset protection or to safeguard privacy for other reasons. The new rules when read alongside the expanded scope of the UK Trust Register are a significant step towards global transparency.

This article is a follow-up to our two previous articles of 20 August 2021 and 7 December 2021.

On 8 October 2021, the OECD/G20 published a statement confirming that 136 jurisdictions¹ had agreed to a two-pillar solution to address the tax challenges that arise from the digitalisation of the economy and setting out an implementation plan.

Regarding the “Pillar Two” component, a 15% global minimum tax on corporations was agreed upon, and model rules to give effect to the Global Anti-Base Erosion rules (the “GloBE rules”) were published on 20 December 2021. Shortly after, on 11 January 2022, the UK government launched a consultation on the UK’s implementation of the GloBE rules by 4 April 2022.

As mentioned in our last article, the Pillar Two component imposes a top-up tax on parent companies regarding the low-taxed income of subsidiaries (thereby decreasing the leverage of low-tax jurisdictions). It also incorporates a rule which denies deductions or requires an equivalent adjustment as an alternative to the first rule.

The recently published model rules define the scope and set out the mechanics of the GloBE rules. Their implementation is envisaged to be completed by 2023.

The GloBE Rules

• Chapter 1 defines the scope of the GloBE rules, which apply to members of an MNE Group with annual revenues of €750m or more. Tax authorities will use the Consolidated Financial Statements of the Ultimate Parent Entity (the “UPE”) to determine if the €750m threshold has been exceeded in at least two of the last four Fiscal Years. Certain entities, including pension funds, real estate investment vehicles, international organisations and NGOs fall outside the scope of the GloBE Rules.
• Chapter 2 sets out the methodology to determine the amount of the UPE’s Top-Up Tax liability. Very broadly:
  • The Income Inclusion Rule (“IIR”) provides that the UPE shall pay a tax in an amount equal to its allocable share of the Top-Up Tax of the corresponding low-taxed entity. The Top-Up Tax is allocated through a formula including the number of employees and the value of tangible assets in each jurisdiction.
  • The Undertaxed Payment Rule (“UTPR”) means that an entity shall be denied a deduction in an amount equal to the additional cash expense that an undertaxed entity should have. In other words, instead of paying extra tax, the relevant group entity is denied a deduction (thereby producing the same effect, in economic terms).
• Chapter 3 deals with the computation of GloBE Income or Loss. Transactions between entities located in different jurisdictions that are not consistent with the Arm’s Length Principle need to be adjusted. The income attribution rules in Article 7 of the OECD Model Convention are recognised for permanent establishments.
• Chapter 5 deals with the computation of the Effective Tax Rate and Top-Up Tax:
  • The Effective Tax Rate is the sum of the adjusted covered taxes (broadly, taxes on income or profits) of the MNE Group in a jurisdiction, divided by the “Net GloBE Income”² of the jurisdiction.
  • The Top-up Tax Percentage is the difference between the Minimum Rate (15%) and the Effective Tax Rate.
  • The formula also includes two carve-outs: one relating to the payroll costs of employees and another to the carrying value of qualified tangible assets.
  • There is also a de minimis exclusion: the Top-Up Tax for an entity shall be deemed zero if: (a) the average GloBE Revenue of that jurisdiction is less than €10m, and (b) the average GloBE Income is less than €1m.
• Chapter 8 addresses the administration of the GloBE Rules. Most notably, there is an obligation on MNE Groups to file a standardised information return in each jurisdiction that has introduced the GloBE Rules. There is also provision for certain safe harbours if the conditions provided under the GloBE Implementation Framework, which the Inclusive Framework on BEPS will develop, are met for the relevant fiscal year.

Implementation of the GloBE Rules in the UK

On 11 January 2022, HMRC launched a consultation on the implementation of the GloBE Rules into UK law. The key points are:

• An IIR will be included in the Finance Bill 2022-23 and will have effect from 1 April 2023, and a UTPR will follow on 1 April 2024 (at the earliest).
• The IIR and the UTPR will only apply to MNEs whose consolidated annual revenues are greater than €750m. The government says that a lower threshold could damage the UK’s attractiveness as a parent location for limited gains.
• The UK will only apply the IIR to UPEs of an MNE Group or intermediate parent entities of foreign headquartered groups when more than 20% is owned by investors in a jurisdiction that has not introduced Pillar Two.
• Another pending issue is the interaction between the GloBE Rules and the US’s Global Intangible Low-Taxed Income (“GILTI”) Regime. Whereas the UE’s relevant rules are incompatible with the GILTI Regime, the UK appears to have adopted the OECD’s position to engage with “international partners to reach solutions (…) as soon as possible”.
• The Research and Development Expenditure Credit Regime will be a Qualified Refundable Tax Credit. It will be treated as an addition to an MNE Group’s GloBE Income rather than a reduction in tax in the Effective Tax Rate calculation. HMRC says that this will “ensure RDEC continues to be an effective instrument for promoting R&D activity in the UK”.
• Finally, the UK is exploring the idea of introducing a Domestic Minimum Tax (“DMT”) to protect domestic taxing rights. The DMT would be closely based on the GloBE Rules, but instead of allowing a foreign country to charge top-up taxes in relation to low-taxed profits of an MNE Group’s entities in the UK, the UK would instead impose that top-up tax.
• One advantage would be to reduce compliance costs of UK headquartered groups by preventing them from being subject to the UTPR in multiple countries for their UK operations.
• The DMT would be implemented on 1 April 2024 or later. In this regard, we should note that the UK corporation tax will increase to 25% from 1 April 2023.

¹ 137 now with the inclusion of Mauritania on 4 November 2021.
² The GloBE Rules also define what is understood by Net GloBE Income.

SUMMARY

1. A so-called “MTIC case”, in which HMRC alleged knowledge or means of knowledge of fraud.  The taxpayer, PTGI, denied those states of knowledge.  After a relatively lengthy trial, the Tribunal allowed the appeal of PTGI.
2. The decision represents a good reminder that HMRC’s “MTIC” decision-making mould is not a “one size fits all”, unbeatable formula at the Tribunal.  The Tribunal will robustly analyse HMRC’s (usually) inference-led allegations.

BACKGROUND AND ISSUES

1. PTGI was a telecommunications company with a retail and a wholesale arm.  The retail arm focused on selling pre-paid telephone cards to individuals, and the wholesale arm focused on purchasing minutes used for the retail component and arbitrage trading.  At all material times, PTGI was wholly owned by its US parent company, PTGI-ICS Inc, a public company listed on the New York stock exchange.
2. On 20 February 2017, HMRC denied PTGI-ICS Limited (“PTGI” or the “Appellant”) the right to deduct input tax (£13.75M) claimed in VAT periods 06/15, 09/15 and 12/15.
3. On 18 August 2017, HMRC denied the same right (£5.42M) for VAT period 03/16.
4. HMRC claimed that PTGI incurred the input tax in transactions connected with the fraudulent evasion of VAT and that PTGI knew or should have known of this.
5. HMRC accepted that the burden of proof was on them and that the standard of proof was the balance of probabilities.
6. PTGI accepted that there was a tax loss at the start of each transaction chain and that the tax losses were attributable to the fraudulent evasion of VAT.
7. The issues are:
   1. Is there a tax loss?
   2. If so, does the tax loss result from fraudulent evasion?
   3. If there is fraudulent evasion, were the Appellant’s transactions connected with the fraud?
   4. If they were connected, did the Appellant know or should the Appellant have known that its transactions were connected with fraud?
8. PTGI accepted that there was a tax loss resulting from fraudulent evasion.  It also accepted the accuracy of the transactions’ descriptions, which were found to be connected to each loss via IKB or Indigo.  Therefore, the focus of the appeal was on the fourth question (the “knowledge question”).

FINDINGS

1. The FTT found that “what must be established, on the balance of probabilities, is that the Appellant should have known or should have known that the only reasonable explanation for the circumstances in which the relevant purchases took place was that they were transactions connected with such fraudulent evasion”.
2. The FTT said that it was “telling” that despite HMRC’s regular visits and the amount of information received from IKB and Indigo, neither was de-registered for VAT nor had input VAT claims been denied during the relevant period.  The Tribunal, therefore, concluded that, even if the due diligence had been different, it was unlikely that this would have given PTGI the means of knowing that the transactions were connected with fraud.
3. The FTT further concluded that the relevant surrounding circumstances did not establish that PTGI should have known of the connection to fraud and nor should it have known that the only reasonable explanation for its transactions was a connection with fraud.
4. The surrounding circumstances established a heightened risk that trading with IKB and with Indigo might have resulted in a connection with fraud and no more.
5. The FTT allowed this appeal.

HMRC has published a consultation on draft regulations to implement the Organisation for Economic Cooperation and Development (OECD) rules on mandatory disclosure of certain avoidance arrangements. Helen McGhee and Nahuel Acevedo-Peña explain the background to the new rules and their implications.

What is the history of the UK’s current disclosable arrangements regulations?

The OECD published the Model Mandatory Disclosure Rules (MDR) for CRS Avoidance Arrangements and Opaque Offshore Structures back in March 2018. The EU engineered its own version of these rules in parallel to the OECD, and these are set out in an amendment to the Directive on Administrative Cooperation, known as DAC 6.

DAC 6 was designed to give EU tax authorities early warning of new cross-border tax schemes by requiring intermediaries (including law firms, accountants and tax advisers) to file reports where arrangements met one of a number of hallmarks (in Categories A to E) that could be used to avoid or evade tax. As the UK was, at that time, an EU Member State, DAC 6 was implemented in the UK in January 2020 in the form of the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, SI 2020/25 (for the purposes of this News Analysis the UK implementing regulations are simply referred to as DAC 6). It will not have gone unnoticed that the UK has now left the EU and the government has made the decision to implement the OECD model rules to replace the somewhat controversial EU version of the rules.

Why is the government proposing to introduce new regulations?

DAC 6 prompted some concern among the professional services industry regarding the onerous level of reporting required and the increased administrative burden placed on advisers. Perhaps as a result of the uproar and certainly to reflect the UK’s more global approach to tax transparency following its EU departure, the government amended the UK regulations (to ensure they remained operative from 1 January 2021) and introduced significant modifications to achieve closer alignment with the OECD MDR.

The hope is that adoption of a global MDR further promotes country by country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled at a global level.

What is the effect of the new regulations, and what differences are there from the existing rules?

The new regulations seek to achieve the same objectives as DAC 6 in requiring the disclosure and reporting of any aggressive cross-border tax arrangements (designed to facilitate non-compliance through the use of CRS avoidance arrangements and opaque offshore structures) in order to allow tax authorities to react promptly to tackle harmful tax practices.

MDR sets out broadly similar reporting requirements for intermediaries (including promoters who design or market the arrangement, service providers who assist or aid the implementation of the arrangement and sometimes taxpayers) as DAC 6 but with some discernible differences and important exemptions.

Many of the differences between the two regimes are minor nuances in the definitions (including a reference to reportable taxpayer in the MDR as opposed to a relevant taxpayer) but importantly HMRC proposes to take a similar approach to the interpretation of these terms in the context of the MDR as it took for DAC 6.

The key differences are the exemptions: see below.

Are there any exemptions from the requirement to report?

The exemptions represent a welcome relief for many tax professionals.

The consultation document states that the regulations are intended to avoid duplicate reporting where possible. Therefore a person may be exempted from reporting where the information has already been reported to HMRC or to a tax authority in a partner jurisdiction. Of real significance (following vehement discussions with the Law Society surrounding DAC 6), there is an exemption from reporting where disclosing the information would require the person to breach legal professional privilege.

For arrangements entered into during the period between 29 October 2014 and the date the regulations come into effect, the regulations will only require reporting of CRS avoidance arrangements, and not opaque offshore structures. Additionally in this period, the reporting requirement will only apply to promoters and not to service providers or taxpayers.

There is also a very welcome de minimis exemption that applies to exempt from reporting a potential CRS avoidance arrangement where the value of the financial account is less than US$1m.

Do historic arrangements need to be reported?

CRS avoidance arrangements entered into between the publication of the CRS (29 October 2014) and the date the MDR regulations come into force will need to be reported subject to the preceding exemptions.

Are we expecting revised HMRC guidance?

HMRC intends to publish guidance on MDR once the regulations are finalised and before the rules come into effect. We can expect that the guidance will be broadly consistent with the existing guidance at HMRC International Exchange of Information Manual IEIM 600000 except where there will be tweaks to reflect the OECD model or to address any gaps in the existing guidance.

When are the new regulations expected to come into force?

The new regulations are expected to come into force in summer 2022. It should be noted that while SI 2020/25, which implemented DAC 6 in the UK, will be replaced and repealed, those regulations will still have effect in relation to arrangements entered into before the MDR regulations come into force.

Should lawyers be advising their clients to do anything now to prepare?

As with DAC 6, there will potentially need to be an audit to ensure any necessary reporting of historic arrangements. The government has acknowledged that this retrospective reporting requirement is likely to create an onerous obligation on businesses and the exemptions outlined above are designed to ease this burden. Where HMRC has previously been informed of an arrangement there is no requirement to notify again. Going forward, when reporting is required, the client must comply with its disclosure obligations within 30 days of the first step of the arrangement being implemented.

Clients ought to be aware of the differences between MDR and DAC 6 where they had previously prepared for the implementation of DAC 6.

The narrative surrounding legal professional privilege is important to note. Lawyers who are unable to report as a consequence of legal professional privilege are still required to ‘notify their client in writing of the client’s disclosure obligations (regardless of whether the client is another intermediary or a reportable taxpayer) within 30 days of the arrangement being made available or the assistance or advice being given’.

On 8 December 2021, judgment in the Post Prudential Group Litigation was handed down by the First-tier Tribunal (Tax Chamber) (“FTT”). These were appeals and applications for closure by approximately 200 taxpayers, who had made a variety of claims seeking repayment of unlawful DV tax imposed on dividends received from foreign portfolio holdings. The FTT considered the validity of these various statutory claims following decisions in test cases in the CFC & Dividend GLO, namely Claimants in Class 8 of the CFC and Dividend Group Litigation v Revenue and Customs Commissioners [2019] EWHC 338 (Ch), [2019] 1 WLR 5097 (“Class 8”) and Prudential Assurance Co Ltd v HMRC [2018] UKSC 39; [2019] AC 929 (“Prudential SC”).

The taxpayers succeeded in all the major issues raised. Some points were decided in HMRC’s favour but, as these were only argued in the alternative to the taxpayers’ main case, the ultimate result of the decision was that all of their claims succeeded.  It is of course now open for HMRC to apply for permission to appeal the decision.

In the meantime, following the Tribunal’s decision, it is now possible to make DTR claims under the extended time limit provided under s806(2), with the starting date in most circumstances being the Prudential SC decision in July 2018.  Taxpayers should note that where management expenses or other forms of losses or group relief were applied against DV income the DTR is not lost but carries forward automatically and applies against the next payment of CT on any income. Steps should be taken to ensure that the carried forward DTR is applied where it can be.  In addition, the FTT has held that EUFT can be claimed at the foreign nominal rate where s806(2) is engaged.

The full judgment in The Applicants in the Post Prudential Closure Notice Applications Group Litigation and Another vs The Commissioners for HM Revenue and Customs [2021] UKFTT 0459 (TC) (“Post-Prudential”) can be found here.

On 26 November 2021, the High Court of Justice issued its judgment in S&S Consulting Services (UK) Ltd, R (On the Application Of) v HM Revenue and Customs [2021] EWHC 3174. The case concerned the issue of availability of injunctive relief in the context of VAT deregistration appeals in the First-tier Tribunal (“FTT"). S&S also made an application for judicial review of HMRC’s decision to deregister it for VAT, which at the time of the hearing, had not yet been considered on the papers.

HMRC cancelled S&S’s VAT registration because it concluded that the company had been principally or solely registered to abuse the VAT system by facilitating VAT fraud. S&S denied any wrongdoing and claimed that it might become insolvent before the hearing of its appeal as a result of the deregistration.

It was also common ground that although S&S had lodged an appeal to the FTT, the FTT had no power to require HMRC to re-register S&S by way of interim relief pending the outcome of the appeal. S&S made an application to the High Court for relief.

Held: Application rejected.

Key points:

• The decision to grant an injunction in a public law case involves the exercise of discretion which takes into account all relevant matters, including the strength of the case advanced by the party seeking relief, but without applying a rigid test, such as requiring a ‘strong, prima facie case’.
   
• The Court considered the difference between the cases concerning alcohol approval schemes (CC&C v Revenue and Customs Commissioners [2015] 1 WLR 4043, R (ABC Ltd) v Revenue and Customs Commissioners [2018] 1 WLR 125) and the process of registering for VAT. It was held that the differences did not warrant a different approach to the Court’s grant of injunctive relief, as the processes involved were, in material terms, the same.
   
• The Court reaffirmed that, following the UK’s exit from the EU, Section 42(4) and 42(4A) of the Taxation (Cross Border Trade) Act 2018 specifically preserve the effect of EU law principles preventing the abuse of the VAT system.
   
• The Court also reaffirmed the Ablessio principle, under which HMRC is entitled to cancel a person’s VAT registration where it is satisfied that the registration is being used to facilitate fraud on the VAT system. This confirms the criteria previously followed in R. (Ingenious Construction Ltd) v HM Revenue and Customs [2020] EWHC 2255 (Admin).
   
• The allegations made by the company, that HMRC broadly misunderstood the facts and failed to consider relevant matters, did not amount to abuse of power, and were in any case points that fall within the scope of the FTT appeal.
   
• It is not an absolute rule that HMRC must always give notice of intended VAT de-registration.
   
• In respect of the substantive argument, the High Court concluded that “whilst there may be a risk of the Claimant becoming insolvent before the presently listed appeal… it has not shown that there is a sufficiently high probability that that will be so”.
   
• Further, the Court indicated approval of HMRC’s arguments on why the balance of convenience and consideration of all relevant factors in the present case comes down in favour of refusing the injunctive relief. The Court noted a question of the overall appropriateness of the order to re-register someone whom HMRC, rightly or wrongly, had found to be facilitating VAT fraud. The Court referred to the decision in R (OWD Ltd (t/a Birmingham Cash and Carry)) v Revenue and Customs Commissioners [2019] 1 WLR 4020 at [70]-[72], where the Supreme Court expressed ‘unease’ at the High Court making an order to safeguard the position of a wholesaler in the circumstances where it would involve the Court requiring HMRC to treat a trader as a fit and proper person when it had concluded that it was not.

HMRC has recently published a policy paper on its approach to tax fraud, as well as new guidance on joint and several liability notices for tax avoidance, tax evasion and repeated insolvency.

On 18 November 2021, the Court of Justice of the European Union (the “CJEU”) delivered its judgment in Case C-385/20 (Promexor Trade SRL v Directia Generala a Finantelor Publice Cluj – Administratia Judeteana a Finantelor Publice Bihor). Promexor is a Romanian company whose VAT number was revoked by the local tax authorities following a period of six months in which its VAT returns did not record any transactions subject to VAT. Under Romanian legislation, a company whose VAT number has been revoked could re-register and retroactively deduct input VAT for the period when it was not registered. However, in this case, Promexor was prevented from doing so because its director was also a shareholder of a company that was going through insolvency proceedings.

The key reasons for the CJEU finding for the taxpayer were:

• The deduction of input tax must be allowed if the substantive requirements are satisfied, even if certain formal requirements are not.
• The principle enshrined in Ablessio (C-527/11) that a Member State cannot refuse to assign a VAT number to a taxable person without legitimate grounds was reaffirmed.
• Refusing to assign a VAT number to a company merely because its director is a partner in another company which is subject to insolvency proceedings is not a legitimate ground.
• A country can continue to levy output VAT on the transactions of a taxpayer that no longer has a VAT number, provided that taxpayer can re-register for VAT purposes and deduct the input VAT paid.

CJEU Judgements after Brexit

Following the European Union (Withdrawal) Act 2018 (the “WA”), UK courts are no longer bound by principles laid down by the CJEU and general principles of EU law are not part of UK domestic law if they were not recognised as such in a case decided before Brexit. In addition, Chapter 5 of the Trade and Cooperation Agreement between the UK and the EU, which governs tax issues, does not establish any exceptions regarding VAT legislation, only obligations related to fraud.  The WA, however, does allow UK courts to consider CJEU decisions post-Brexit if they are relevant to any matter before a UK court.

Schedule 13 of the Finance Act 2020 (the “FA 2020”) introduced measures that allow HMRC to give joint and several liability notices (“JSLN”) to company directors, shadow directors and members of LLPs in certain circumstances. Although the FA 2020 came into force on 22 July 2020, HMRC only recently published a guidance note about these new powers.

JSLNs provide HMRC with a power to recover from individuals taxes that might otherwise not be paid by a corporate taxpayer.

When does it apply?

There are three cases in which these provisions apply.

      (1) Tax avoidance and tax evasion cases

The first case is when a company has entered into tax avoidance arrangements or has engaged in tax evasive conduct. Paragraph 6 establishes what comprises that type of arrangement, e.g. one for which a notice of final decision has been given under the GAAR legislation.

The conditions are: (1) that the company is subject or likely to be subject to an insolvency procedure; (2) that the individual was responsible for the company’s conduct or benefited from it; (3) that there is, or is likely to be, a tax liability related to the conduct, and (4) that there is a serious risk that the tax liability, or part of it, will not be paid.

     (2) Repeated insolvency and non-payment cases

The second case is related to repeated insolvency and non-payment. It is aimed at those who set up companies that do not pay their tax liabilities – becoming insolvent after some time – and “replace” them by setting up a new company that carries on the same business.

The conditions are: (1) that during the last five years there have been two or more old companies connected to an individual, each of which became insolvent and had a tax liability; (2) that a new company connected to the individual has been carrying on a similar business to the old ones, and (3) that the old companies have a tax liability of both more than (a) £10,000 and (b) 50% of the total amount of those companies’ liabilities to their unsecured creditors.

      (3) Penalties for facilitating tax avoidance or evasion

The third case is where a penalty for facilitating tax avoidance or evasion has been issued.

The conditions are: (1) that the company is subject or likely to be subject to an insolvency procedure; (2) that the individual was a director or shadow director of the company or a participator in it at the relevant time, and (3) that there is a serious risk that the penalty, or part of it, will not be paid.

Time limits

For tax avoidance and evasion cases, and for repeated insolvency and non-payment cases, Schedule 13 of the FA 2020 only applies to liabilities relating to any period that terminates on or after 22 July 2020. If the period started before that date, the legislation applies to the entire period. For penalties for facilitating tax avoidance or evasion, it applies only to defaults and events occurring on or after the same date.

Are there any safeguards?

Yes, Schedule 13 of the FA 2020 does contain safeguards:

• Important decisions must be taken by a properly qualified member of staff known as an “authorised officer”.
• HMRC must withdraw a JSLN given to an individual if any condition was not met when giving the notice.
• HMRC must also withdraw a JSLN given to an individual if it is not necessary for the protection of the revenue that the JSLN continues to have effect.
• HMRC must offer a review of its decision to an individual who has been given a JSLN, provided the tax liability has been established. The individual has 30 days to accept the offer.
• An individual has the right to appeal against a JSLN to the First-tier Tribunal within 30 days from the date shown on the JSLN, or from the date of HRMC’s notice informing the individual of the outcome of the review mentioned in the previous point.
• An individual has the right to take full part in the appeal hearing or to continue the appeal if the company is unable or unwilling to do so, provided the individual was given a JSLN and the company is subject to an insolvency procedure.

This article is an update from a previous article published on 20 August 2021.

On 8 October 2021, the OECD/G20 Inclusive Framework published a statement where 136 jurisdictions^[1] agreed to a global minimum tax on corporations (“GMCT”). The previous article noted that much will depend on the outcome of future political negotiations. After some negotiations, the new statement represents an improvement from the previous one, incorporating more countries.

Background

• Pillar One allocates profits (“Amount A”) to market jurisdictions whose customers contribute to the success of large MNEs without raising fiscal revenue in return. In-scope companies are MNEs with global turnover above €20bn and profitability above 10%, which has remained unchanged from the July statement.
• The GMCT is expected to raise c.$150bn in additional global tax revenues^[2].
• Pillar Two of the agreement establishes a rule consisting of a top-up tax on parent companies in respect of the low taxed income of subsidiaries, which would decrease the leverage of tax havens.
• It also incorporates another rule in the same direction, which denies deductions or requires an equivalent adjustment as an alternative to the first rule.

Changes from the previous statement

• The initiative is now supported by Estonia, Ireland and Hungary, which means that the last statement has been agreed by all 38 OECD member countries.
• For Pillar One, the Multilateral Convention (“MLC”) to implement Amount A will be developed in 2022. The new statement includes an annex setting out a detailed implementation plan.
• For Pillar Two, the new statement establishes a partial exclusion for smaller MNEs (defined as those with maximum €50m of tangible assets abroad and operation in five or less jurisdictions).
• Pillar Two also provides for a de minimis exclusion, and the new statement clarifies that this will be for jurisdictions where an MNE has revenues of less than €10m and profits of less than €1m.
• The GMCT sought to introduce a minimum corporate tax of “at least” 15%, which meant it could be higher than that. After negotiations with countries like Ireland, which has a corporate tax rate of 12.5%, the new agreement establishes a minimum corporate tax of 15%.
• Finally, the proposal incorporates a Subject to Tax Rule (“STTR”) for developing countries, applying to interest, royalties and other payments. The July statement had determined that the minimum rate for the STTR would be between 7.5% and 9%, whereas this new statement clarifies that it will be 9%. This lessens the advantage that developing countries may obtain from this provision.

Key points for the future

• Many countries have recently introduced Digital Services Taxes (“DSTs”), which are proposed to be abolished in the new statement. DSTs are broadly considered to be discriminatory by the US, so the success of the GMCT partially depends on their abolition. The joint statement signed on 21 October between the UK, France, Italy, Spain, Austria, and the US provides for DSTs to remain in force until Pillar 1 takes effect. The US and India reached a similar agreement on 24 November 2021.
• In addition, the new statement adds that no newly enacted DST will be imposed from 8 October 2021 until either (1) 31 December 2023, or (2) the coming into force of the MLC, whichever comes first. Nevertheless, the Autumn Budget confirmed that the UK will introduce an online sales tax. Whether this is considered a “relevant similar measure” to a DST will be an important discussion, particularly for the UK.
• We argued in our previous article that much of the success of the GMCT will depend on its local implementation. The new statement acknowledges that caveat, mandating the Task Force on the Digital Economy to develop model rules for domestic legislation by early 2022 in order to facilitate the incorporation of Pillar One.
• In the US, the Republican opposition is still staunchly against Pillar One,^[3] which could relocate 30% of the targeted MNEs’ global profits from the US to “market jurisdictions”. Without Republican support, it would take one Democratic senator to vote against the proposal for it to fail in the US.
• Although Ireland, Hungary and Estonia joined the new agreement, Cyprus, another EU member, has not done so yet. Some say that Pillar Two may be incompatible with the EU’s freedom of establishment under Cadbury Schweppes. Although implementing Pillar Two through an EU Directive could help the CJEU conclude that they are compatible, Cyprus could block said Directive. Whether Cyprus will eventually join this initiative remains to be seen.
• Finally, a model treaty provision to give effect to the STTR, which favours developing countries, was supposed to be published by the end of November 2021.^[4] In this regard, which types of payments fall under this special rate is likely to be the subject of future political negotiations.

^[1] 137 now with the inclusion of Mauritania on 4 November 2021.
^[2] OECD, ‘International community strikes a ground-breaking tax deal for the digital age’ (8 October 2021).
^[3] Politico, ‘Global tax deal risks having US half in, half out’ (22 October 2021).
^[4] As of 7 December 2021, it has not been published.