In Degano Transporti, the District Court of Udine (Italy) was presented with an application by Degano Transporti (“the Taxpayer”) for approval of a debt compromise arrangement similar in nature to a scheme of arrangement pursuant to the UK Companies Act 2006, Part 26. The proposed scheme of arrangement would result in the Italian tax authorities receiving only a partial payment of the Taxpayer’s VAT liability. The Court, of its own motion, requested a preliminary reference from the CJEU on the question of whether the acceptance by the Italian tax authority of a partial payment of the Taxpayer’s VAT liability would be in breach of the provisions of TFEU and the VAT Directive (Directive 2006/112/EC) concerning the principle of the fiscal neutrality and the obligation on Member States to take the necessary administrative and legislative measures to ensure the proper collection of VAT due.
The Court, largely following the Opinion of AG Sharpston, reasoned that the acceptance of the partial VAT liability would not constitute a breach of EU law. In particular, it noted three safeguards about the Italian insolvency legislation which militated in the Member State’s favour. Firstly, the legislation in question permitted the arrangement to be valid only if an independent expert attests that the tax authority, as a creditor, would not enjoy better treatment in the event of the Taxpayer being declared insolvent and subsequently liquidated. Secondly, the arrangement must be voted on by the creditors. This offered the tax authority the opportunity to oppose the partial payment of the tax liability. Thirdly, even if the arrangement is agreed between the majority of the creditors and the company, the arrangement requires court approval. During this final stage, the tax authority has a second opportunity to oppose the arrangement and demand full payment of the outstanding VAT liability. For EU jurisdictions where there is an insolvency regime similar to the Italian system, this judgment will allay the concerns of insolvency practitioners as to compatibility with EU law.
This article appears in the JHA April 2016 Tax Newsletter, which also includes:
Court of Appeal Finds for the Taxpayer
By Paul Farmer and Alex Psaltis
The Court of Appeal today handed down judgment in the Prudential Test Case in the CFC & Dividend GLO. The judgment dismisses HMRC’s appeal and upholds Henderson J’s decisions except on three minor computational issues.
The judgment is given following the ECJ’s ruling that the UK legislation in force at the material time unlawfully refused UK companies a credit for foreign underlying corporation tax paid by their foreign portfolio holdings.
The central issue was whether Prudential, as a recipient of foreign portfolio dividends, was entitled to claim a credit at the foreign nominal (or statutory) corporation tax rate (rather than at the actual underlying tax rate, which would be impossible for Prudential to prove). The Court of Appeal, upholding Henderson J’s judgment, held that Prudential could claim either a nominal rate credit or an actual tax credit. Prudential therefore succeeded on its claim, and it was unnecessary for the Court to consider whether the EU principle of effectiveness exempted Prudential from the need to show the actual tax paid in order to make its claim. HMRC had agreed that in that event Prudential’s claims in relation to dividend income from non EU countries would also succeed.
HMRC were refused permission to raise the argument that in the event that credit was given at the nominal rate, that nominal rate should be the rate of the profit source of the dividend (which again would be impossible for Prudential to prove) as opposed to that of the foreign dividend paying company. The Court also rejected HMRC’s attempt to run a series of other new or late points, including limitation, change of position and the argument that the flow of the EU income through and out of the UK group had to be traced in order to determine the amount of unlawful ACT. That argument was also rejected on its merits.
The Court found that the conforming interpretation previously given by the Court of Appeal to section 231 ICTA 1988 in Test Claimants in the FII Group Litigation v HMRC [2010] EWCA Civ 103 provided the answer to how to determine the amount of unlawful ACT. The Court considered that the conforming interpretation to section 231 described in the FII case was to be achieved by modifying section 231 to create a tax credit in respect of foreign dividends assessed by reference to the relevant foreign nominal or effective rate of tax (whichever is the higher), capped at the UK nominal rate of tax. This interpretation meant that no change was needed to the other ACT provisions which ought to operate in the normal way on the tax credit in respect of the foreign dividends.
The Court held that it was bound by the Court of Appeal’s decision in Littlewoods establishing the right to compound interest on repayments of unlawful tax (but noted that the decision was the subject of a pending appeal in the Supreme Court).
This article appears in the JHA April 2016 Tax Newsletter, which also includes:
The Court of Justice has recently given judgment in a case concerning the VAT liability of claims settlement services. The case concerned a company established in Poland that supplied comprehensive services for the settlement of insurance claims.
The Court considered first of all whether the services provided consisted of insurance transactions covered by the exemption in Article 135(1)(a) of the VAT Directive, defined in the case-law as transactions where “the insurer undertakes, in return for prior payment of the premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded”. The Court found that the transactions were not insurance transactions. The company tried to argue that, by analogy with financial services, its services could benefit from the exemption because they formed a “distinct whole” and fulfilled “the specific, essential functions” of the insurance transactions. The Court rejected this argument, emphasising the difference in wording between the exemptions for insurance transactions and the exemptions for transactions concerning or relating to certain banking operations. The Court emphasised that this finding was not called into question by the principle of fiscal neutrality. That principle cannot extend the scope of an exemption in the absence of clear wording to that effect because it is not a rule primary law but rather a principle of interpretation to be applied concurrently with the principle of strict interpretation of exemptions.
The Court also found that the services could not benefit from the exemption for “services related” to “insurance and reinsurance transactions, … performed by insurance brokers and insurance agents”. The company was able to meet the first of the necessary conditions, namely that the service provider must have a relationship with both the insurer and the insured party. In this case the company was in a direct relationship with insurance company, performing activities in the name and on behalf of the insurance company. It also had an indirect relationship with the insured party in the context of the examination and management of claims. However, It was unable to meet the second condition, namely that the activities must cover the central aspects of the work of an insurance agent, such as the finding of prospective clients and their introduction to the insurer.
An interesting aspect of the judgment is that the Court commented that it was not necessary, as the UK Government had maintained, to refer to other European legislation in which the concepts such as insurance mediation, or the business activities of insurance brokers or agents were defined, because that legislation pursued a different object from that of the VAT Directive.
On 17 June 2016, the Council’s presidency put forward a compromise text regarding the Commission’s proposed Anti-Tax Avoidance Directive, subject to a silence procedure that ended at midnight on 20 June 2016. The draft Directive covers all taxpayers that are subject to corporation tax in a Member State as well as the subsidiaries of such companies based in third countries.
The compromise text, which reportedly drops the switch-over clause from the ambit of the draft Directive, lays down rules in the following five specific fields:
According to the Council, the draft directive will ensure that the OECD anti-BEPS measures will be implemented by all EU Member States, including non-OECD members.
As the silence procedure expired today without any objections, the draft Directive will be submitted to the Council for adoption at an upcoming meeting.
Court of Appeal confirms stricter approach to breach of tax tribunal orders
The Court of Appeal has held that it is appropriate for tax tribunals to apply the stricter approach to compliance with rules and directions made under the CPR as set out in Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537 and Denton v TH White Ltd and other appeals [2014] EWCA Civ 906 when dealing with non-compliance.
The case before the Court concerned whether the First-tier Tribunal (FTT) was right to debar HMRC from further participation in the substantive proceedings before the FTT for their serious and prolonged breach of an order requiring them to give proper particulars of their pleaded case against the appellant, BPP Holdings. The appeal turned on the proper approach of tax tribunals in cases where there has been breach of an order.
The Court of Appeal held that there was nothing in the wording of the overriding objective of the tax tribunal rules that was inconsistent with the general legal policy described in Mitchell and Denton. Further, it could see no justification for a more relaxed approach to compliance with rules and directions in the tribunals: the tribunal’s orders, rules and practice directions are to be complied with in like manner to a court’s.
In allowing the appeal, the Court restored the order of the FTT debarring HMRC from further involvement in the proceedings.
The decision resolves the previous conflict between the Upper Tribunal decisions in Leeds City Council v HMRC [2014] UKUT 0350 (TCC) and HMRC v McCarthy & Stone (Developments) Ltd and another [2014] UKUT B1 (TCC).
The Chancellor’s Budget delivered to Parliament on 16 March 2016 contained, as usual, a significant number of tax reforms relevant to EU claims and cross border transactions including:
Hybrid Mismatch Arrangements
In response to the OECD Report on hybrid mismatches, the Bill seeks to deal with tax mismatches involving permanent establishments. The legislation tackles perceived aggressive tax planning, typically involving multinational groups, where either one party gets a tax deduction for a payment while the other party does not pay tax on the receipt, or where there is more than one deduction for the same expense. The legislation will have effect from 1 January 2017.
BEPS
New rules will be introduced to limit the tax relief that companies can claim for their interest expenses. In October 2015, the OECD published its recommendations for best practice in this area as one of the outputs from its BEPS project. The government has consulted on the merits and general framework of the recommendations and has decided to introduce rules to limit interest deductions by companies. Existing commercial arrangements within the oil and gas ring-fence regime will not be adversely affected. The new rules will come into effect from 1 April 2017.
Royalty Payments
Provisions will be included to widen the circumstances in which withholding tax must be deducted from payments of royalties to persons not resident in the UK and to counter the use of contrived arrangements involving double taxation treaties to obtain relief from withholding taxes on royalties. The changes preventing the use of contrived arrangements have effect for payments made on or after 17 March 2016. The changes to widen the circumstances in which withholding tax must be deducted from payments of royalties will be introduced later in the passage of Finance Bill 2016 and will have effect for payments made on or after the date of Royal Assent to the Finance Bill 2016.
Some Other Provisions
The Finance Bill will be published on 24 March 2016.
This article appears in the JHA March 2016 Tax Newsletter, which also features:
By Jivaan Bennett
The High Level Working Party (Taxation), a Council preparatory body, decided in 2014 that a concrete roadmap was necessary to address the issues of unfair tax competition, base erosion and profit shifting in the EU context (“EU BEPS”). Following from the Commission’s launch of its Anti-Tax Avoidance Package on 28 January 2016 (see our February newsletter), the Dutch Presidency has set out its key objectives. In the short term, the two principal legislative developments will be:
In the medium term, the Dutch Presidency will undertake work on transfer pricing, outbound payments (payment flowing out of the EU), disclosure of aggressive tax planning, beneficial ownership of non-transparent entities, dispute settlement in the area of transfer pricing and the conditions and rules for the issuance of tax rulings.
This article appears in the JHA March 2016 Tax Newsletter, which also features:
Breaching Orders in the Tax Tribunal
Tax Tribunals are to apply the strict approach to compliance with rules and directions under the CPR as set out in Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537 and Denton v TH White Ltd and other appeals [2014] EWCA Civ 906.
The Court of Appeal held that the First-tier Tribunal (FTT) was correct to debar HMRC from continuing participation in the FTT proceedings for their serious and prolonged breach of an order requiring them to give proper particulars of their pleased case against the appellant, BPP Holdings. In so finding, the Court of Appeal held that there was nothing in the wording of the overriding objective of the tax tribunal rules that was inconsistent with the general legal policy described in Mitchell and Denton. There was no justification for a more relaxed approach to compliance with rules and directions in the tribunals.
This article appears in the JHA March 2016 Tax Newsletter, which also features:
Income tax avoidance on bankers’ bonuses
Section 425(2) Income Tax (Earnings and Pensions) Act 2003 exempts employment-related “restricted securities” from income tax. Pursuant to ss420(1) and 423(2) ITEPA, “restricted securities” include shares which are subject to forfeiture if certain circumstances arise or do not arise.
UBS AG (“UBS”) and DB Group Services (UK) Ltd (“DB”) awarded redeemable shares to its employees, as opposed to paying bonuses directly, in a special purpose offshore company established solely to facilitate the avoidance of income tax. Conditions were attached to the shares, which were removed after a short time thereby allowing the employees to redeem their shares for cash.
The Supreme Court, construing the legislation purposively, held that, since Part 7 was intended to counteract opportunities for tax avoidance, Parliament could not have intended to encourage the award of shares to employees where this had no purpose other than obtaining an exemption from income tax. The Court therefore concluded that the exemption for “restricted securities” should be construed as limited to provision for a commercial or business purpose. This precluded the UBS and DB bonus schemes from exemption.
This article appears in the JHA March 2016 Tax Newsletter, which also features:
Originally printed in Tax Journal on 26 Feb 2016.
The recent judgment of the Court of Justice in Scotch Whisky Association and Others v Lord Advocate and Advocate General for Scotland (C-333/14) (23 December 2015) provides further guidance on how national courts in the EU should review legislation restricting trade. The CJEU decided that excise duty, rather than a minimum selling price, was the correct mechanism to combat the evils of alcohol abuse. In doing so, the court applied a much more stringent proportionality test when deciding whether measures equivalent to quantitative restrictions could nevertheless be justified under TFEU article 36. However, in applying this strict proportionality test and considering alternative measures, the court showed no regard for the member state’s devolution arrangements and the actual powers of the authority by which the contested measure was adopted. The case highlights the complexities of policy making where both the legislative competence of a devolved administration and compatibility with EU law need to be considered.
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