On 22 January 2016 Henderson J awarded summary judgment to a number of claimants in the FII GLO on their claims for restitution of ACT paid on foreign income dividends (FIDs).
The judge found that the FID issue in the FII GLO has now been conclusively determined in the BAT test case and that the claimants’ FID claims were in an identical position to the BAT claimants. Accordingly, they were entitled to final judgment on that part of their claim, and their applications for summary judgment were largely successful.
It was determined in the Sempra Metals case that the time value of ACT between payment and repayment is calculated on a compound interest basis and in FII (High Court) II that the rate was a 10 year moving average of the yield on 10 year gilts compounded 6 monthly (i.e. the rate applied in valuing the FID claims). Those issues are no longer in dispute and therefore the Judge accepted that the claimants’ claims are to be computed on that basis.
However, the issue of whether simple or compound interest should be awarded for the period following repayment of the ACT is still being litigated in the Littlewoods case, which has now been granted permission to appeal by the Supreme Court (see below). The judge therefore concluded that the claimants are not at present entitled to final judgment for that portion of the compound interest claim. That issue has now been put on hold pending determination of the Littlewoods litigation.
This article appears in the JHA February 2016 Tax Newsletter, which also features:
On 28 January 2016, the European Commission presented a seven-part draft Anti-Tax Avoidance Package (ATAP). Following the European Commission’s strong support for the BEPS (Base Erosion and Profit Shifting) Final Recommendations, published in October 2015, the ATAP seeks to co-ordinate the response by EU Member States to corporate tax avoidance so as to usher in an era of fair taxation. Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, stated:
“Europeans and businesses that play fair end up paying higher taxes as a result. This is unacceptable and we are acting to tackle it. Today we are taking a major step towards creating a level-playing field for all our businesses, for fair and effective taxation for all Europeans.”
The ATAP is based on three core pillars: (1) Ensuring effective taxation in the EU; (2) Increasing tax transparency; and (3) Securing a level playing field.
To that end, the ATAP includes a number of wide-ranging proposals and recommendations. These include:
(i) The introduction of an Anti-Tax Avoidance Directive (ATAD) – The ATAD aims to address tax planning by introducing six legally-binding rules, namely a CFC rule, a switchover rule (to address double non-taxation), rules pertaining to exit taxation, interest limitation and hybrids and a general anti-abuse rule. The Commission aims to have the ATAD adopted within six months so that it may come into effect from 1 January 2017.
(ii) A Commission Recommendation on Tax Treaties which advises EU Member States to protect their tax base from treaty abuse while complying with EU law. The recommendation draws in part from the Final Recommendation of BEPS Action 6 namely the principal purpose test.
(iii) The revision of the Administrative Cooperation Directive – The proposed revised rules, which give effect to BEPS Action 13, will see national authorities exchange tax-related information on the activities of multinational companies on a country-by-country basis (CbC reporting). The Commission hopes to have the new rules in effect from 1 January 2017.
(iv) The re-launch of the Common Consolidated Corporate Tax Base (CCCTB) proposal – The Commission considers the CCCTB as a key tool to address BEPS concerns. As such, it hopes to adopt a revised CCCTB proposal by autumn 2016.
(v) A Communication on an EU External Strategy for Effective Taxation – This non-binding instrument sets out the Commission’s views on achieving a harmonised approach by EU Member States for tackling base erosion threats from outside of the EU. The Communication calls for various measures such as “tax good governance clauses” in trade agreements between Member States and third countries.
The two legislative proposals [(i) and (iii) above] will be presented to the European Parliament for consultation and to the Council for adoption. It is expected that the Council and Parliament will endorse the Recommendation (ii) and that Member States will apply its principles when revising their tax treaties. Finally, the Commission calls upon Member States to endorse the new External Strategy and give “high political priority to their implementation.”
As a whole, the ATAP represents a monumental shift in the landscape of European tax law. We shall continue to monitor the progress of these new proposals and keep you up to date of the potential impact of these measures.
This article appears in the JHA February 2016 Tax Newsletter, which also features:
On 27 January 2016, 31 countries, including the UK, signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of Country-by-Country reports so as to implement the Final Recommendations of BEPS Action 13.
Through Country-by-Country (CbC) reporting, the tax authorities of jurisdictions (party to the MCAA) where a company within a multinational group operates will receive aggregate information annually. This will begin with 2016 accounts and will cover information relating to the global allocation of income and taxes paid, along with other indicators pointing to the location of economic activity within the multinational group. It will also cover information about which entities do business in a particular jurisdiction and the business activities in which each entity engages. The information will be collected by the country of residence of the multinational group, and will then be exchanged through exchange of information supported by MCAA. First exchanges will start in 2017-2018 on 2016 information.
The 31 jurisdictions signing the MCAA are: Australia, Austria, Belgium, Chile, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Mexico, Netherlands, Nigeria, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland and United Kingdom.
This article appears in the JHA February 2016 Tax Newsletter, which also features:
The European Commission has requested that the Netherlands amend the limitation of benefits clause in its double taxation treaty (DTT) with Japan. Article 21 of the DTT limits key treaty benefits (exemption from source state taxation) in respect of certain classes of income paid to “qualified persons. Residence in the Netherlands is crucial to derive the benefits of the DTT.
The Commission is challenging the differential treatment which Japan will apply to specific items of income and paid to persons who do not satisfy the limitation of benefits test and, in particular, the Dutch residence requirement. The Commission drew from previous authorities (Open Skies C-466/98 and Gottardo C-55/00) where the ECJ held that EU law forbids Member States from entering into an agreement with a third state which permitted that third State to discriminate, to the benefit of residents of that Member State, against persons who are resident in other Member States.
Many will observe the development of this matter especially as the Limitation of Benefits clause was one of the recommendations of the OECD BEPS Action Plan 6. While double taxation treaties have been the subject of several ECJ decisions, the authorities cited by the Commission did not involve taxation. In the new BEPS era where the EU institutions have awoken to the threat of “industrial-scale tax avoidance”, it is left to be seen if the principles enunciated in Open Skies and Gottardo will be successful.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
HMRC has updated VAT Notice 701/14 to clarify whether Scottish snowballs are liable for VAT.
The notice provides that most “food of a kind used for human consumption” is zero-rated, but that there are some exceptions. In 2014, HMRC challenged the zero-rate on Scottish snowballs relying on a previous decision which had considered Swedish snowballs to be liable for VAT. However, the first tier tax tribunal in Edinburgh dismissed HMRC’s challenge. It found that, although not everyone would consider a snowball to be a cake, it looks like a cake and would not look out of place on a plate of cakes. Moreover, the snowball shared other characteristics with a cake, namely the ‘mouth feel’ and the difficulty of consuming it whilst walking or in the street.
HMRC has therefore confirmed in the notice that Scottish snowballs, defined as “a dome of marshmallow coated with chocolate or coconut, aerated and boiled (not baked), they have a short shelf life and harden rapidly when removed from the packet”, are not liable for VAT.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
Income tax payable on contributions to employee benefit trusts
This appeal to the Scottish Court of Session concerned the income tax treatment of sums paid by the Appellants into an employee benefit trust where sub-trusts were set up for the benefit of each employee and/or his family. The EBT arrangements in question pre-dated the introduction of the disguised remuneration legislation (ITEPA, Pt 7A). No income tax at source (PAYE) was applied by the Appellants in making the payment into the trusts. The employee was entitled to apply for a loan from the relevant sub-trust. The sums settled on the sub-trust would be almost invariably applied in accordance with the wishes of the employee.
From a tax perspective, the key issue was whether the scheme represented a mere redirection of earnings (as defined in ITEPA, s. 62) such that the employees’ liability to income tax subsisted. The court found that the critical feature of an emolument and of earnings is that they represent the product of the employee’s work. As such, the sums transferred to the EBT did constitute “earnings”. That they were paid to a third party was irrelevant. Neither the existence of contractual obligation upon the employer to pay the sum nor an absolute transfer of funds to the employee were considered essential for earnings to be taxable under the general charge to tax under ITEPA (s. 6).
In light of the introduction of follower and accelerated payment notices in Finance Act 2014, taxpayers with similar (unresolved) EBT arrangements will be interested to see whether the remaining Respondent (the other four being in liquidation) will seek to appeal this decision to the Supreme Court.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
VAT – Special Investment Funds
The ECJ has given a preliminary ruling as to whether the exemption from VAT for the ‘management of special investment funds’ within Article 13B(d)(6) Sixth Council Directive 77/388/EEC extends to the management of the underlying properties of a real estate fund. Case C-595/13 Fiscale Eenheid X N.V. concerned a fiscal group (FEX), of which one of the members, A Beheer BV, provided management services to several pension funds for the purchase, sale and exploitation of real estate. The Dutch courts referred two questions to the ECJ.
The first was whether a special investment fund can include a real estate fund. The ECJ held that there was nothing in the definition of ‘special investment funds’ that limited investments by ‘type’. In principle, a real estate fund is therefore capable of qualifying for the exemption. The ECJ did, however, hold that the fund must be subject to State supervision and must demonstrate the characteristics necessary to place it in direct competition with other forms of investment.
The second was whether the term management included the actual management of the company’s real estate, which the company has entrusted to a third party. The ECJ held that the term management only covers transactions ‘specific’ to the business of the special investment fund. This would include the purchase and sale of the immovable property, but not the actual management of the properties because that is not ‘specific’ to the business of the fund.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
In this appeal to the First-Tier Tribunal (FTT), the taxpayer argued that VAT repayments (and related interest) due to it were not subject to corporation tax. The taxpayer, which operated full-service food and drink vending machines, had wrongly treated both hot and cold drinks as subject to VAT at the standard rate and accounted such VAT to HMRC. The taxpayer’s argument was that it could freely choose to claim repayment of tax under any one of three mechanisms – (i) statutory claim under the VAT Act (ii) a claim for restitution of tax wrongly-collected (Woolwich claim), or (iii) a mistake-based restitution claim (a DMG claim). The taxpayer argued that it had wished to make its claim to repayment of VAT in reliance on the mistake-based route. Flowing from this argument was the assertion that HMRC should disgorge itself fully of the benefit of the wrongly collected tax and that subjecting the repayment of VAT and interest to corporation tax runs contrary to the basic foundations of the restitutionary remedies available for wrongful enrichment.
The FTT disagreed with this argument however. The FTT noted that in relation to the interest to be paid to the taxpayer, it (FTT) had no jurisdiction to determine whether it represented an “adequate indemnity”. If the statutory rate of interest did provide an adequate indemnity for the lost time value of the VAT wrongly-paid to HMC, then there could hardly be any question of the taxpayer invoking a wrongful enrichment argument as the statutory regime would apply. Moreover, the Tribunal found that, firstly, the common law remedy of disgorging all the benefits of an unjust enrichment could not result in the disapplication of corporation tax. Further, the VAT repayment and interest earned on it would have been taxable in the hands of the taxpayer had it not been paid mistakenly to HMRC. Therefore, the principle of effectiveness was satisfied where the taxpayer was repaid interest that was equally taxable.
Many would have been following this case with enthusiasm not only because of the legal points in question, namely, the income tax implications surrounding employee benefit trusts (EBTs) but also because one of the Appellants was the owner of Scottish Championship team, Rangers FC.
This appeal to the Scottish Court of Session concerned the income tax treatment of sums paid by the Appellants into an employee benefit trust following which sub-trusts were set up for the benefit of each employee and/or his family. The EBT arrangements in question pre-dated the introduction of the disguised remuneration legislation (ITEPA, Pt 7A). No income tax at source (PAYE) was applied by the Appellants in making the payment into the trusts. The employee would be entitled to apply for a loan from the relevant sub-trust. The sums settled on the sub-trust would be almost invariably applied in accordance with the wishes of the employee.
Before the Court of Session, several interesting legal points were raised. From a tax perspective, a key issue was whether the scheme represented a mere redirection of earnings (as defined in ITEPA, s. 62) such that the employees’ liability to income tax subsisted.
The court found that the critical feature of an emolument and of earnings is that they represent the product of the employee’s work – his personal exertion in the course of his employment. As such, the sums transferred to the EBT did constitute “earnings”. The fact that such product of the employee’s work was paid to a third party was irrelevant. Likewise, the court viewed that neither the existence of contractual obligation upon the employer to pay the sum nor an absolute transfer of funds to the employee as being essential for earnings to be taxable under the general charge to tax under ITEPA (s. 6).
In light of the introduction of follower and accelerated payment notices in Finance Act 2014, taxpayers with similar (unresolved) EBT arrangements will be interested to see whether the remaining Respondent (the other four being in liquidation) will seek to appeal this decision to the Supreme Court.
The most recent version of the Finance Bill 2015 making its way through Parliament (published on 21 October 2015) introduces a new special rate of corporation tax for restitution interest paid by HMRC to companies. Where certain conditions are satisfied and, notably, where the rate of interest is greater than the statutory rate, interest payable by HMRC to companies will be treated as restitution interest subject to a ringfenced 45% corporation tax charge. HMRC will collect this tax at source when making payments to the companies. The new measures are not the first time the UK has sought to introduce legislation limiting claims made by taxpayers, particularly claims based on EU law. It remains to be seen whether they would survive the scrutiny of domestic or European courts.
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