Global Tax Disputes Update – June 2016

Global Tax Disputes Update – June 2016

Welcome to the June 2016 edition of our quarterly Global Tax Disputes Update, bringing you the latest news in tax controversy around the world.

Global Head of Dispute Resolution & Controversy

KPMG in the U.S.

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Welcome to the June 2016 edition of our quarterly Global Tax Disputes Update, bringing you the latest news in tax controversy around the world.


With tax audit and disputes activity rising in almost every country, keeping up with trends and developments is more important than ever. In this edition, you’ll find briefings on key news, events and thought leadership submitted by Global Tax Dispute Resolution & Controversy professionals in KPMG member firms worldwide. Staying informed can be a crucial first line of defense as you manage your disputes around the globe.

Make sure to view our past issues of the Global Tax Disputes Update.
 

In this issue:

    

Global highlight:

Webcast series: Around the World with KPMG's Global Tax Dispute Resolution & Controversy Network

Today’s fast-paced tax landscape is making it more challenging for global organizations to protect against, prepare for, and resolve disputes with tax authorities. Our KPMG International tax experts are hosting a series of five webcasts, focusing on the latest developments in tax disputes around the world. Click here to register for the fourth of the webcast series, which will explore the latest developments in Nigeria, South Africa and Turkey, as well as view past and upcoming webcasts from this series.

Australia

ATO position on potential compliance risk areas

The Australian Taxation Office (ATO) has issued draft Practical Compliance Guideline PCG 2016/D1, which outlines the nature and role of Practical Compliance Guidelines (PCG) within the framework of public guidance already provided by the ATO.

PCGs will set out the ATO’s position on potential compliance risk areas. The ATO describes the benefit of PCGs as allowing taxpayers to “position themselves within a range of behaviors, activities or transaction structures that the ATO describes as low risk and unlikely to require scrutiny – to safely ‘swim between the flags’.”

Read the article.

Proposal for diverted profits tax

Australia’s government announced as part of the 2016 federal budget an intention to introduce a diverted profits tax (DPT) with effect for income years beginning from 1 July 2017. Broadly, the DPT would target arrangements with ‘insufficient economic substance’ between an Australian entity and an overseas related party that is taxed at a rate less than 80 percent of the applicable Australian tax rate. No grandfathering of existing arrangements is proposed.

Read the article.

Related-party foreign currency borrowings and cross-currency swaps

The Australian Taxation Office is continuing its focus on the currency in which taxpayers undertake transactions. Most recently, Taxpayer Alert 2016/3 considered related-party foreign currency denominated borrowings together with associated related-party cross-currency swaps.

Read the article.

Tax provisions in federal budget 2016

Among new measures announced in Australia’s federal budget for 2016 are a new anti-avoidance measure, anti-hybrid rules, a new transparency regime and whistle-blowing rules.

Read the article.

Austria

Accounting errors found during tax audits

In a recent publication, the Austrian Ministry of Finance stated that accounting errors leading to a deductible expense (e.g. non-deductible input VAT) detected in the course of a tax audit have to be considered in the year the (additional) tax claim materializes and not in the year the respective error was accounted for.

Read the article.

Brazil

Tax voluntary disclosure program, repatriation of assets

A newly enacted voluntary disclosure program in Brazil provides a pathway for repatriating previously undeclared or underreported assets held abroad with respect to tax periods prior to 31 December 2014.

The provisions1 allow taxpayers to declare assets held abroad or to revise incorrect data about their assets, including bank deposits, investments, insurance policies, loans, pension plans, stocks, equity investments, intangible assets and real estate. The provisions also apply to certain automobiles, airplanes and private boats (subject to lien provisions). The tax will be imposed at a rate of 15 percent (e.g. the capital gains tax rate as of the end of 2015).

In determining the value of the assets, taxpayers are to convert the value into US dollars (USD) and then into Brazilian real (BRL). The deadline to participate in this program is generally 210 days from the date of publication of the law on 14 March 2016.

Read the article.

1Lei nº 13.254 de 2016, published in the official gazette on 14 March 2016.

Bulgaria

Tax agency inquiries, personal use of company assets

Bulgaria’s tax authorities have been requesting information from companies concerning tax issues relating to the personal use of company assets.

Companies have been required to clarify the value added tax (VAT) treatment of goods used and services provided for the personal use of company owners and employees or for purposes other than those related to the economic activity of the business.

Read the article.

Canada

Intercompany dividends may trigger anti-avoidance rule

Canadian corporations that receive dividends from other Canadian corporations now have more guidance from the Canada Revenue Agency about the potential application of an expanded anti-avoidance rule. Many corporations may be adversely affected by this rule, which re-characterizes certain otherwise tax-free inter-corporate dividends as taxable capital gains. This expanded rule would apply to dividends received after 20 April 2015.

Read the article.

Procedures for exchange of tax rulings under BEPS rules

The Canada Revenue Agency issued a technical interpretation outlining the types of rulings that potentially may be shared with other countries under Canada's new commitment to exchange information on certain tax rulings. The technical interpretation also confirms that pre-ruling consultations will be made a permanent part of the advance income tax ruling service.

Read the article.

Czech Republic

Transfer pricing examination trends

It has been almost 1 year since the Czech Republic introduced a requirement that taxpayers include in an appendix to their corporate income tax returns information summarizing transactions with related parties. Accordingly, it is not surprising that tax inspections primarily have tended to examine companies that reported losses in 1 or more tax periods while listing material transactions with related parties. Corporations showing significant fluctuations in profit also have attracted the tax administration’s interest.

Read the article.

China

Participation in global tax initiatives on BEPS and CRS

Against the backdrop of the May 2016 meeting of the Organisation for Economic Co-operation and Development Forum on Tax Administration in Beijing, China’s State Tax Administration intended to showcase its efforts to adhere to global initiatives—such country-by-country reporting pursuant to the base erosion and profit shifting (BEPS) project and the automatic exchange of information under common reporting standard (CRS).

Read the article.

Denmark

Interest deductions denied under thin cap rules but allowed for Danish resident companies

The Advocate General of the Court of Justice of the European Union recently considered a case concerning Danish rules that allow for a tax exemption on interest income if the corresponding interest deduction is denied due to thin capitalization rules but, in effect, only if the debtor company is resident in Denmark.

Read the article.

Transfer pricing adjustment statistics, trends and forecast

The Danish tax authorities published an annual report of last year’s transfer pricing statistics. The report reveals a steady high number of tax audits and taxable income adjustments – but one that is significantly lower than previous years’ results. For 2015, the total income adjustments amounted to 5.9 billion Danish kroner ((DKK) approximately 0.79 billion euros (EUR)).

Read the article.

European Union

‘Domestic sale’ concept mitigates ‘first sale’ repeal

The European Commission has issued updated draft guidance clarifying that a ‘domestic sale’ is not to be considered when establishing the customs value of imported goods.

Draft guidance from the EC in early April 2016 implied that a domestic sale would not be considered when establishing the customs value of imported goods. However, the domestic sale concept was neither defined nor explained.

Read the article.

Draft anti-tax avoidance package includes recommendations for ‘blacklist’ countries

On 13 May 2016, the European Commission published draft Council conclusions on its Communication on an External Strategy for Effective Taxation and on the Commission Recommendation on the implementation of measures against tax treaty abuse. The draft conclusions indicate, among other things, that the Council may endorse a European Union list of non-cooperative jurisdictions in 2017.

Read the article.

No agreement on anti-avoidance directive, exchange of tax information

On 25 May 2016, the Economic and Financial Affairs Council (ECOFIN) met to discuss and agree on its position on the draft anti-tax avoidance directive (ATAD). Although the Dutch Presidency, the Commission and a number of member states pressed for adoption of the current draft Presidency compromise on the ATAD, no agreement was concluded and the matter has been postponed until the next ECOFIN meeting.

Read the article.
 

Notice intended to clarify ‘state aid’ concept

On 19 May 2016, the European Commission published a 68-page notice that clarifies the key concepts relating to the notion of ‘state aid’. The aim of the notice is to contribute to an easier and more transparent and consistent application of the notion of state aid and to help (among others) tax authorities and companies to identify when measures can be granted without needing approval under EU state aid rules.

Read the article.

Response to consultation, double taxation dispute resolution mechanism

On 16 February 2016, the European Commission launched a public consultation on double taxation dispute resolution mechanisms to gather views on how the current dispute resolution mechanisms operate and how they can be improved.

KPMG member firms and professionals from KPMG’s Global Transfer Pricing and Dispute Resolution Practices, supported by KPMG’s EU Tax Centre, took the opportunity to reply to the questionnaire and submit a further explanatory memorandum summarizing their position on this issue.

Read the article.

‘State aid’ and transfer pricing rulings

The European Commission on 19 May 2016 issued a communication concerning the concept of ‘state aid’ and in particular concerning tax rulings and settlements. The communication refers specifically to the arm’s length principle and guidance provided in the Organisation for Economic Co-operation and Development’s transfer pricing guidelines for assessing whether transfer pricing rulings constitute state aid.

Read the article.

State aid investigations of tax rulings, response to US concerns

The European Commission’s state aid investigations have prompted concerns among some US politicians and officials that US companies are being unfairly targeted, creating potential compliance issues under current international tax standards. Recent developments in this area are as follows:

  • The European Commission issued a letter Treasury Secretary Jack Lew to respond to these concerns. Read the article.
  • In May 2016, members of the US Senate Finance Committee today wrote to the Treasury Secretary Jack Lew, calling on him to continue ‘aggressive engagement’ with the EC with respect to tax rulings issued to US companies. Read the article.
  • A Treasury Department official has responded to a request from the Senate Finance Chairman that Treasury consider whether, under the US tax code, US corporations are being subjected to discriminatory taxation regarding the EC’s investigations.Read the article.

Summary of CJEU judgments, infringement actions

A round-up of recent decisions of the Court of Justice of the European Union (CJEU) and other European courts includes findings that:

  • the Belgian Net Asset Tax applying to foreign investment funds marketing their units in Belgium is compatible with European Union (EU) law
  • Finnish national legislation setting out the rate of tax applicable to income from a retirement pension does not breach EU prohibitions against age discrimination
  • German legislation introducing an option for EU/European Economic Area resident taxpayers to apply for unlimited tax liability in order to benefit from a higher tax allowance (which would be applicable to residents) when donating a German piece of land is contrary to the free movement of capital.

Read the article.

France

Rental car website subject to VAT rules for travel agencies

 

A court in France determined that a company operating a website that allows customers to compare the rates of various car rental companies, reserve vehicles and receive information and advice about car rentals was providing travel agent services. As such, the website was subject to the special value added tax (VAT) rules under the ‘margin scheme’.

Read the article.

India

APA for earlier year may apply, determining ‘tested party’

The Delhi Bench of the Income-tax Appellate Tribunal held that foreign related parties that are the ‘least complex’ entities in the transaction must be selected as tested parties for the purpose of determining arm’s length nature of international transactions. While doing so, the tribunal considered a prior advance pricing agreement reached between the taxpayer and the Central Board of Direct Taxes based on similar facts.

Read the article.

Brand promotion expenses not ‘international transaction’ for arm’s length standard

The Bangalore Bench of the Income-tax Appellate Tribunal held that advertising, marketing and sales promotion expenses to promote brand value were incurred only for increasing the taxpayer’s sales, and not those of the foreign related party. Accordingly, even when these expenses were greater than those of comparable companies, without an agreement between the taxpayer and the foreign related party, these expenses were not an ‘international transaction’. As such, the arm’s length price standard does not arise.

Read the article.

Company liable despite consideration paid directly to shareholders

The Delhi High Court held that ‘partial consideration’ for a business transfer, received directly by the transferor company's shareholders pursuant to an arrangement, would form part of the total consideration accruing to the transferor company for the purposes of computing capital gains tax.

Read the article.

Exploration, mining services not PE under treaty with Germany

The Mumbai Bench of the Income-tax Appellate Tribunal held that consultancy services for exploration, mining and extraction rendered by a German company do not constitute a permanent establishment (PE) in India under the India-Germany income tax treaty.

Read the article.

Income from container services; no PE under Singapore treaty

The Mumbai Bench of the Income-tax Appellate Tribunal held that income arising from container services cannot be treated as income arising from a shipping business because the taxpayer did not own, charter or lease any vessel or ship. The tribunal concluded that the income was taxable as business income, but in the absence of a permanent establishment under the India-Singapore income tax treaty, none of the income was taxable in India.

Read the article.

Indirect transfers of assets; royalties under UK treaty

The Bangalore Bench of the Income-tax Appellate Tribunal held that a payment received by a UK resident from its Indian affiliate under a management and administrative services agreement was taxable as a royalty under the Income-tax Act, 1961 as well as under the India-United Kingdom income tax treaty. The tribunal noted that to qualify as a ‘royalty’, there must be an imparting of experience and information by the taxpayer to the Indian company.

Read the article.

No aggregation of transactions for benchmarking in unusual circumstances

The Delhi High Court rejected the taxpayer’s aggregation or bundling of imports of component parts under the transactional net margin method because the facts in this case demonstrated that the import arrangements, when viewed in their totality, differed from those that would have been made by independent enterprises acting in a commercially rational manner. The High Court upheld the approach of the Transfer Pricing Officer to benchmark the transactions pertaining to imports of the component parts separately.

Read the article.

Outsourcing services not PE under UK tax treaty

The Delhi Bench of the Income-tax Appellate Tribunal held that a taxpayer engaged in outsourcing services had a ‘business connection’ in India under the Income-tax Act but did not have a permanent establishment (PE) under the India-UK income tax treaty. Since there was no PE in India, the business income was not chargeable to tax in India. Even if there were a PE in India, no profit would be attributed because the PE was compensated at an arm's length price.

Read the article.

Virtual voice network-related payments, not taxable under UK treaty

The Mumbai Bench of the Income-tax Appellate Tribunal held that payments for the use of a virtual voice network are not taxable as:

  • ‘fees for technical services’ under the India-United Kingdom tax treaty because no services were made available
  • royalties because they were not paid for scientific work or the use of a patent, trademark, design, plan, secret formula or process.

Read the article.

Indonesia

Tax audits to be revitalized

The Director General of Tax (DGT) issued a new tax audit policy in 2016 that revitalizes tax audit activities and investigations in order to increase the quantity and quality of an audit and promote sustainable tax revenue growth.


An effective audit does not generate tax debt (tax assessment can be settled) or lead to tax disputes and promotes sustainable tax compliance. The DGT says tax audit productivity can be improved by increasing tax audit turnover through accelerating the audit period, increasing the number of audited taxpayers and increasing the number of tax audit units and auditors.

The new policy provides for an acceleration of audit examination and its extension. The tax audit examination can be extended only once by a maximum of 1 month. The benefit from this new tax audit policy is to ensure the tax auditor does not issue tax assessments that cannot be paid by the taxpayer. However, taxpayers should be aware that the tax audit examination can only be extended once and for up to 1 month only, where previously it could be extended 2 months when certain criteria were met.

Further information:

Eko Prajanto

eko.prajanto@kpmg.co.id

Diana Hutagaol

diana.hutagaol@kpmg.co.id

Italy

Is CFC regime compliant with EU law, tax treaties?

Tax professionals in Italy have filed a complaint with the European Commission asserting that the Italian controlled foreign company (CFC) regime – in particular, provisions applicable to CFCs that are not located in ‘blacklist’ countries – is contrary to standards under the European Union (EU) Treaty.

Read the article.

New guidelines for international tax rulings and APAs

The Italian tax authorities issued guidance revising the procedures concerning international tax rulings that may be issued to companies that have ‘international business operations’. These procedures apply with respect to advance pricing agreements (APA) for taxpayers with transfer pricing issues.

Read the article.

Luxembourg

VAT treatment of directors’ fees

The value added tax (VAT) treatment of fees paid to company directors in Luxembourg has been unsettled, but recent statements from tax authorities appear to indicate some resolution of the issue may be forthcoming.

Read the article.

Netherlands

‘30-percent ruling’ for employees not contrary to EU law

The Dutch Supreme Court (Hoge Raad) concluded that the 150-kilometer criterion for the ‘30-percent ruling’ is not contrary to European Union law. This judgment means that employees who resided more than 150 kilometers from the Dutch border, during at least two-thirds of the 24 months preceding the commencement of their employment in the Netherlands, are eligible for the ‘30-percent ruling’ benefit.

Read the article.

Pending CJEU case could have VAT implications for Dutch holding companies

A case concerning value added tax (VAT) deductions that is currently pending before the Court of Justice of the European Union (CJEU) could have implications for Dutch holding companies that are actively involved in the management of participations within a group.

Read the article.

New Zealand

Court determines tax residence of overseas individual

A decision of the Court of Appeal of New Zealand may affect individuals in New Zealand looking to move overseas, current expatriates, and persons looking to invest or spend time in New Zealand.

Read the article.

Nigeria

Tax authorities focus on tax collection and enforcement activities

Reports from Nigeria suggest that the Federal Inland Revenue Service (FIRS) has intensified its efforts to recover unpaid taxes from defaulting taxpayers and enforce compliance with tax law provisions. After conducting value added tax (VAT) and withholding tax monitoring exercises of some companies, the FIRS has affixed ‘non-compliance stickers’ on the premises of some defaulting companies.

Read the article.

Expenses for offshore production costs are deductible, tribunal concludes

The Tax Appeal Tribunal, Lagos, found that taxation is strictly based on the statutory provisions and not on contracts or agreements. Accordingly, the tribunal determined that all expenses wholly, exclusively and necessarily incurred by the taxpayer for purposes of its petroleum operations were deductible. The expenses were not limited to the extent of the taxpayer’s 40 percent equity participation in a joint venture with the Nigerian National Petroleum Corporation.

Read the article.

The court further held that provisions under the Nigerian law specifically governing offshore production contracts did not apply because those particular provisions relate to cost recoverability and oil allocations—and not to the tax deductibility of expenses.

Read the follow-up article.

OECD

Tax administrations meet on ‘Panama papers’

Senior tax administration officials from member countries of the Organisation for Economic Cooperation and Development (OECD) convened in April 2016 to discuss opportunities for obtaining data, cooperating and information-sharing in light of the ‘Panama papers’ revelations.

Read the article.

Report to G20, additional steps under tax transparency standards

In April 2016, the Organisation for Economic Cooperation and Development (OECD) delivered a report to the finance ministers of the G20 countries advocating that all jurisdictions need to implement tax transparency standards. The OECD also proposed that the G20 take additional steps to urge all countries and jurisdictions to immediately endorse and implement the global tax transparency standards.

Read the article.

Puerto Rico

Federal district court enjoins enforcement of AMT

 

The US District Court for the District of Puerto Rico issued an opinion and order permanently enjoining the Secretary of the Puerto Rico Treasury from enforcing a component of the commonwealth’s alternative minimum tax (AMT). Notably, in the view of the federal district court, the AMT imposed on tangible property and services transferred from an ‘out-of-island entity’ to a Puerto Rico affiliate discriminated against interstate commerce and violated the Equal Protection Clause.

Read the article.

Poland

Implementing standard tax audit file, schedule

Poland’s Ministry of Finance published a statement concerning implementation of and schedule for the ‘standard audit file’. A provision of the tax law in Poland requiring that a standard audit file be implemented was enacted in 2015, with effect from 1 July 2016.

Read the article.

Poland’s Ministry of Finance later published the following related guidance:

  • final guidelines and answers to frequently asked questions (FAQ) concerning the implementation of the standard audit file, released in March 2016 (read the article)
  • an FAQ on the selection of taxpayers for audit, released in May 2016 (read the article)
  • new or updated FAQs, released in May 2016 following a public consultation (read the article).

Spain

Tax leasing system (amended) not state aid

In the Court of Justice of the European Union’s (CJEU) judgment in a case concerning the Spanish tax lease system (as amended), the CJEU upheld a prior determination that a challenge to this tax regime was unfounded.

Read the article.

Switzerland

Automatic exchange of information, update

Switzerland is expected to continue efforts for the automatic exchange of information (AEoI) with 38 partner states beginning in 2017. In December 2015, the Swiss Parliament ratified the law for implementation of the automatic exchange of information. Unless a referendum is called against it, nothing will prevent the AEoI from taking effect as of 1 January 2017.

Read the article.

South Africa

Automatic exchange of information and corporate reporting standard, update

South Africa’s Minister of Finance in the 2016 budget speech reiterated South Africa’s commitment to combating tax evasion on a global level, warning that time is running out for “…taxpayers who still have undisclosed assets abroad.”

Read the article.

Collection of tax debts from third parties

The South African Revenue Service introduced six new tax provisions1 related to the collection of tax debts from third parties. Similar to provisions in the Companies Act, the new tax rules aim to ‘pierce the corporate veil’ and incorporate a redeveloped civil law garnishee order provision.

Among other things, the new rules codify the power of SARS to:

  • demand payment from a third party acting as an agent for monies owing by a taxpayer (e.g. banks, employers, etc. similar to a garnishee order)
  • hold a financial manager liable for the tax debts of a taxpayer based on negligence or fraud
  • hold a shareholder liable for the tax debts of a taxpayer where a company is voluntarily wound up
  • hold a transferee (connected person) liable for the tax debts of a taxpayer based on receipt of an asset for nil or below fair market value consideration
  • hold a person liable for assisting in dissipation of assets (e.g. obstructing the collection of tax debt)
  • recover tax debts from other persons, where, for example a representative of the taxpayer has alienated of disposed of assets or funds.

Further information:

Johan van der Walt

johanvdwalt.tax@kpmg.co.za

Elle-Sarah Rossato

elle-sarah.rossato@kpmg.co.za

Exchange of tax information and repatriation of assets

With the relaxation of tax borders,2 global pressure to review tax havens and ongoing refinement of tax treaties and protocols, the South African Revenue Service has introduced two tax provisions3 dealing with cooperation with other foreign revenues to assist in the exchange of information and the conservancy of assets. These changes follow on recent tax court decisions in Ben Nevis and Another v Commissioner for HMR&C Court of Appeal4 and Krok v CSARS.5

Further, SARS may now also apply for an order in South Africa against a taxpayer for the repatriation of assets (located beyond the country’s borders) in order to satisfy the taxpayer's tax debts.

Further information:

Johan van der Walt

johanvdwalt.tax@kpmg.co.za

Elle-Sarah Rossato

elle-sarah.rossato@kpmg.co.za

Special voluntary disclosure program launched

A Special Voluntary Disclosure Program was announced in February 2016 in relation to the regularization of undisclosed offshore assets and the resultant income stream. The program will provide a single process covering both historical tax non-compliance and exchange control contraventions. The application window will be from 1 October 2016 until 31 March 2017. Persons already under audit or investigation are ineligible to apply for relief under the program.

Read the article.

In a recent blog, KPMG in South Africa weighs taxpayers’ various options regarding voluntary disclosure in South Africa.

Footnotes

1See sections 179–184 of the Tax Administration Act No. 28 of 2011 (TAACT).

2See, for example, the revenue rule pronounced in India v Taylor.

3See sections 185 and 186 of the TAACT.

4[2013] EWCA CIVv 578.

5[2015] ZASCA 107.

Sri Lanka

‘Limitation of time’ without limiting time

The Tax Appeals Commission (TAC), the second stage of Sri Lanka’s four-stage appellate procedure, commenced hearings in 2012. However, its efficiency has been questioned as the TAC was inactive for over a year due to changes in membership. This was resolved recently and TAC recommenced hearings.

The time bar for the TAC is 270 days from its first sitting. The TAC is continuing to hear all appeals, even though some cases are statute-barred. The TAC’s position is that the statutory limitation provision is not mandatory but directive.

The TAC argues that the delays have been due to reasons beyond its control and that the law is silent on the consequences of not complying with the statutory limitation. Thus the TAC’s view that it is a manifestation of the legislative intent that the mere failure to adhere to the time bar is only directive. Therefore, TAC has not lost jurisdiction to hear the cases that have exceeded the limitation period.

This position adopted by TAC has not been questioned in a court of law to date, but it is likely that a court will consider the TAC’s position in the near future.

Further information:

Suresh Perera

sperera@kpmg.com

Thailand

Clarifying aspects of tax audit protection program for SMEs

The tax authorities in Thailand have clarified and expanded on the tax audit exemption program announced in early 2016 for small and medium size entities (SME). The program aims to provide incentives for SME taxpayers to regularize their tax affairs on a forward-looking basis, by providing protection from tax audits.

Read the article.

United Kingdom

Appellate court concludes no stamp duty land tax on GBP1 billion land purchase

The UK Court of Appeal concluded that an appellant is not liable to pay stamp duty land tax (SDLT) on a land purchase worth 1 billion British pounds (GBP).

The court held that an SDLT anti-avoidance provision did not apply and GBP50 million of tax was payable, but not by the appellant. An SDLT relief for alternative property financing was not available for the bank that financed the purchase of the land because the purchase was a ‘sub-sale’, which meant that the SDLT anti-avoidance provision did not apply – there was no tax saving.

Read the article.

Co-operative compliance framework

In Budget 2015, the UK Government announced new measures to improve large business tax compliance. Following consultation, in the Autumn Statement it was announced that a framework for cooperative compliance would be published.

A copy of this framework is being circulated by HM Revenue & Customs (HMRC) to large businesses, and it is expected to be published in the autumn. The framework represents a set of principles that both large businesses and HMRC should apply that should reduce the scope for tax disputes or enable controversial issues to be worked out collaboratively.

Read the Autumn Statement.

Corporate criminal offence

On 11 April 2016, the UK government confirmed its intention to create a new criminal offence targeted at corporations that fail to prevent facilitation of tax evasion. A corporation will be liable in relation to offences committed by its employees or other ‘associated persons’ unless it can demonstrate an effective application of ‘reasonable care’ procedures. The new offence operates in three stages:

  1. There is criminal tax evasion by a taxpayer (either an individual or an entity) that could be charged as cheating the public revenue under common law.
  2. There is criminal facilitation of this offence by a representative of the corporation that could be charged as aiding and abetting.
  3. The corporation failed to prevent its representative from committing the criminal act (outlined at stage two).


This strict liability offence will apply unless the corporation can show it had reasonable procedures to prevent facilitation of evasion, or that it was reasonable to have no procedures.

Read the article.

Read HMRC’s consultation document.

HMRC creates a new taskforce in response to ‘Panama papers’

In early April 2016, the International Consortium of Investigative Journalists (ICIJ) revealed that it was reviewing over 11 million files in relation to companies incorporated by a law firm in Panama. The information included shareholder registers, bank statements, emails and passport scans. The ICIJ also published a searchable database of nearly 320,000 entities created in 21 jurisdictions covering nearly 40 years in relation to the documents (the so-called ‘Panama papers’).

In the UK, HM Revenue & Customs (HMRC) confirmed it has asked the ICIJ to share the leaked data so that it could cross-reference it with its own intelligence database ‘CONNECT’, to see how the information adds to the 700 current leads HMRC already has with a link to Panama.

While there could be legitimate reasons for having an offshore structure, HMRC is keen on examining this data and says it will act on it swiftly and appropriately where there is any evidence of tax underpayment or evasion. In response to this information leakage, the UK government created a cross-government task force.
KPMG in the UK believes that it is important for those potentially affected to ensure that their current and historical tax affairs are in order, seeking specialist advice if they are unsure about the technical tax aspects of offshore arrangements. Failure to do so could potentially lead to prosecution and penalties on any unpaid tax.

Read the UK government’s response to the ICIJ on the matter on offshore tax evasion.

Judicial review of HMRC’s tax dispute governance procedures

A recent UK tax dispute centered on a potential underpayment of tax arising from a taxpayer’s relocation from the UK. The matter became subject to litigation, but the taxpayer entered into negotiations with HM Revenue & Customs (HMRC) through Alternative Dispute Resolution (ADR) and a potential settlement position was identified.

The potential settlement position was referred to the Tax Disputes Resolution Board (TDRB), which reviewed the proposal and recommended the HMRC Commissioners should reject it. The Commissioners agreed and rejected the settlement proposal.

The taxpayer applied for a judicial review, arguing that the decisions to select his case for scrutiny by the TDRB and the reasons given for rejecting his settlement proposal were ‘irrational and unfair’. He also argued that HMRC had failed to provide adequate reasons for selecting his case or for accepting the TDRB’s ‘reject’ recommendation.

The TDRB issued the recommendation (not published) to reject the settlement proposal on the basis that HMRC had the stronger legal argument and, if successful at litigation, HMRC would receive a substantially higher amount of tax than was offered by the taxpayer following ADR. Therefore, the TDRB believed this made the settlement proposal non-compliant with HMRC’s Litigation and Settlement Strategy.

Having heard the application, the court roundly rejected all of the taxpayer’s arguments and determined that the basis upon which the case was selected and the reasons for rejecting the proposal were free from reproach. The court took a very restricted view of the requirement for HMRC to provide reasons for its decisions, indicating it was not persuaded that there was an arguable case imposing a duty upon HMRC to provide the taxpayer with reasons why his case was selected for consideration by the TDRB. The court also had considerable reservations as to whether the TDRB was under any obligation to supply the taxpayer with reasons for its recommendations to the Commissioners.

The view of KPMG in the UK is that ADR remains an effective option for resolving tax disputes. However, it has to borne in mind that in certain cases, including where the tax at stake is more than GBP10 million, any potential settlement proposal identified through ADR will be subject to further consideration by HMRC’s tax disputes governance procedures

Read HMRC’s Litigation and Settlement Strategy.

Publication of tax strategies

The UK Government is introducing an obligation for large businesses to publish their tax strategies on the internet, insofar as the strategy relates to UK taxation. The Finance Bill 2016 introduced the requirement for qualifying large businesses for financial periods beginning after the bill becomes law, which is expected to be in autumn of 2016.

The strategy must cover four areas:

  1. the approach of the UK group to risk management and governance arrangements in relation to UK taxation
  2. the attitude of the group towards tax planning (as it affects UK taxation)
  3. the level of risk in relation to UK taxation that the group is prepared to accept
  4. the approach of the group to its dealings with HM Revenue & Customs.


Non-publication of an identifiable tax strategy or an incomplete tax strategy based on the four areas outlined above could lead to an initial 7,500 penalty British pounds (GBP), which would be subject to an appeals process. A further GBP7,500 penalty arises if the failure is not rectified after 6 months and then monthly if it continues.

The basic requirement applies to corporations with an aggregate UK turnover exceeding GBP200 million or aggregate UK balance sheet assets exceeding GBP2 billion. The test is applied on the financial position of the corporation at the last day of the preceding financial year. Other organizations caught by these provisions include certain types of partnerships, UK permanent establishments of overseas groups and certain subsidiaries of overseas parent companies.

Read HMRC’s draft high level guidance.

Special measures regime – sanctions for persistently uncooperative large businesses

The UK Government is introducing legislation to provide that large businesses with an ongoing history of aggressive tax planning and/or refusal to engage with HM Revenue & Customs (HMRC) may be subject to special measures.

A business in this position would be advised via a ‘warning notice’ that they may be at risk of being put into special measures. A 12 month improvement period will then allow HMRC and the business to work together to resolve issues. At the end of the period, the behavior will either have improved and so the business will not enter special measures, or it will be notified via a ‘special measures notice’ of entry into special measures. A special measures notice may be withdrawn by HMRC at any time by giving a further notice, or it expires 27 months after the date of original notice.

Businesses that enter special measures risk sanctions if they demonstrate further instances of the behaviors that led to their inclusion. Legislated sanctions are as follows:

  • Errors in documents (e.g. tax returns) relating to tax avoidance schemes entirely or partly attributable to a ‘speculative’ interpretation of legislation will be treated as a failure to take reasonable care (and thus be subject to higher penalties)
  • Potentially being named as being in special measures.


Businesses enter special measures for a default period of 2 years. HMRC will conduct an ‘exit review’ 2 years from entry into special measures to decide whether the behaviors have improved and the business should exit special measures, or whether an extension of special measures is required. If HMRC considers an extension is required, a ‘confirmation notice’ will be issued, which can be withdrawn at any time or expires after a further period of 27 months.

Read HMRC’s policy paper.

Supreme Court rules on arrangements involving bonus payments

HM Revenue & Customs have succeeded in the Supreme Court in two cases, heard together, regarding arrangements designed to pay bonuses without triggering income tax and NIC. The actual planning at issue in these cases has been blocked by legislative changes, and the UK’s statutory GAAR could potentially apply. However, the outcome of these cases is still relevant, both to other historical cases with similar fact patterns and in the context of the courts’ approach to tax avoidance more generally

Read the article.

VAT treatment of credit card handling services, CJEU judgment

In two cases on referral from the United Kingdom concerning the value added tax (VAT) treatment of card handling services, the Court of Justice of the European Union (CJEU) found that the processing of debit and credit card payments did not qualify for the VAT exemption for payment transactions.

Read the article.

United States

APMA program, APA statistics for 2015

The Internal Revenue Service released an advance version of Announcement 2016-12, providing the annual report on the advance pricing and mutual agreement (APMA) program for 2015 and setting out advance pricing agreement (APA) statistics for 2015.

Read the article.

Expanded industry issue resolution program

In March 2016, the Internal Revenue Service (IRS) released an advance copy of Rev. Proc. 2016-19 concerning the ‘industry issue resolution’ program, which is used to identify frequently disputed or burdensome tax issues that are common to a significant number of entities and that are resolved by the issuance of IRS guidance.

Read the article.

KPMG report: Updated IRS publication, IRM provisions on examination process

The Internal Revenue Service (IRS) has revised Publication 5125, which provides guidance on changes to the Large Business and International (LB&I) examination process following the recent restructuring of LB&I. In March 2016, the IRS began updating the controlling sections of the Internal Revenue Manual to reflect and detail these changes.

A report from KPMG in the US highlights the material changes to chapter 4.46, LB&I Examination Process.

Read the report.

IRS can amend answer, grounds not listed in deficiency notice

The US Tax Court held that in a tax deficiency case, the IRS may plead grounds not originally listed in the notice of deficiency, and that this would not violate a uniform approach to judicial review of the IRS administrative action. The Tax Court also held that when no trial date has been set and there is ample time for discovery, no prejudice results to the taxpayer from the IRS being allowed to add a ‘new matter’ to its answer to the taxpayer’s petition.

Read the article.
 

IRS issues new practice units to guide IRS examiners

The Internal Revenue Service’s (IRS) Large Business and International Division posted new practice units providing guidance to IRS examiners on the following topics:

  • review of transfer pricing documentation by outbound taxpayers (read the article)
  • outbound services by US companies to controlled foreign companies (read the article)
  • residual profit split method – outbound (read the article)
  • interest expense limitation computation under section 163(j) of the Internal Revenue Code (IRC) (read the article)
  • inbound resale price method – routine distributor (read the article)
  • three requirements for application of IRC section 482, which allows the IRS to make allocations so that taxpayers clearly reflect income attributable to controlled transactions and to prevent the evasion of taxes (read the article)
  • taxpayer’s affirmative use of IRC section 482 (read the article).

IRS model closing agreements, tax-exempt bond compliance

The Internal Revenue Service (IRS) announced the release of ‘model closing agreements’ to resolve compliance issues in an IRS examination or under the Voluntary Closing Agreement Program. These model agreements contain language that will generally be used by the IRS Tax Exempt Bonds (TEB) office in closing agreements relating to tax-exempt bonds.

Read the article.

New competent authority agreements with Switzerland, Brazil, Barbados

The US recently signed competent authority agreements with other countries as follows:

  • The US and Switzerland signed a competent authority agreement concerning an exemption from the Foreign Accounts Tax Compliance Act (FATCA) regime for certain accounts of lawyers (in general, custodian and depository accounts). Read the article.
  • Brazil and the United States signed a competent authority arrangement, pursuant to the terms of the intergovernmental agreement (as signed by Brazil and the United States in September 2014) for implementing the FATCA regime. Read the article.
  • The United States and Barbados signed a competent authority arrangement pursuant to their 2014 intergovernmental agreement for implementing information reporting and withholding tax provisions under the FATCA regime. Read the article.  

Pre-filing agreement update, increased user fee

The IRS released an advance version of Rev. Proc. 2016-30 that updates the rules and procedures for taxpayers seeking an IRS examination and resolution of certain specific issues relating to tax returns before the returns are actually filed. If the IRS and the taxpayer reach an agreement on the issues, a pre-filing agreement may be executed.

Read the article.

Revised IRS administrative appeals process for docketed Tax Court cases

The Internal Revenue Service (IRS) released an advance version of Rev. Proc. 2016-22, which updates and revises IRS practices with respect to the administrative appeals process for cases docketed in the US Tax Court. The document provides guidance as to how taxpayer case files will be treated administratively by IRS Appeals in 14 situations when the cases have been docketed in the Tax Court.

Read the article.

Vietnam

Tax collection increases attributed to enhanced audits

While the decrease in crude oil prices in 2015 adversely affected Vietnam’s state budget, information from the Ministry of Finance reveals that revenue collection increased by almost 8 percent, primarily due to aggressive and expanded tax audits (in particular, audits involving transfer pricing issues), increased recovery of tax debts and new tax policies designed to increase tax revenue.

Read the article.

These articles represent the views of the authors only, and do not necessarily represent the views or professional advice of any KPMG International member firm.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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