Baker Tilly’s Weekly Tax Brief – 29 September 2015…
In this edition of Baker Tilly’s weekly round-up of the most important tax news, we cover the latest developments…
- Labour tax policy: which levers will they pull and how hard?
In his speech to the Labour Party conference this week, the new Shadow Chancellor John McDonnell set out the broad direction of the party’s tax policy, but many of the issues he has identified for action are already being tackled.
- BEPS – is this the solution we’ve been waiting for?
Next Monday (5 October) the OECD will release its final recommendations for reforming the international tax system and clamping down on avoidance by multi-nationals. The Base Erosion and Profit Shifting (BEPS) project has been a mammoth task, but will it achieve its objective?
- BEPS – what we already know
Key elements of the BEPS project – such as country by country reporting, changes to beneficial tax regimes such as the UK’s patent box and a new definition of ‘Permanent Establishment’ – are already known. While most OECD governments are likely to indicate support for the recommendations, what is less clear is how long they will take to implement the measures and whether tax authorities outside the OECD will play ball.
- Labour tax policy: which levers will they pull and how hard?
When preparing the ground for his speech on Monday, New (or should that be Newest?) Labour Shadow Chancellor John McDonnell emphasised that he would not be making any major statements on tax. And he was right. However, piecing together John McDonnell‘s comments, together with Jeremy Corbyn’s recent speech, it is possible to build up a picture of the broad direction of travel of Labour tax policy.
The underpinning economic aims are to reject austerity, to live within our means as a nation, and to secure dynamic growth within the economy. As austerity is rejected, the tax system assumes particular importance in:
- Aiding the reduction of borrowing.
- Securing a measure of redistribution by restoring benefits for low-income groups while imposing higher taxes on wealthy individuals and on companies.
So much is clear.
The Labour party’s ‘fairer tax policies’ are also clear. They include, and I quote:
- The aim of country-by-country reporting for multinational corporations.
- Reform of small business taxation to discourage avoidance and tackle tax evasion.
- Enforcing proper regulation of companies in the UK to ensure that they file their accounts and tax returns and pay the taxes that they owe.
- Lastly, and most importantly, a reversal of the cuts to staff in HMRC and at Companies House, taking on more staff at both, to ensure that HMRC can collect the taxes the country so badly needs.
Emphasis is also laid on reducing the tax gap, estimated by the Treasury at £34bn. However, the Labour party seems to be using a much higher estimate of £120bn.
All this sounds clear and straightforward until you compare Labour policies with what is actually happening now:
- We already have a general anti-abuse rule in the UK, with the prospect of a similar anti-avoidance rule having a much wider scope in Scotland.
- Country-by-country reporting for multinational corporations is part of the OECD project on which more announcements are expected on Monday 5th October. My colleague Rebecca Reading provides a preview of likely developments below.
- The UK already has a robust system to enforce the filing of accounts and tax computations by companies.
- More resources would undoubtedly help HMRC, which was reflected in George Osborne’s Budget commitment.
Moving away from the big picture to small details, John McDonnell also promises to remove a tax allowance for landlords, which is described as encouraging them to keep their properties in good shape. This allowance is said to be worth £13bn and is available whether or not landlords spend money remedying wear and tear. The removal of that allowance is already subject to an HMRC consultation, so, to be honest, there is not much new there either.
Two key observations flow from this:
- It’s hardly surprising that such a new leadership team in the Labour Party has not yet been able to formulate its tax policies in any detail. There is no shame in that: Labour have said they wish to consult widely among their members to determine the future shape of their policies. Tax is presumably included in that. At one level, that could be quite a healthy debate if – as has been suggested – the value of specific tax reliefs is assessed and those which are not doing the intended job are repealed. However, the Office of Tax Simplification has spent many years doing just that.
- In reality, the levers of change available to the Labour Party are pretty much the same as those available to the Conservatives and to the Coalition before them. The balance in the tax system – regressive or progressive – is therefore largely determined by the levels of allowances, the amounts of benefits and the rates of tax operated at different points in the system. The real question, therefore, is which levers Labour will pull, and how hard?
Apart from general expectations that the top rate of income tax will rise from 45% to 50% or perhaps even 60%, and that the rate of corporation tax will increase if Labour has its way, John McDonnell’s statements are completely devoid of numbers. For those we will have to wait and see.
- Will BEPS provide the solution to tax avoidance by multi-nationals?
Clamping down on avoidance by multi-nationals is a either a popular sound-bite or a tax policy, depending on one’s perspective, which is common across the political spectrum. With less than a week to go before the OECD release their final recommendations on reforming the international tax system, will we finally have the solution we’ve been waiting for?
The OECD set themselves a mammoth task back in 2013, when they set the end of 2015 as the deadline for their project on Base Erosion and Profit Shifting (BEPS), but it appears they are on schedule, the final package of measures being announced next Monday (5 October).
The BEPS recommendations aren’t law, so it will be up to individual countries to enact them. What the BEPS measures will certainly purport to be is internationally coherent or in other words even handed and fair, matching tax takes to economic value creation. It is likely that the plans released next Monday will set out a clear way forward for governments to address the gaps in existing rules that allow corporate profits to disappear or shift to tax havens.
There is a political problem, though, with BEPS, in that it contradicts what certain individual governments want to achieve. This not only applies to territories that have built their economy around tax competition – such as tax havens that will see their tax base shrink – but also places like the UK where the new Diverted Profits Tax is an example not only of “going it alone” (so much for international cohesion), but also of a measure that can only increase UK tax, rather than being equitable and balanced.
The OECD will have delivered to their deadline. This isn’t so much the end, but it may be the end of the beginning.
- BEPS – what we already know
The OECD BEPS project has been a huge undertaking, with multiple Discussion Drafts, Public Consultations and thousands of pages of stakeholder input. Now the end is in sight, what do we know? Will anything change and has it really been worth the effort?
We know that there will be changes to what information multinationals have to disclose to tax authorities about their business activities and taxes paid around the world, in the form of a so-called Country-by-Country report, the format of which has essentially been agreed. A few countries, the UK included, have already taken steps to implement this part of BEPS, with the vast majority of OECD nations expected to follow suit. Although there will be greater information sharing between tax authorities, some may be disappointed to know that the OECD has not gone with the European Commission idea of making this information public.
We also know that there will be a change to special, beneficial tax regimes, such as the UK’s Patent Box, which are considered Harmful Tax Practices. The OECD has made it clear that tax breaks have to be linked to economic activity – so a nexus approach will need to apply – but we don’t yet know the details of what this means. We can be fairly certain, though, that Patent Box will be phased out, probably from June next year.
Another major change will be to the definition of Permanent Establishment. This international tax concept, where a tax authority can tax a portion of the profits of a foreign entity based on certain activities being carried on in its country, has been around for many years but BEPS will see it get a complete revamp. A new standard definition should be able to handle 21st century business models and certainly will address some of the concerns around the structuring done by Starbucks, Amazon et al.
The final BEPS package will be presented at the G20 Finance Ministers meeting on 8 October. Whereas most OECD governments are likely to be supportive, questions remain about the timetable for implementation and the commitment from the US particularly. Tax authorities outside the OECD can be hard to predict and some have a poor track record in terms of accepting approaches not completely bespoke to their specifications. There could still be some challenges here for multinationals aiming to be BEPS-compliant.
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