Criminal tax law: UK corporate criminal offence (CCO)

Transcription

1 FSO Germany Tax Controversy News Alert January 2018 Criminal tax law: UK corporate criminal offence (CCO) Impact on German companies A new (corporate) criminal offence has been introduced in the UK in September 2017 to combat tax evasion: Corporate offence of failure to prevent the facilitation of tax evasion (CCO). Under this offence, a company may face unlimited fines if a person associated with it has enabled or facilitated tax evasion. To avoid conviction, the company generally will need to demonstrate that it has reasonable prevention procedures in place. The CCO is neither restricted to the evasion of UK taxes nor to offences committed in the UK. Due to the global reach of the CCO, foreign companies, including German ones, with business dealings in the UK will need to consider what action they need to take in response to the new criminal offence. This brochure illustrates the impact of the CCO on German companies.

2 Criminal tax law: UK corporate criminal offence (CCO) Legislative process/ entry into force The new corporate criminal offence (CCO) is part of an extensive legislative package (Criminal Finances Act 2017) aimed at combatting corporate tax evasion. The Criminal Finances Act 2017 received royal assent on 27 April 2017 and the CCO has come into force in September In the absence of transitional rules affected companies need to take immediate action. The CCO was modelled heavily on the UK Bribery Act and evidence of reasonable prevention procedures, i.e. an appropriate internal control system (Internes Kontrollsystem (IKS)), will normally be the only way for companies to avoid penalties where the other requirements of the offence have been met. Ideally, an IKS that meets the statutory requirements of the CCO (see below for details) should therefore be in place since October. To the extent that this is not yet the case, a risk assessment as a prerequisite for the procedures should be performed and documented as soon as possible. Background Previously, the requirements for imposing fines on a company in the UK were very limited if its employees aided and abetted tax evasion. In particular, it had to be proven that a director of the entity had committed specific elements of the offence. If employees below management level aided and abetted tax evasion, a corporate penalty could regularly not be imposed. In Germany, authorities would be able to fine a company for violation of obligatory supervision by supervisory personnel in such cases (Secs. 30 and 130 OWiG [ Ordnungswidrigkeitengesetz : German Administrative Offences Act]). Owing to the different legal situation in the UK, management pleading ignorance of operational matters in order to avoid prosecution of the company allegedly has become fairly widespread. The CCO has been designed to combat this trend. 2 FSO Germany Tax Controversy News Alert January 2018

3 Impact on German companies The offence General The CCO comprises two separate offences: 1. The UK tax evasion facilitation offence relates to the facilitation of UK tax evasion. 2. The foreign tax evasion facilitation offence relates to the facilitation of non-uk tax evasion, e.g., German taxes. Each offence has three requirements: (for the additional requirements of the non UK tax evasion offence see below) A taxpayer has committed tax evasion that was criminally facilitated by an associated person 1. Taxes have been evaded (by either an individual or a legal entity). 2. A person associated with the company (associated person) has criminally enabled or facilitated the tax evasion. 3. The company has not taken reasonable prevention procedures to prevent its associated person from enabling or facilitating tax evasion. of a relevant body without reasonable prevention procedures If the other requirements (1. and 2.) have been met, the company will be criminally liable unless it can prove that a reasonable IKS has been put in place which can prevent the misconduct by the associated person ( reasonable prevention procedures ). Alternatively, a company can escape punishment if it can prove that an IKS would appear unreasonable. However, this exculpation will rarely succeed (e.g., small undertakings). The CCO covers criminal tax evasion only and not legal tax avoidance. The definition of associated persons is very broad and includes individuals and bodies corporate. It covers all employees and other individuals working for or on behalf of the company. Subsidiaries are also considered associated persons. The associated person must have criminally enabled or facilitated the tax evasion (especially aiding and abetting). There are several ways this can happen: Being knowingly concerned in, or in taking steps with a view to, tax evasion as well as abetting such tax evasion. In addition, inciting or encouraging a client already resolved to evade taxes is interpreted as facilitating. The CCO only applies to bodies incorporated and partnerships formed, i.e., relevant bodies are either corporations or partnerships. The CCO does not apply to individuals. FSO Germany Tax Controversy News Alert January

4 Criminal tax law: UK corporate criminal offence (CCO) Examples of the facilitation of tax evasion Assisting a client to forge or produce false papers Implied approval of a client s opaque corporate structures Failure to object to obviously improper advice of an advisor of the client Collaborating with a client to abuse the laws of a foreign country Accepting clients with suspicious activities in terms of tax evasion UK tax evasion facilitation offence The UK tax offence applies when UK taxes have been evaded. In this case, it is irrelevant where the relevant body is domiciled. It is also irrelevant from where the associated person enabled or facilitated the evasion of UK taxes (extra-territorial effect). Under the UK tax offence, the UK may also impose unlimited fines on foreign (e.g., German) companies. This even applies when the associated person was acting in another country. Foreign tax evasion facilitation offence The foreign offence applies when non-uk taxes have been evaded. The foreign offence has two additional criteria: 1. The relevant body has a UK nexus. 2. There is dual criminality, both in terms of the original tax evasion and in terms of the associated person s criminal act of facilitation. 4 FSO Germany Tax Controversy News Alert January 2018

5 Impact on German companies UK nexus The relevant body has a UK nexus if it is a body incorporated, or a partnership formed, under UK law (e.g., UK LLC) it carries on business or part of its business in the UK any conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK (e.g., employee of a German bank advises a client during a business trip to London on evading Spanish income taxes) Dual criminality Dual criminality exists If the tax crime constitutes an offence under the law of a foreign country (e.g., Germany) and would constitute a tax evasion in the UK, if the actions took place in the UK. At the same time, the foreign jurisdiction must have an equivalent offence covering the associated person s criminal act of facilitation and it must also be the case that the actions of the associated person constitute a crime if they took place in the UK. The UK understanding of facilitation of a tax crime would essentially be compatible with the German legal doctrine of criminal aiding [ Beihilfe ] and abetting [ Anstiftung ]. However, in individual cases there may be differences which would need to be analyzed as part of the defence. Examples of global reach An employee of the French branch of a German bank (with a branch in the UK) helps a French client evade taxes. A foreign subsidiary of a German bank (with a branch in the UK) advises clients on their tax structures for evading German taxes. Employees of a German bank (with no branch in the UK) advise German clients in the UK on evading German taxes. German parent company UK subsidiary Chinese subsidiary Irish subsidiary UK branch US branch In the scope of the CCO regarding all (global) tax crimes In the scope of the CCO regarding tax crimes committed in the UK or in relation to UK taxes FSO Germany Tax Controversy News Alert January

6 Criminal tax law: UK corporate criminal offence (CCO) Exculpation A cornerstone of the CCO is the statutory exculpation for the relevant body if it demonstrates that it had reasonable procedures in place (designed) to prevent associated persons from committing tax evasion facilitation offences. Ultimately, the CCO is intended to encourage companies to maintain an IKS for tax purposes or a tax compliance management system (Tax-CMS). The CCO was modelled on the UK Bribery Act, under which evidence of adequate procedures is also the only way for companies to exculpate themselves from acts of corruption. The CCO calls for a tax compliance organization has certain similarities to an IKS or tax CMS under German law (AEAO [ Anwendungserlass zur Abgabenordnung : Decree on the Application of the German Tax Code] relating to Sec. 153; IDW AssS 980). The importance of such an IKS should be far greater in the UK where failure to install an IKS is a punishable statutory offence. In Germany, the exculpatory effect of a tax CMS has not been incorporated into law yet / to date. However, it has an indicative effect and can provide effective protection against allegations of tax evasion. The UK tax authorities have set out six guiding principles for developing reasonable procedures which are very similar to the seven basic components of a German tax CMS under IDW AssS 980 (see text box). The nature and scope of the procedures required for exculpation will always depend on the size and complexity of the relevant body. Six guiding principles of reasonable procedures 1. Risk assessment 2. Proportionality of risk-based prevention procedures 3. Top-level commitment 4. Due diligence 5. Communication, including training 6. Monitoring and review Risk assessment Top-level commitment Communication, including training Proportionality of risk-based prevention procedures Due diligence Monitoring and review 6 FSO Germany Tax Controversy News Alert January 2018

7 Impact on German companies Sanctions The range of sanctions for the CCO is immense: Unlimited fines Ancillary orders, such as seizure orders or serious crime prevention orders* Conclusion The CCO is neither restricted to the evasion of UK taxes nor to offences committed in the UK. For German companies with a UK nexus, there is therefore a risk of criminal liability not only if UK taxes are evaded (UK offence), but also where German or other non-uk taxes are evaded (foreign offence). In view of the CCO, German companies with business dealings in the UK should analyze their risk of criminal liability in the UK and review whether their tax compliance system meets the legal requirements of the CCO and provides effective protection. Due to the overlapping requirements for an exculpatory IKS/ tax CMS in the UK and in Germany, companies can consider conjoining implementation of procedures to mitigate criminal tax law risks in the UK with plans to introduce an IKS in Germany in accordance with IDW AssS 980. * For more detail see also: FSO Germany Tax Controversy News Alert January

8 FSO Tax Controversy Practice Group EY s Tax Controversy Practice Group specializes in preventing, advising on and resolving tax controversies. Our Tax Controversy Practice Group comprises experienced tax attorneys and tax advisors with many years of experience in procedural tax law, criminal tax law as well as in tax & legal risk management. We offer legal representation of German and foreign businesses, their board members, executives and employees as well as of individuals vis-à-vis the fiscal and law enforcement authorities and before the fiscal and criminal courts. Contact persons The authors are members of the FSO Tax Controversy Practice Group. Please do not hesitate to contact us if you have any further questions. Germany UK Martin H. Seevers LL.M. Tax (USA) Rechtsanwalt (lawyer/attorney), Steuerberater (tax advisor) EMEIA FSO Tax Controversy Leader Partner Phone martin.seevers@de.ey.com EY Assurance Tax Transactions Advisory About the global EY organization The global EY organization is a leader in assurance, tax, transaction and advisory services. We leverage our experience, knowledge and services to help build trust and confidence in the capital markets and in economies the world over. We are ideally equipped for this task with well trained employees, strong teams, excellent services and outstanding client relations. Our global purpose is to drive progress and make a difference by building a better working world for our people, for our clients and for our communities. The global EY organization refers to all member firms of Ernst & Young Global Limited (EYG). Each EYG member firm is a separate legal entity and has no liability for another such entity s acts or omissions. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information, please visit In Germany, EY has 21 locations. In this publication, EY and we refer to all German member firms of Ernst & Young Global Limited Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft All Rights Reserved. GSA Agency NDA ED None Julian Skingley Partner Phone jskingley@uk.ey.com Debbie Ward Partner Phone dward1@uk.ey.com Steven Francis Executive Director Phone sfrancis@uk.ey.com David Wren Executive Director Phone dwren@uk.ey.com In line with EY s commitment to minimize its environmental impact this document has been printed CO 2 neutral and on FSC - certified paper that consists of 60% recycled fibers. We have offices in 700 locations and 150 countries across the globe. This publication contains information in summary form and is therefore intended for general guidance only. Although prepared with utmost care this publication is not intended to be a substitute for detailed research or the exercise of professional judgment. Therefore no liability for correctness, completeness and/or currentness will be assumed. It is solely the responsibility of the readers to decide whether and in what form the information made available is relevant for their purposes. Neither Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft nor any other member of the global EY organization can accept any responsibility. On any specific matter, reference should be made to the appropriate advisor.