ATTRIBUTION OF GAINS TO MEMBERS OF CLOSELY CONTROLLED NON- RESIDENT COMPANIES AND THE TRANSFER OF ASSETS ABROAD

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TAXREP 53/12 (ICAEW REP 160/12) ICAEW TAX REPRESENTATION ATTRIBUTION OF GAINS TO MEMBERS OF CLOSELY CONTROLLED NON- RESIDENT COMPANIES AND THE TRANSFER OF ASSETS ABROAD Comments submitted on 22

non-resident companies, and (ii) the transfer of assets abroad published on 30 July 2012 Contents Paragraph Introduction 1-4 Who we are 5-7 Key point summary 8-14 General comments 18-29 Responses to

1 TAXREP 53/12 (ICAEW REP 160/12) ICAEW TAX REPRESENTATION ATTRIBUTION OF GAINS TO MEMBERS OF CLOSELY CONTROLLED NON- RESIDENT COMPANIES AND THE TRANSFER OF ASSETS ABROAD Comments submitted on 22 October 2012 by ICAEW Tax Faculty in response to HM Revenue & Customs consultation document Reform of two anti-avoidance provisions: (i) the attribution of gains to members of closely controlled non-resident companies, and (ii) the transfer of assets abroad published on 30 July 2012 Contents Paragraph Introduction 1-4 Who we are 5-7 Key point summary 8-14 General comments Responses to consultation questions Ten Tenets for a Better Tax System Appendix 1 The Institute of Chartered Accountants in England and Wales T +44 (0) Chartered Accountants Hall, Moorgate Place F +44 (0) London EC2R 6EA UK E taxfac@icaew.com icaew.com/taxfac

2 INTRODUCTION 1. ICAEW welcomes the opportunity to comment on the consultation document Reform of two anti-avoidance provisions: (i) the attribution of gains to members of closely controlled nonresident companies, and (ii) the transfer of assets abroad published by HM Revenue & Customs (HMRC) on 30 July We should be happy to discuss any aspect of our comments and to take part in all further consultations on this area. 3. On 11 January 2012 we attended a meeting with HMRC in which we put forward some key comments and concerns and discussed aspects of the existing regime. 4. Information about the Tax Faculty and ICAEW is given below. We have also set out, in Appendix 1, the Tax Faculty s Ten Tenets for a Better Tax System by which we benchmark proposals to change the tax system. WHO WE ARE 5. ICAEW is a world-leading professional accountancy body. We operate under a Royal Charter which obliges us to work in the public interest. ICAEW s regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the UK Financial Reporting Council. We provide leadership and practical support to over 138,000 member chartered accountants in more than 160 countries, working with governments, regulators and industry in order to ensure that the highest standards are maintained. 6. ICAEW members operate across a wide range of areas in business, practice and the public sector. They provide financial expertise and guidance based on the highest professional, technical and ethical standards. They are trained to provide clarity and apply rigour, and so help create long-term sustainable economic value. 7. The Tax Faculty is the voice of tax within ICAEW and is a leading authority on taxation. Internationally recognised as a source of expertise, the faculty is responsible for submissions to tax authorities on behalf of ICAEW as a whole. It also provides a range of tax services, including TAXline, a monthly journal sent to more than 8,000 members, a weekly newswire and a referral scheme. KEY POINT SUMMARY 8. The proposals do not make the two regimes comply with EU law. Coupled with this, the CD is proposing that measures designed for large corporates should be used for a very different category of taxpayers. This will give rise to complexity and uncertainty, is likely to lead to litigation which will create unwarranted expense for both taxpayers and HMRC and further modifications to the legislation in the future. 9. For both regimes there are several problem areas that need to be resolved including the low threshold for application of the charges; the lack of proportionality in the charges; the potential for charges on more than the amount received and lack of effective credit; the cost and difficulty in obtaining information, particularly for minority investors; and the absence of any clearance mechanism. There will be mismatches with double tax treaties arising inter alia from the fact that both regimes give rise to deemed charges. 10. In particular, with regard to s.13 TCGA 1992 there are problems in its application to charities and foreign domiciliaries and lack of relief for offshore intra-group transactions. 2

3 11. And in relation to s.720 et al, ITA 2007 the power to enjoy definition is over extensive and there are too many possible associated operations. 12. It needs to be clear that the revised rules will apply to existing structures, not only those where there are transfers after 5 April We support the objectives that HMRC is trying to achieve, the primary aim being to make the two anti-avoidance regimes comply with EU law whilst protecting the exchequer and the secondary aim being to simplify and clarify the provisions. 14. Given that a General Anti-Abuse Rule is to be introduced and the need to revise these measures to be EU compliant, the opportunity should be taken for a wholesale and meaningful review of both sets of legislation. We recommend that the CD proposals are withdrawn and that HMRC enters into discussions with experts from representative bodies so that collaboratively we can devise a solution that not only conforms with the aims of the consultation but also improves the legislation so that the provisions are clear and workable at the coalface in terms of ease of both taxpayer compliance and HMRC enforcement. RESPONSES TO CONSULTATION QUESTIONS GAINS ATTRIBUTED TO MEMBERS OF A CLOSELY CONTROLLED NON-RESIDENT COMPANY: SECTION 13 TCGA Business establishment test Question 1: Is the approach set out in Chapter 2 workable and effective in achieving the aim set out at Chapter 1? 15. We consider that the aim and the proposed ways of achieving the aim are misguided. We do not see how economically significant activities can be sufficiently clearly defined to make it possible for taxpayers to ascertain whether they are caught be the rules. 16. In addition the tests relate to EU rights to freedom of establishment but the measures are related to freedom of movement of capital; it seems to be the wrong approach to focus on the freedom of establishment criteria. If the measures are to be made freedom of establishment compliant then the leading case is Cadbury Schweppes as referred to in the CD. Rather than apply the test laid down in that case, the test proposed in the CD goes further and it is unlikely to be easy to apply in practice. 17. There is no basis in EU law for excluding investment activity nor for restricting activities to those wholly outside the UK or for connected party transactions. Question 2: Are there any particular issues for private equity firms here, or other types of investment vehicle? 18. There are likely to be issues for private equity including: (a) the deemed connectedness that arises through the use of limited partnerships which gives a level of interest above the investors economic interest; (b) any restriction on the double tax agreements would be unhelpful; (c) given that structures have to be managed for a wide range of investors many of whom who will not care about these issues, the practical complications of double taxation that arise under the existing rules are hard to manage; and 3

4 (d) most funds subcontract management to a UK manager this activity per se should not call into question the nature of the overseas establishment whose activities would be commensurate with the economic activity needed in that jurisdiction. Motive test Question 3: Is the motive test helpful? Are there any suggested modifications or refinements? 19. We think that a motive test is far too subjective to provide a satisfactory level of certainty. If the motive test is unclear in its application, narrowly drawn (as for s.720 at present) and onerous for the taxpayer to demonstrate compliance, it will be of limited use and also quite possibly not be a proportionate response; the result could thus be that the entire measure would not be compliant under EU law. 20. We also consider that the opportunity should be taken to exclude: (a) charities; and (b) s79b TCGA 1992 Attribution to trustees of gains of non-resident companies where there is intestacy, as those who die intestate do not do so with a view to tax avoidance. Other proposed amendments Minority shareholders Question 4: Are there any views on the size and nature of a de minimis participation limit? 21. It would be consistent with the freedom of establishment approach adopted to move to a 25% threshold with a rebuttable presumption if above 25% of significant influence and an exclusion if below. This will not remove the practical issues for those affected by the measures which must still be addressed but will ensure that only those with significant economic interests are affected. The 25% holding should apply to individual holdings, and not include associates, or at the very least the 25% threshold should apply only where the shareholding without associates exceeds say 10%. Disproportionate compliance costs de minimis Question 5: How might such an approach be designed? What would be a reasonable de minimis level? 22. We should welcome clarification of how taxpayers will be able to ensure that they are within or outwith the regime without doing the computations. For overseas investments tax computations are normally drawn up on a calendar year basis and the investor taxpayer is unable to access information that would enable apportionment to a 5 April year end to be calculated. An easement is required so that any tax charge is computed on the basis of periods ending in the tax year, and reasonable accountancy fees in ascertaining the taxable amount for UK tax purposes should be allowable for tax purposes. 23. The de minimis would better be struck around a generous shareholding threshold rather than an exclusion, although the alternative would be welcome in some contexts. A practical problem exists in smaller cases in that how is it possible to decide that a shareholding is small without undertaking work to find out. For any other than 100% controlling shareholders there may well be a reluctance to supply information or bear costs to enable this exercise to be done. 4

5 Public investment funds Question 6: Having regard to the proposed business establishment test, what is the extent of the problem? What might be the defining characteristics of such funds? 24. The freedom of movement of capital rules indicate that overseas funds may only be discriminated against if this is a proportionate measure and the threshold in the case of a 'retail' fund is likely to be very high. There is already a regime for offshore funds and a fund or fund of funds should not also be within s720 or s13. Funds may have more complex structures and these will cover a variety of sectors such as private equity, property, equities, bonds, alternative assets etc. As indicated above investment activity is not excluded from EU freedoms and in practice, if the rules are made compliant with this principle, most funds should meet the exclusion test. 25. There is an inference at paras 2.21 and 2.22 that DTAs will be renegotiated in the light of the proposals; this would be inappropriate unless the new rules were themselves compliant with the treaty freedoms that the European Commission considers to be infringed. TRANSFERS OF ASSETS: CHAPTER 2 PART 13 ITA The new exemption Qualifying arm s length transactions Question 7: Does this approach exempting income attributable to a qualifying arm s length transaction achieve the aim set out in Chapter 1 of this consultation document? 26. No it does not achieve the stated aim. It is too complex and not compliant with EU principles. Question 8: Is the definition of economically significant activities sufficiently clear and functional? Would it be helpful for HMRC guidance to direct users of the legislation to additional material such as the OECD s 2010 Report on the Attribution of Profits to Permanent Establishments to help them determine whether economically significant activities are taking place overseas and thus whether the new exemption may be claimed? 27. No, the definition is not clear. Importing OECD principles into a measure designed to apply to individuals and private companies can only lead to cost, confusion and practical difficulties in compliance. The effect of the new exemption Question 9: What should any rule for attributing income to transactions, to ensure that income is exempted only to the extent that it is attributable to economically significant activities that take place overseas, look like? 28. These proposals are misconceived. They will build a further measure of complexity upon legislation that many taxpayers and even many professional advisers cannot understand because of the extensive case law and complexity of the existing legislation. This was a factor which led the European Commission to say that the measure was disproportionate; this further tier of complexity, building upon the existing rules rather than replacing them, must itself be subject to the same criticism. 29. Clearly the case law excludes artificial transactions. The new rules need to recognise that investment as well as trading and other business activity are possible and the level of activity will vary depending on the nature of the business. The rules need to recognise that there are 5

6 many forms of business organisation and many inputs into the creation of profits or income beyond human capital (indeed the case law and some of HMRC's historic arguments on what constitute associated operations to the creation of income recognise this) which is overemphasised in the CD proposals. Question 10: What comments do you have on the operation of the new test to exempt income attributable to qualifying arm s length transactions from a charge under the transfer of assets legislation? 30. The test needs to be clear and EU law compliant. If it is not then the underlying freedom prevails but there are practical complications for both taxpayer and HMRC. Other proposed amendments Identifying relevant income Question 11: Are rules to match income arising to a person abroad with benefits received by a UK individual necessary? 31. The pooling and matching rules mean that s.731 can be more onerous for non-transferors than for transferors. Revision of the rules should remove genuine overseas activities and target abusive situations. Also restricting the matching rules to those within the charge would be disproportionate and unfair where there have been payments or benefits to non-residents. Double charging Question 12: Are there any other circumstances where an application of the transfer of assets provisions could potentially result in a double charge to tax? 32. More complex structures (with tiers of companies for example) frequently give rise to exposure to multiple taxation on what is in essence the same income. Question 13: Would a more extensive double charge relieving provision provide greater clarity and certainty for taxpayers in the operation of these provisions? 33. A statutory double charging relief mechanism is greatly to be welcomed. Double taxation relief Question 14: Do you agree that the approach set out in paragraphs 3.35 to 3.38 will give greater clarification of the way in which the provisions operate in relation to treaty reliefs and ensure that neither treaty provisions nor the transfer of assets legislation is applied in an unintended way to seek a relief that would not otherwise be due? 34. This appears to be a change in the law, not a clarification. Its impact will depend on the precise form of the revised EU compliant measures. If drawn in line with the underlying EU law then the impact may be limited as most activities in jurisdictions with double tax agreements (assuming they have not been established artificially) would be expected to meet the test to be excluded under EU law principles. E sue.moore@icaew.com Copyright ICAEW

7 All rights reserved. This document may be reproduced without specific permission, in whole or part, free of charge and in any format or medium, subject to the conditions that: it is appropriately attributed, replicated accurately and is not used in a misleading context; the source of the extract or document is acknowledged and the title and ICAEW reference number are quoted. Where third-party copyright material has been identified application for permission must be made to the copyright holder. icaew.com/taxfac 7

8 APPENDIX 1 ICAEW TAX FACULTY S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1. Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament. 2. Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. 3. Simple: the tax rules should aim to be simple, understandable and clear in their objectives. 4. Easy to collect and to calculate: a person s tax liability should be easy to calculate and straightforward and cheap to collect. 5. Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes. 6. Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear. 7. Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it. 8. Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed. 9. Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions. 10. Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK. These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99 (see icaew.com/en/technical/tax/taxfaculty/~/media/files/technical/tax/tax%20news/taxguides/taxguide-4-99-towards-a-better-tax-system.ashx ) 8

FINANCE BILL 2012 DRAFT CLAUSES: INFORMATION POWERS

TAXREP 11/12 ICAEW TAX REPRESENTATION FINANCE BILL 2012 DRAFT CLAUSES: INFORMATION POWERS Comments submitted in February 2012 by ICAEW Tax Faculty to HM Revenue & Customs in response to the draft Finance