It has been now more than a year since the Organisation for Economic Cooperation and Development (OECD) issued its recommendations addressing base erosion and profit shifting (BEPS). Following this initiative, Europe has embraced the BEPS Project and has passed various directives at a rapid pace, thus actively contributing to changing the international tax landscape. One of the biggest milestones reached so far is the Anti-Tax Avoidance Directive, which was passed by the Economic and Financial Affairs Council (ECOFIN) in July this year.

The measures of this Directive are expected to have a significant impact on the tax landscape in Europe. Most EU countries are thus already reforming their taxation systems and proposing new tax incentives in compliance with the latest standards.

Luxembourg has not escaped this trend and is adapting its tax framework to both the OECD-BEPS standards and the new EU requirements, while also ensuring that it remains attractive. Luxembourg’s recent announcement of a progressive decrease in the corporate income tax rate, from 21% to 18%, marks one of the first steps towards remaining competitive, and will lead to a global income tax rate of circa 26% in 2018. The government is already considering a further decrease in the corporate income tax rate, but a final decision will not be taken before an assessment of the effects of the BEPS Project and related measures on the State budget is made.

Bearing in mind the above developments, a key element of the country’s competitiveness undoubtedly remains its economic strength and stability. Major rating agencies have confirmed the country’s 'AAA' rating with a stable outlook. And it is further expected that Luxembourg will continue to experience growth superior to the European Union and Eurozone average, which is particularly noteworthy given the current changes in the international corporate tax framework. Additionally, in the context of Brexit, Luxembourg is well positioned compared to other EU countries as a leading centre in Europe for investment funds (in second place worldwide after the USA), and investors can rely on its long-standing business-friendly environment as well as on fewer bureaucratic and administrative hurdles.

Looking into the future, it is clear that the Luxembourg tax landscape will continue to evolve to keep pace with international tax changes. In the short term, the main trends that are likely to remain dominant are a continuing and increased focus, by the Luxembourg and other local tax authorities, on transfer pricing and substance requirements. This has already resulted in the recent release of a new bill in Luxembourg providing further guidance on applying the arm’s length principle from 2017 onwards, in line with the work on Actions 8-10 of the BEPS Project (on ‘Aligning Transfer Pricing Outcomes with Value Creation’). The bill outlines the legal framework for a comparability analysis and emphasises that the arm’s length principle must be applied to all controlled transactions. Another trend that will inevitably derive from all these evolutions, and from tax transparency and automatic exchange of information becoming the new normal, is the increase in tax audits and cross-border tax disputes.

These international developments will heavily affect multinational groups, which face the challenge of understanding the changes, delineating the unique ways in which their organisations are affected, and mapping out the best way to respond. Companies must therefore start reshaping their structures and business models, where appropriate. They must also ensure that they have adequate transfer pricing and supporting documentation to outline how they have determined the arm’s length principle for their intra-group transactions in the context of a wider value chain analysis, and to demonstrate that they have the right economic substance and business rationales underlying their transactions. This will definitely be key in a world in which tax authorities worldwide have, more rapidly than ever, greater access to all taxpayers’ data.

New figures published by City of London Corporation show that the total tax contribution for the financial services sector reached £71.4 billion in the year to 31^st March 2016. This was a 7.4% increase on the previous year’s figures and the highest in the nine years that the report has been produced.

The contribution, which is the last set of financial services tax data to be published before Brexit negotiations commence, is 11.5% of total UK government tax receipts. It also shows that for every £1 of corporation tax paid – one of the largest direct taxes - there is another £3.83 paid in other direct taxes.

The report, which was produced by PwC, shows banks and insurance firms were the highest overall tax-paying sub-sectors, due to reforms in corporation tax and the bank levy. The analysis shows financial firms paid £8.4 billion in corporation tax, up from £7.6 billion (10.5%) on the year before, whilst the bank levy saw foreign and UK based banks contribute £3.4 billion in the last financial year – an increase of more than 25%.

Data from the report shows that the equivalent of almost a quarter (23.3%) of financial services’ turnover in the last financial year went straight to the public coffers.

For the first time since the data has been collected, the analysis compares the sector’s highest tax contributors - banks and insurers. Other than highlighting sector-specific levies and tax measures, the comparison shows that employment taxes make up over half of the contribution from banks but are less significant for insurers, where they make up less than a third of the contribution.

Overall, employment generates the largest amounts of tax paid into the public finances, accounting for 47.8% of total receipts. Financial services employs 1.1million people across the UK (3.4% of the workforce), while the study found average employment taxes per employee were over £32,000. Reforms on pension drawdowns, which came into force in April this year, are also represented in employees’ tax totals but is expected to level out in next year’s data.

Mark Boleat, Policy Chairman at the City of London Corporation said: “As the last set of data on financial services’ tax contribution before the Brexit negotiations begin, it is hugely important.

“In light of the UK’s decision to leave the EU, these new findings not only demonstrate the significant contribution made to Government revenues, but are also key in helping us to understand the potential impact of Brexit on different sub-sectors within financial services.

“As one of the UK’s biggest service exporters, it’s understandable the sector also contributes a considerable amount of tax. Despite this, the sector arguably stands most to lose as negotiations loom. It makes it clear the argument that Government should be engaging with firms as it approaches talks with the remaining EU 27, and the pulling of the political trigger.”

Andrew Kail, Head of Financial Services at PwC, said: "The City of London Corporation report shows the continued importance of the financial services sector to the UK Exchequer and the wider economy.

"Specifically, the report highlights an increasing reliance on tax receipts from banking and insurance firms. This is balanced against a backdrop of downward pressure affecting return on equity for the banks in particular, resulting from regulatory changes and the low interest rate environment.

"With the added potential adverse impacts of Brexit on the sector, the question arises as to whether the current levels of tax contribution are sustainable."

Indirect taxes – which companies collect on behalf of others, such as income tax collected under PAYE, employee tax and national insurance contributions – are 1.27 times the size of direct taxes, such as corporation tax and the bank levy. For every £1 of corporation tax paid by financial services companies there is another £6.01 in taxes collected. Employees’ income tax and NIC deducted under PAYE are the largest taxes collected, and together represent on average 65.4% of the total taxes collected.

(Source: City of London Corporation)

Over the next few pages, Finance Monthly speaks with one of Australia's leading tax lawyers - Dr Niv Tadmore, who introduces us to the Australian transfer pricing system.

What are the most important features of the new transfer pricing provisions in Australia?

Australia's new transfer pricing rules have some important differences to the OECD Guidelines.

In the past, the question was more focused on pricing the transaction, whereas now the question would be what are we pricing - the transaction that actually took place, or a notional transaction?  In other words, the first question is moving towards "what is the counterfactual"?

However, transfer pricing in Australia is now expected to move towards restructuring and recharacterisations.

What makes the Australian Taxation Office (ATO) likely to review a taxpayer’s affairs? Are there any particular risk factors to be aware of?

The ATO generally reviews almost all large transactions. If the transaction is large, but simple and routine, then the level of scrutiny may be light. The more complex the transaction and the less comparables there are, the higher the likelihood of intense scrutiny is. Among the risk factors that one needs to be aware of are:

• the global economic value creation chain and hubs;
• profitable functions that are performed outside Australia in low tax jurisdictions, such as Singapore;
• dealings in intangibles;
• restructures;
• project finance in Australia;
• financial instruments, derivatives and hybrids; and
• large industries such as LNG.

What can be done to reinforce a taxpayer’s transfer pricing position in anticipation of an ATO review?

First of all - strengthening traditional transfer pricing documentation. In order to achieve this, the focus should not be only on the economic analysis, but also on the factual assumptions, which require substantiation by way of admissible evidence. It is important to remember that the ATO challenges the factual assumptions in the taxpayer’s transfer pricing documentation. Very importantly, the taxpayer bears the onus of proof. The economic analysis may be undermined if the assumption cannot be proven as a matter of fact by the taxpayer.

Another vital step in the process is considering the counterfactual from the beginning. There are two questions that the taxpayer should ask (and be able to prove, using evidence to support their assertions): “What other option would be available to achieve a commercial outcome?” and “Why are those options less favourable to the Australian entity than the transaction that actually took place?”

What is the ATO focus in transfer pricing disputes? How has this changed over time?

The ATO traditionally focused on pricing and tended to accept assertions made by taxpayers. In contrast, today the ATO does not accept assertions – it challenges them. It also looks at counterfactuals and takes a global perspective, focusing on the global value economic value creation chain, beyond Australia.

Do you have any particular tips for taxpayers to bear in mind when being reviewed by the ATO?

Timing and resourcing tips:

-Transfer pricing reviews by the ATO are often lengthy. As a rough guide, they may take a year and a half to two and a half years;

-Taxpayers will normally have resource constraints and should use their resources efficiently and wisely throughout the period. Taxpayers should bear in mind that the information gathering process that takes place at the beginning of the process could be quite resource intensive.

Relationship tips:

• As distinct from other countries, the ATO is suspicious of an overly formal approach adopted by taxpayers;
• It is important to keep a constructive relationship and dialogue with the audit team, although that may not be easy at all times. In our experience, this is the most constructive and effective way to handle a dispute;
• Sometimes a taxpayer may feel that a particular decision or conduct of the audit team requires escalation to a higher team within the ATO. In certain cases, such a view will be warranted, however we would recommend not overusing this approach, in order to maintain its effectiveness.

Process tips:

• Information requests can be onerous in terms of scope and timeframe. We advise taxpayers to engage with the ATO regarding how the scope of a request can be narrowed and what the timeframe should be;
• Once the scope and the timeframe of the request are settled, it is important to get on with the process and ensure it is done in accordance with what has been agreed. Rightly or wrongly, delays can make the ATO suspicious and that can then result in a negative impact on the dispute going forward.

What is your approach to resolving transfer pricing disputes with the ATO?

Relationship approach:

-Remember that the ATO’s approach and philosophy may be different to that of other revenue authorities;

-One of the key drivers in a review context will be constructive engagement with the ATO;

-Engagement is based on a voluntary framework, rather than a formal and legalistic framework imposed by the ATO;

- A formal framework is not only much more costly and onerous, but it is also likely to lead to less favourable outcomes and potentially litigation in open court.

Timing approach:

• There is a tendency among taxpayers, especially those who are not experienced in the Australian dispute environment, to propose resolution at the very early stages of the review, typically during the information gathering process;
• The ATO as a matter of principle would be reluctant to resolve matters at this stage before receiving and reviewing the information. Unless there are really obvious cases, such as attempts would have a strategically negative outcome. The ATO may also perceive this approach as being ‘too little, too early’, and this could be viewed with suspicion by the ATO;
• After the information gathering process is complete, the ATO would the issue a position paper. This is the point where the ATO would start to feel more comfortable to discuss a resolution of the matter.

Settlement approach:

-Settlement discussions should occur on a without prejudice basis;

-The guiding principle for both sides will be what the ATO calls the ‘litigation risk test:

• this is effectively an assessment by the ATO of its chances to win or lose the case if it went to court;
• given that we have new law today in Australia, part of the litigation risk may be based on legal questions based on the interpretation and construction of the new provisions;
• in addition, many times the lion's share of the litigation risk will be based on factual issues and the ability to prove them. The litigation risk is based on the ability to prove the correctness of the assertions and the economic analysis of the taxpayer, and the ATO will assess the quality and the admissibility of the evidence the taxpayer can produce. This is significant given that the onus of proof is on the taxpayer;

-Very recently, the ATO created a new function, called Independent Assurance of Settlements. This is a review of settlements on which the ATO has already agreed conducted by retired judges:

• its purpose is to assure the community that the ATO is conducting a settlement process properly and to enable the ATO to improve its settlement processes as well;
• this is a new process, and is only a few weeks old. One of the more obvious implications is that the settlement submission should be tailored to the eyes of a judge rather than just the eyes of an economist, for example. This means that the emphasis should be more on the legal and evidentiary analysis of the taxpayer’s offer.

How do you see the Australian transfer pricing landscape developing in the future?

Like in other countries, transfer pricing will be an area with increasing revenue office focus because the law is new and there's large amounts of money at stake.

The ATO has significantly boosted its internal resources by recruitment in this particular area and we are certainly seeing a growth in terms of the scope, intensity and comprehensiveness of ATO reviews.

We think the ATO will be more and more willing to use its reconstruction powers and will take a stricter approach to penalties.

Whilst there is a growing trend to increase the use of Advance Pricing Agreements (APAs) and the ATO has been encouraging their use, the ATO is becoming more selective regarding which taxpayers may be admitted to the process and more rigorous when reviewing APA applications.  There may be scope for growing disputes between the ATO and other revenue offices when bilateral APAs are negotiated, or where disputes involving the Mutual Agreement Procedure provisions in treaties arise.  Australia is one of 20 countries committed to mandatory binding arbitration under the Base Erosion and Profit Shifting (BEPS) project.

The ATO has also said it would look to run some test cases in order to test the boundaries of the law.  Identifying test cases it wants to run forms part of the ATO review process.

We see that transfer pricing is becoming a more important agenda item, not only within internal tax teams, but also at the level of senior management of the company.

An effective risk management system around transfer pricing may not prevent an audit by the ATO, but may make the audit process less onerous, with much higher likelihood of a positive outcome.

Food for thought

Do you have a mantra or motto you live by when it comes to helping your clients?

My key principle is that you have to put yourself in the client's shoes and look at the issue from their broader perspective.This means never considering the narrow legal issue in a vacuum, but looking at the broader issues that affect the company, such as the relationship with the ATO, governance and certainty and above all, the broader commercial context of the dispute.

What would be your top 3 tips on ‘going the extra step’?

• Adopt a solution-oriented approach - try to progress and resolve matters, rather than adopting a narrow focus solely based on a legal argumentative approach.
• Be proactive with the client and the ATO - anticipate the next steps and be ready to handle them.
• Conventional ideas can only take you so far - to resolve the difficult issues we deal with, you often need to broaden the spectrum of possible approaches and solutions to the issue at hand.

What does a typical day in the office look like for you?

I like to start each day with a run. Once I'm in the office, my day involves:

• a lot of client interaction;
• engaging in discussions with the ATO;
• discussing strategy with the team; and
• supervising and settling documents and submissions to the ATO.

It is a dynamic practice and no two days are the same.

Career highlights

• building a team of 10 excellent lawyers with whom I enjoy working;
• building a practice that includes some of the largest groups in the world as clients; and
• developing the position of a thought leader in my area of expertise.

[Contact details]

Website: https://www.claytonutz.com/

Aware of the coverage of transfer pricing in the media in recent years, Finance Monthly interviews Ruth Steedman, Managing Director at FTI Consulting, who has specialised in transfer pricing for over 20 years. Ruth works with multinationals to determine and implement transfer pricing solutions.  At FTI Consulting, Ruth leads a team of over 10 dedicated transfer pricing advisors, working alongside tax, economics, strategic communications and corporate finance professionals.

We have heard a lot about BEPS in a transfer pricing (“TP”) context. What do finance managers need to be aware of in relation to BEPS and TP guidance?

As part of the BEPS project, the OECD has introduced extensive new guidance for TP and international tax – much of this is already reflected in UK law. In particular, there is a focus on understanding where risks are controlled and borne within groups and remunerating group companies accordingly. Another key theme is the requirement to have sufficient economic substance, for which there is a parallel with the UK’s Diverted Profits Tax that was introduced in 2015.

Economic substance is not a clearly defined term - it perhaps suffices to say that it is no longer sufficient for risk to be borne on paper. Rather, the reality of decision making and control needs to align with intercompany contractual arrangements.

In addition, there are specific recommendations resulting from the BEPS project (under Action 4) that will impact multinational companies with intercompany borrowing. Also, companies having activity overseas should be aware of the changes to the definition of permanent establishment (“PE”) under Action 7. And, of course, there is the introduction of country-by-country (“CbC “) reporting, which is a huge development.

What is the significance of CbC reporting?

CbC reporting requires multinational groups with consolidated revenue of Euros 750 million or more to report various financial information (including revenue, profit, headcount, tax paid) on a country-by-country basis to tax authorities. In the UK this requirement is already effective for financial years starting on or after 1 January 2016.

An electronic exchange will be set up to allow tax authorities in different countries to easily exchange CbC reports, thereby potentially making the CbC data for a multinational available to the tax authority in every country where it operates. Qualifying companies are grappling with assembling the necessary information and considering how that information may be interpreted by tax authorities. Significantly, there is wide expectation that the introduction of CbC reporting will lead to an increase in TP audits around the world, which typically take a lot of time and resources to manage.

Multinationals with revenue below Euros 750 million should not be complacent as the threshold for CbC reporting is expected to come down. Smaller groups that are required to prepare transfer pricing documentation for UK purposes should consider whether to prepare TP documentation in the Master File/Local File format prescribed by the OECD.

Could you tell us more about BEPs Action 4 and what is happening in the UK?

The UK will adopt the OECD’s recommendations under Action 4 with effect from 1 April 2017 to cap the amount of relief for net interest expense. Specifically, a fixed ratio rule will be introduced limiting the tax deductions available for net interest expense to 30% of UK earnings (EBITDA). A consultation is in progress which will determine the detail of the new rules and there remains huge uncertainty for business in relation to the impact of these changes. Undoubtedly, the ETR of a lot of companies will be affected and we are already seeing moves by a number of groups to undertake a wholesale transfer pricing/supply chain restructuring.

As a thought leader in this segment, how are you keeping abreast of technical developments and interpreting new requirements?

The team at FTI Consulting has contributed to the OECD’s public consultation on new TP guidance and recently spoke at the OECD on the attribution of profit to PEs and proposed guidance for the application of the Profit Split method. As well as drawing on former HMRC experience and supply chain specialists within the team, we also have a team of experienced economists and valuation experts with whom we develop economic analyses to satisfy the increasingly complex requirements of the OECD.

Given all the recent changes in TP, what practical recommendations do you have for companies?

Our advice is in two parts: now is the time to undertake a substance and risk review and assess alignment of TP policies with the new OECD guidance for TP. Secondly, we recommend companies prepare their CbC report and Master File/Local Files as soon as possible and ensure that there is consistency between the various reports.

Is there anything else you would like to add?

We are clearly moving to an environment of greater transparency in relation to tax and TP. There are moves in the European Parliament to make the publication of CbC reports compulsory and in the UK large companies are now required to publish a tax strategy online. As of mid-September, the UK Treasury has the power to pass new regulations to require the inclusion of a company’s CbC report in their published tax strategy. It remains to be seen whether the UK Treasury enforces these powers, but in the interim companies are advised to prepare their CbC report and tax strategy.

Commenting on the European Commission proposal to simplify rules on value-added tax (VAT) for cross-border e-commerce, Ian Young, ICAEW International Tax Manager, said:

“According to a forthcoming ICAEW-EGIAN survey of more than 170 tax professionals from 29 European countries, which is the first of its kind, VAT is seen as the single most complex tax category for businesses with 2 in 3 companies struggling to comply with VAT rules. The proposals to simplify the rules are good news but ultimately a more stable and simple tax system is what is wanted by companies of all sizes across Europe.

“The public is rightly concerned about tax avoidance and the European Commission is actively pursuing change through a variety of reform measures. These, however, need to ensure that they bring real and genuine simplification.

“The abolition of the low value consignment relief may help counter avoidance but the collection of VAT on the import of millions of small value packages may prove onerous. The EC proposal to introduce a de minimis threshold will enable the smallest businesses to treat cross-border online sales under €10,000 as if they had been sold domestically – something that has been a significant barrier to intra-community trade by small businesses. Additionally, it will be down to each government to decide if it will implement the proposal to align VAT rates between electronic and hard copy publications.”

(Source: ICAEW)

In light of the UK’s Chancellor Philip Hammond’s Autumn Statement today, where he vowed to make the UK economy "resilient" in its exit from the EU, and noted an expected economy of higher borrowing and slower growth, Finance Monthly has heard from several sources who have given their opinions and comments on the Chancellor’s announcements. The comments below range regarding the productivity investment fund, tax free personal allowance, and the new NS&I savings bond, to the fintech sector, economic forecast, IR35 tax legislation, and general funding in infrastructure, R&D and more.

You can read about the key points delivered in Hammond’s Autumn Statement here.

CEO and Co-Founder of MoneyFarm, Giovanni Daprà:

Tax free personal allowance

By raising the tax free personal allowance and higher rate threshold, the government is providing Brits a terrific opportunity to save and invest more money. By 2020 when these changes are in full effect, people earning £30,000 will have close to an additional £300 in their purse each year while those earning £50,000 will be as much as £1,700 better off. Investing this money for the future, as it is earned, is an incredibly easy way to grow wealth over time.

News savings bond

The new savings bond announced today is a reminder from the government that interest rates are low so Brits need to consider an alternative to cash savings. Chancellor Hammond has provided a potential solution in terms of capital preservation – however a 3 year term at 2.2% will tie up money. Some expectations suggest inflation may shoot above the target 2% during that time frame, in which case locking money into this bond may hinder wealth growth.

This is one option but each individual needs to look at their personal circumstance and financial goals to see if a savings bond is a good solution for them. There are other alternatives to cash savings in the investment market, the growth of robo-advice has helped make this more affordable.

Kerim Derhalli, CEO and Founder of invstr:

Much has been made of the recent dip in venture funding within fintech, but we’re simply observing the typical cycle of an innovative environment. The fintech boom has seen rise to many impressive products, but also a large quantity of lower level pretenders who will, naturally, fall by the wayside. Venture capitalists have now reached a point where only the best ideas with real longevity will find funding.

The key for foreign investors looking to invest in the booming UK fintech scene is consistency. By essentially maintaining the status quo in today’s statement, Mr Hammond has gone a way to restoring calmer waters following the tidal wave of concern following Brexit and Donald Trump’s election. The reality is that, despite various forecasts, no one really knows what Brexit means so businesses will look to reduce their own volatility until details emerge.

The City is going to remain the hub of finance and fintech, irrespective of Brexit. The likes of Barclays and HSBC have already said as much. If a fintech start-up wants to succeed it needs to be where it’s at – which is the UK. For now, the outlook doesn’t look too bad.

Markus Kuger, Senior Economist at Dun & Bradstreet:

In the UK government’s first major economic statement since the shock Brexit vote, Chancellor of the Exchequer Phillip Hammond has announced a series of new measures designed to alleviate the economic pressures facing businesses in the UK. Firms looking to combat the continued slowdown of business growth and navigate fluctuating global markets should turn to data as the key to unlocking smart growth and mitigating risks.

A bleak forecast was expected from the UK government, and similarities with the US, following the surprise ascension to power of Donald Trump, won’t go unnoticed in the globalised business world. It’s also important to note that the long-term impact of Brexit is yet to be felt, as Article 50 is only likely to be invoked in Q1 of next year.

With levels of uncertainty remaining very high, Dun & Bradstreet is maintaining its ‘deteriorating’ outlook for the UK’s country risk rating. The two downgrades we have made to the UK’s rating since the referendum make the UK the worst performing economy in 2016, in terms of rating changes. In this light, we remind companies that it’s crucial to carefully assess growth opportunities, while preparing for the far-reaching negative implications of Brexit.

Geoff Smith, Managing Director of Experis UK & Ireland:

In response to the £23bn Productivity Investment Fund

It’s pleasing to see the Government pledge billions of pounds worth of investment into the tech and science sectors in a bid to create more highly-skilled and better-paid jobs. Despite high employment levels in the UK, productivity remains low, part of which is down to the rise in low-paid, low-skilled jobs, following the economic crisis, so it’s encouraging to see the Chancellor attempt to turn things around.

However, if we’re to see an improvement in wages and living conditions, it’s vital that we upskill the tech sector as quickly as possible. Organisations are struggling to find the right talent, and as a result, demand and remuneration for IT professionals continue to grow, with cloud, IT security and mobile skills most in demand, according to our recent Tech Cities Job Watch research.

Upskilling will be vital to success for businesses that want to retain their best talent. By offering the right training and development opportunities, organisations can support their employees in learning the latest skills as these evolve. This needn’t be a complicated or expensive process – a lot of the skills that IT professionals already have are easily transferrable.

To take advantage of the Government’s funding boost, businesses need to think about building their optimum teams for the future.  We work closely with our customers to ensure they have a long-term workforce solution in place when it comes to anticipating what skills will be needed three to five years from now, and the IT know-how required to deliver business success.

In response to the changes to IR35 tax legislation

While HMRC’s intentions to amend existing IR35 legislation in a bid to crack down on tax avoidance should be lauded, we’re concerned about the impact that the change in regulation will have on the IT sector. In an industry where organisations are already struggling to find the right talent, there is a serious risk of ‘brain drain’, whereby projects could be ground to a halt until they find individuals willing and able to work under the new regulations. In fact, we wouldn’t be surprised to see how such a change might encourage existing IT professionals to set their sights abroad to countries courting their talent in a post-Brexit world.

To mitigate against any likely risk, organisations should prepare for these changes now, and also optimise their use of talent for the long term. This can be done in various ways. Firstly, invest in Employed Consultants (ECs) that are permanently employed by recruitment companies and sit outside the scope of the legislation. ECs will be a steady investment for any project, and will offer organisations cost savings and flexibility. Secondly, if developed correctly, Statement of Work projects that clarify deliverables/results, resources, costs, and timelines will help ensure that all Personal Service Company (PSC) work is compliant with IR35 requirements. Finally, consider implementing a Managed Service which will help reduce the time taken to process a high number of contractors, by transferring all the admin and risk to the master vendor.

Lucy-Rose Walker, CEO of Entrepreneurial Spark:

The Chancellor’s pledge to provide an economic environment that drives productivity and supports growth sounds great for entrepreneurs, but we’re keen to see more support for early stage and scale-up businesses in the form of tax relief, access to finance and support for employing and developing people.

On broadband investment

Technology is a great enabler for business growth and here at Entrepreneurial Spark we’re seeing growing momentum across the UK in the technology sector. Investing in broadband will help more internet based businesses to grow, however many of our Chiclets and alumni are facing issues in accessing basic broadband services, so access for all should be prioritised before investment is made into 5G networks. We are currently looking to the future to help entrepreneurs right across the UK through a virtual business growth enablement programme so access to broadband is essential to help us deliver this.

On R&D funding

Investment into R&D is crucial for British firms to compete in a global economy. The commitment of £2 billion per year in tax breaks between now and 2020 for research and development will certainly help, however we’d like to see more done to help start-ups and scale ups access finance to help them grow.

On regional investment

The increased support for economies outside of London will help to strengthen entrepreneurship and economic growth across the UK through schemes such as City Deals and investment into regional transport infrastructure.

On the British Business Bank VC Fund

Unlocking £1bn in finance for growing firms through the British Business Bank as venture capital funding is a great step forward in helping start-up and scale-up businesses to invest in growth.

On Corporation Tax

Sticking to the previously announced tax roadmap is a good move for the Chancellor, reducing corporation tax to 17% by 2020 as previously planned is crucial at this time of uncertainty for British business. We hope this will see continued investment into UK start-ups.

Jake Trask, currency analyst at UKForex:

Sterling fell this afternoon as Philip Hammond announced a raft of measures in an effort to stave off a potential post-Brexit slowdown as we head into 2017.

The pound jumped earlier, as measures to tackle a lack of productivity were announced. However, this good news was tempered by the feeling that the statement didn’t go far enough with regards to infrastructure projects and other measures to promote growth. After an initial snap higher, the pound fell away as investors were left disappointed by the Chancellor’s stimulus package.

Ben Brettell, Senior economist at Hargreaves Lansdown:

We might have a new chancellor but Philip Hammond’s speech today came straight out of the George Osborne playbook.

Like his predecessor he was keen to stress the economic positives in his opening remarks, highlighting that the IMF predicts the UK will be the fastest growing major economy this year, with employment at a record high.

To be fair to Mr Hammond, the economy has proved surprisingly resilient in the wake of the vote to leave the EU. Nevertheless forecasts were unsurprisingly downgraded, to 1.4% next year and 1.7% the year after.

Also predictable were the abandonment of the commitment to eradicate the deficit by 2019/20 and the announcement of a mild fiscal stimulus, focused on housing and infrastructure, and with an emphasis on regional development and improving productivity.

This focus on productivity was welcome, and long overdue. The UK has fallen behind in productivity for too long, though it should be noted that promising to tackle the problem is much easier than finding a solution.

Danny Cox, Chartered financial planner at Hargreaves Lansdown:

We saw from the popularity of the NS&I ‘pensioner’ bonds introduced back in January 2015, how savers are desperate for a better return on their cash. With no end to low interest rates in sight a new bond aiming to pay 2.2% over 3 years and a limit of £3,000 is a decent gesture, but with inflation rising and heading toward 3%, its unlikely money in this new bond savings will do anything but go backwards.

Ray Withers, CEO of Property Frontiers:

This statement was less show-stopping than usual, though not without its moments. Hammond is apparently keener on setting top-level economic policy than laying out specific spending measures, which will sensibly (if less entertainingly) be left for individual departments. His overarching themes included easing pre-referendum austerity commitments, more (and less glamorous) spending on infrastructure and housebuilding, and help for struggling families.

The best way to help working people is simply to fix the economy, and we are hopeful that Hammond's moves on that front will be successful.

More interestingly for those of us in the industry, however, the Chancellor today cemented the place of housebuilding as the cornerstone of Mrs May's refashioned 'working for everyone' economy.

There is important work to be done on that front. 'Just about managing' families are more than twice as likely to rent privately as to own their own homes and the Treasury is clear about its intention to help would-be buyers get a foot on the ladder.

The main pledge today - a £2.3bn fund for 100,000 new homes in high demand areas - is relatively substantial, but even smarter is the focus on infrastructure spending in ways and places that support new development.

An encouraging takeaway from this supposedly final autumn statement is a clear indication that the government understands the need to make the rental sector more affordable in addition to beefing up its traditional focus on housebuilding.

With landlords still reeling from Osborne's final statement, we had been hoping that Hammond's first would also offer them some conciliatory breathing room in this area. A reversal of the recent changes around stamp duty and tax relief on mortgage payments, as a string of industry bodies have called for, was always a long shot and did not happen.

Indeed, the prospect of a silver lining of any kind faded fast with news overnight heralding a now-confirmed ban on lettings fees. The Chancellor in fact targeted landlords specifically with the rebuff: 'landlords appoint letting agents and landlords should meet their fees'.

A ban of this kind is something that has been the subject of debate for some time, and so not altogether surprising. Scottish renters already benefit from something similar, while English households reportedly face average fees of £337 per year. Some of those fees are indeed overinflated, but the key question is: who will eat the cost?

It is not difficult to imagine a farcical parlour game in which the Treasury passes the cost from tenants to agents, who pass it to landlords, who in turn pass it back to tenants. The only part of the chain at no risk of incurring the cost is the Treasury itself, and indeed a subsidy for agents to charge extortionate fees is ridiculous.

But this is indicative of a wider and more worrying misunderstanding in the government's handling of the private rental market: it is largely treated as a zero sum game in which losses for landlords are automatically wins for tenants. That is not the case.

With any luck, the repercussions of this new ban will focus the debate on the balance of pressures affecting every part of the rental supply chain - including landlords. Recent moves giving the Bank of England powers to limit overstretched buy-to-let mortgages, for example, seem like a better way of discouraging the darker side of the rental market than squeezing profits for all landlords.

We wish the Chancellor great success with his new program, and have faith that the pendulum will swing back if the desired corrections to the housing market do underwhelm. In the meantime it is not such a bad time to be a landlord: mortgage rates are at historic lows, and Savills projects rent increases of around 19% across the country in the next five years.

On a more local and self-centred note, we are delighted at the confirmation of a £27m expressway connecting our hometown of Oxford with Cambridge via Milton Keynes. Congestion is probably the main constraint on the UK's twin knowledge economies, and shortened commutes will be a welcome boost to our own staff morale, when it eventually happens.

Charles Owen, Founder of CoInvestor:

Hammond’s announcement to reduce the Money Purchase Annual Allowance is likely to come as a blow to those who currently benefit from double tax relief on their pensions. However, significant tax relief can still be found through investing in alternative assets, such as those under the Enterprise Investment Scheme and Venture Capital Trusts.

It is becoming increasingly important that investors assess how they can diversify their portfolio to protect themselves against economic volatility. Our research has shown that half (48%) of mass affluent Britons who decided to act on pensions freedoms now feel more in control of their own investments and 38% have already benefitted from alternative tax-efficient investments. Considering the decreasing state support and the growing mistrust in pension schemes, we expect this trend to continue as Britons look to take growing their pensions into their own hands.

Tax professionals already anticipate an expected onslaught of VAT changes resulting from the United Kingdom’s exiting the European Union, according to a recent poll by Avalara EMEA, a leading provider of cloud-based tax compliance automation for businesses of all sizes.  51 percent project increased complexity in VAT compliance, and paying more in VAT and customs (68%).  While 53 percent of those polled expect substantial impact on their businesses, more than half have not yet begun planning for Brexit at all (54%).

“Now more than ever, VAT automation becomes key to ensure businesses are prepared for the new requirements of Brexit,” said Richard Asquith, VP of Global Indirect Tax, Avalara EMEA.  “While the timing remains uncertain, businesses can start to prepare now by ensuring they are set up with the right technology.  VAT automation platforms ensure organisations remain compliant with regulations and do not suffer the burden of huge losses in the midst of navigating a new trade environment.  Updating systems now can ensure a seamless transition once Brexit arrives.”

The poll also uncovered the following findings:

• 49% predict Brexit will happen by the end of 2020, a ‘soft exit’
• Half anticipate the UK will adopt a Canadian trade model (World Trade Organization/Free Trade Agreement)
• Poll respondents believe that the highest risks Brexit will bring for the industry include:
  • 63% - Preparedness of HM Revenue & Customs
  • 55% - Increases in customs and other border costs
  • 45% - Adapting internal enterprise resource planning (ERP) systems

EU VAT Implications

Avalara anticipates many areas of shared VAT practices will be reviewed and revised as Brexit negotiations take place.  Some of those include the following:

• Legislation - Upon completion of the exit negotiations, the UK will no longer be required to follow the EU VAT Directive or European Court of Justice (ECJ) rulings. Instead, the UK’s VAT Act will take supremacy. The UK government will be free to amend the Act to reflect its fiscal policy objectives.
• Exit from the single market - The major VAT change for UK companies following Brexit will be the loss of their intra-community trading status. Instead of zero-rating B2B sales to EU companies, transactions will be treated as imports into the EU, and subject to EU VAT.
• UK to join the EEA? - It is possible that the UK could become a member of the European Economic Area, which participates in the Single Market encompassing the free movement of goods, services, people and capital. This would give the UK many of the benefits of free trade with the EU, although it would lose the right to have a veto or vote over any EU laws passed that are imposed on EEA members.  The EEA does not cover indirect tax, so the UKwould remain outside of the EU VAT regime.

• Freedom to set UK VAT rates - The UK will no longer be constrained by the EU VAT Directive on setting its VAT rates. The UK will therefore be uninhibited to change reduced VAT rates on key products like domestic fuel, women’s sanitary products and e-books.
• EU VAT recovery - UK companies will lose the right to use the simplified 8th Directive online VAT recovery system for their EU VAT reclaims. Instead, since they will be non-EU companies, they will have to resort to the paper-based 13th Directive regime. This is slower, and prone to challenges from the tax authorities.

For more information on Avalara and ongoing news on Brexit and the tax industry, please visit www.vatlive.com. 

Poll conducted on 13^th September 2016 at Avalara’s VAT Summit with 60 VAT specialists.

“The recent amendment to the UK Finance Bill 2016 to include enabling legislation that would require companies to publish a ‘country-by-country report’ (CbCR), showing where they paid their taxes and earned their revenues, is nothing more than an ineffectual naming and shaming exercise,” says Miles Dean, Managing Partner, Milestone International Tax.

“If countries do adopt CbCR, what purpose does it serve? It would show that countries like Luxembourg and Ireland aren't interested in Corporation Tax - they want bums on seats; they want jobs that produce income, that generates income tax receipts, and that gives rise to consumption, thus producing VAT receipts. This begs the question: is Corporation Tax necessary? Is it the solution, or is there an alternative? Maybe Ireland and Luxembourg are ahead of the curve on this one.

“What gets missed in all of this brouhaha is the fact that whatever tax is suffered by a multinational enterprise (MNE) is ultimately passed on to the consumer: Vodafone, Starbucks, Amazon, Boots, Shell, Apple etc., would simply increase the price of their product to protect their bottom line.

“What CbCR would undoubtedly show up is that the US tax system is to blame for much of the corporate tax ‘abuse’. An outdated, not fit for purpose Controlled Foreign Companies (CFC) regime, coupled with the ‘Check the Box’ election, no exemption for foreign dividends, and pliant treaty partners like Luxembourg and Ireland (who can't compete unless they drop their Corporation Tax aspirations), and you have the perfect (tax) storm: very low effective corporate tax rate and long term tax deferral (there being no incentive for the likes of Apple to repatriate their profits to the US).

“The UK and other countries can bleat about how unfair it is that Ireland and Luxembourg are gaming the system, but HMRC could have policed its treaty network better, including invoking anti-abuse provisions in its treaties (Limitation on Benefits).

“Earlier this week Caroline Flint MP said: ‘Today is a victory for fairer taxation. A victory for openness, and a clear message to those global corporations that shift profits to low tax havens, that we expect them to play by the same rules as every other business.’”

“But which UK MNE’s is she concerned about? She probably can’t name one UK MNE that she thinks these new rules will apply to or affect. The simple reason for this is that it is US MNE’s and their legitimate tax planning (which they have employed in reaction to the laws set down by their legislature), that is the focus of most attention, and which has skewed the debate. There is no political will in the US to change the status quo, nor is there any evidence that the US will kowtow to the OECD. So the campaigners and MP’s can holler all they like, but CbCR isn’t going to change a great deal.

“The other problem is that the expectations of the likes of Flint will never be met – to suggest a domestic company is the same as a MNE is Alice in Wonderland stuff – either genuinely stupid or wilfully blind. MNE’s are hugely complex enterprises and, like it or not, have the ability to locate operations, risks, staff, manufacturing, etc. wherever they like and wherever they can get the best deal. Period. That’s life and that’s choice. What the campaigners really want is to remove choice.”

(Source: Miles Dean, Managing Partner, Milestone International Tax)

Avalara EMEA, a leading provider of cloud-based transactional tax compliance automation for businesses of all sizes, held its second annual VAT Automation Summit, sponsored by Brewer Morris. The summit brings together leading indirect tax professionals to discuss topics affecting the industry, including EU VAT fraud and the future of tax compliance automation. A central theme of the summit is focused on the need for businesses to adopt tax automation solutions to combat fraud and ensure greater compliance. This topic is timely, due to recent news released by the European Commission regarding the ‘VAT Gap’, or the staggering €160 billion in lost EU VAT revenues in 2014. .

“Moving to real-time tax reporting will help to increase transparency in the VAT system and can prepare businesses for tax authorities’ demands for more, live data,” said summit speaker Richard Asquith, vice president of Global Indirect Tax, Avalara EMEA.  “VAT automation systems are a valuable solution for managing complex VAT processes, such as cross-border sales for businesses trading in countries with different regimes or regulatory requirements.”

In addition to the EU VAT Gap, the summit is addressing major developments shaping domestic and international trade, including the UK’s initiative to streamline the tax reporting process through its 2020 ‘Making Tax Digital’ initiative. Through this new system, HM Revenue & Customs aims to eliminate the tax return over the next five years.  Instead, businesses will be required to track tax compliance digitally and update HMRC at least quarterly via a digital account.  The goal of this proposal is to create a more efficient tax reporting process; with further regulatory change on the horizon, such as Brexit, its implementation is paramount.

Across the globe, countries such as China, India, Egypt and the Gulf Cooperation Council (GCC) states, are placing increased emphasis on VAT collections or introducing new regimes. These new systems lead to further changes in international VAT requirements, and thus further complexity.

New regulations and the need to mitigate fraud present a prime opportunity for tax automation services that help businesses to comply with country VAT rates and eliminate errors which are costing firms millions in tax penalties.

Blockchain technology

While VAT automation services offer a more immediate solution to address these recent trends, a longer term opportunity for accountants lies in blockchain technology.  This public ledger system records and validates each and every transaction.  Entries are registered and cryptographically sealed, making them nearly impossible to falsify or destroy.

“Blockchain technology has massive implications for tax professionals,” said Kid Misso, Senior Director of Solution Consulting, Avalara EMEA.  “The fact that it is a validated agreement between two or more parties means it cannot be repudiated or invalidated. The indelibility, speed, and synchronization of this technology can lead to greater accuracy and transparency, helping to reduce the likelihood of fraud in the future.”

For more information on Avalara and video from the 2016 VAT Automation Summit, please visit www.vatlive.com. 

The European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid.

Commissioner Margrethe Vestager, in charge of competition policy, said: "Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules. The Commission's investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 % on its European profits in 2003 down to 0.005 % in 2014."

Following an in-depth state aid investigation launched in June 2014, the European Commission has concluded that two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991. The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a "head office". The Commission's assessment showed that these "head offices" existed only on paper and could not have generated such profits. These profits allocated to the "head offices" were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force. As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International.

This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules. The Commission can order recovery of illegal state aid for a ten-year period preceding the Commission's first request for information in 2013. Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to €13 billion, plus interest.

In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.

(Source: European Commission)

Tax transparency is becoming the new norm as the OECD, European Commission and national governments demand more data from businesses. However, many companies do not have systems or resources in place to meet new requirements, according to EY’s report, entitled ‘A new mountain to climb: tax reputation risk, growing transparency demands and the importance of data readiness.’ The report is the third instalment of the 2014-15 Tax risk and controversy survey series, which surveyed 962 tax and finance executives in 27 jurisdictions.

Amid increasing scrutiny of business’ tax arrangements by government and other groups, companies are more focused than ever on tax risk and controversy, with 83% reporting that they regularly brief the CEO or CFO about the issue. For many tax professionals normally accustomed to primary focus on meeting legal and regulatory requirements, this heightened scrutiny is a new and unfamiliar challenge.

Notably, 94% of the largest companies interviewed think that global disclosure and transparency requirements will continue to grow in the next two years. Not surprisingly, 71% of all respondents expressing an opinion said that they would need additional resources in order to gather and provide the information required.

Jay Nibbe, EY’s Global Vice Chair of Tax, says: “We are at a critical stage as the global tax environment evolves. Increasing transparency readiness presents an opportunity not only to comply with new disclosure demands but also to proactively work to mitigate reputation risk. Getting prepared will require some additional investment in technology, data extraction capabilities, and new skills in people resources. It also involves increased awareness on how you think about your tax position, and how it could be perceived by a wide range of stakeholders.”

The European Commission has announced a package of tax transparency measures as part of its ambitious agenda to tackle corporate tax avoidance and harmful tax competition in the EU.

A key element of this Tax Transparency Package is a proposal to introduce the automatic exchange of information between Member States on their tax rulings.

Corporate tax avoidance is thought to deprive EU Member States’ public budgets of billions of euros a year. The EC’s Tax Transparency Package aims to ensure that Member States are equipped with the information they need to protect their tax bases and effectively target companies that try to escape paying their fair share of taxes.

"Everyone has to pay their fair share of tax. This applies to multinationals as to everyone else. With this proposal on the automatic exchange of information, tax authorities would be able to better identify loopholes or duplication of tax between Member States. In the coming months, we will put forward concrete actions to tackle such loopholes or overlaps. We are committed to following up on our promises with real, credible and fair action," said Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "Tolerance has reached rock-bottom for companies that avoid paying their fair share of taxes, and for the regimes that enable them to do this. We have to rebuild the link between where companies really make their profits and where they are taxed. To do this, Member States need to open up and work together. That is what today's Tax Transparency Package aims to achieve."

Transparency on Tax Rulings

The central component of the Transparency Package is a legislative proposal to improve cooperation between Member States in terms on their cross-border tax rulings and it aims to mark the start of a new era of transparency. Currently, Member States share very little information with one another about their tax rulings. The lack of transparency on tax rulings is being exploited by certain companies in order to artificially reduce their tax contribution.

To redress this situation, the Commission proposes to remove this margin for discretion and interpretation. Member States will now be required to automatically exchange information on their tax rulings

The Commission proposes to set a strict timeline: every three months, national tax authorities will have to send a short report to all other Member States on all cross-border tax rulings that they have issued. Member States will then be able to ask for more detailed information on a particular ruling.

The automatic exchange of information on tax rulings will enable Member States to detect certain abusive tax practices by companies and take the necessary action in response. Moreover, it should also encourage healthier tax competition, as tax authorities will be less likely to offer selective tax treatment to companies once this is open to scrutiny by their peers.