The International Tax Round Autumn 2023

Editor’s message

Draping the steps of the Royal Exchange that beam with glorious end-of-summer sunshine, I sit alongside dozens of Londoners overhearing numerous tales of flight delay woes. I’d normally have been abroad but these stories, coupled with soaring temperatures, are helping me feel rather well compensated. There is nothing quite like London in the summer.

Adding to this unusually cheerful start to Autumn, and after a full year of major house renovations, I’m finally back home. It’s a wonderful feeling but difficult to describe – I’m home, but it looks and feels different. It’s familiar but there’s newness. It’s comforting yet super exciting.

This paradox leads me to the fierce debate around AI technology and the implications it has on the way we do things, the way we think, the way we live and critically how we embrace what we don’t know. Whether or not you’ve tried the likes of ChatGPT, or whether you agree with it in principle, there’s no doubt that it could save us precious time by doing pretty useful things, despite its difficulty in understanding the complexities of human language and connection. If we allow ourselves to dabble with the art of the possible, will it set off fireworks, or dampen out our creative spark?

Whether you’re on board or have serious concerns that it will nab jobs – and perhaps some brain cells by dumbing us down – it’s clear that AI is not just a passing trend, but rather something that’s weaving its ways into our lives in a tangible way. Are we better off embracing rather than fighting it?

I hope the lingering sunshine eases you into a wonderful Autumn – happy reading!

Contents

• Government open consultation on Transfer pricing, Permanent Establishments and Diverted Profits Tax
• Draft legislation released to change penalties for Promoters of Tax Avoidance Schemes (POTAS)
• Pandora Papers – HMRC to nudge those named
• Putin suspends tax treaties with ‘unfriendly’ companies
• Standout case decided regarding domicile in First-Tier Tribunal (FTT)
• Export system changes
• Summary Report on Chinese Individual Income Tax Policies by Azure Group China

Government open consultation on Transfer pricing, Permanent Establishments and Diverted Profits Tax

The government has recently begun a consultation on possible reforms to UK legislation on Transfer Pricing, Permanent Establishments and Diverted Profits Tax. The possible reforms to be brought forward have three key objectives:

• Ensure multinational enterprises (MNC’s) pay tax on profit made in the UK in the same way as domestic businesses.
• Simplify existing rules in place and develop easier to understand legislation.
• Support growth, by increasing tax certainty and access to tax treaty benefits which promotes investment in the UK.

The consultation ran to 14 August 2023. It will be interesting to see if any changes are made to such key parts of International Tax. Watch this space!

Draft legislation released to change penalties for Promoters of Tax Avoidance Schemes (POTAS)

In an earlier edition of the International Tax Round, I wrote about how two Belize based companies were named and shamed as promoters of tax avoidance and that the government had released a consultation on increasing punishment for failure to comply with a Stop Notice. As a follow on to the consultation, the government has now released draft legislation which proposes to make it a criminal offence. The current legislation has the failure to comply with the Stop Notice as a civil matter with related civil penalties such as fines. This means that HMRC would have the power to disqualify directors and companies involved in promoting tax avoidance and impose unlimited fines along with possible jail time. These legislative changes are designed to augment HMRC’s powers to quickly respond and deal with Tax Avoidances Schemes and their Promoters.

Pandora Papers – HMRC to nudge those named

Back in 2021, a huge leak of just shy of 12 million documents was released showing structures and set ups in low tax or no tax jurisdictions including several high-profile figures such as Tony Blair and Ringo Starr. This leak came to be known as the Pandora Papers.

HMRC now intend to send out nudge letters to those named in the papers in an effort for them to come forward and disclose to HMRC any outstanding tax. Penalties are quite severe if HMRC find out tax was due, with up to 200% penalties for non-compliance or even criminal prosecution. This is another big step up on the crackdown on tax avoidance.

Putin suspends tax treaties with ‘unfriendly’ companies

In response to the worldwide sanctions imposed on Russia for their involvement with the war in Ukraine, the Russian President has on Tuesday 8 August signed a decree to suspend tax treaties with several so called ‘unfriendly’ countries. The Kremlin overall has suspended double taxation agreements with 38 countries including the UK, USA, Germany and many other countries who have sanctioned Russia.

Article 22 of the tax treaty between the UK and the Russian Federation however has not been suspended, meaning you can still claim tax credits for tax suffered in Russia. The suspension would likely create increased tax revenues for the Kremlin, as UK sourced income beneficially owned by Russian residents would now be taxed in Russia in the first instance.

Double taxation treaties are agreements between states designed to protect against the risk of the same income being taxed twice in both countries.

Standout case decided regarding domicile in First-Tier Tribunal (FTT)

In June 2023, a case was heard at the FTT regarding the domicile of the late Mr Shah, who was born in what was at the time British India and later moved to Tanzania before spending a number of years here in the UK.

A brief summary of the facts are as follows: Mr Shah, arrived in the UK in 1954 as a University of Sunderland student before returning to Tanzania then subsequently moving back to the UK in 1973 with his immediate family. During his time in the UK, he worked, bought a business and the freehold for the building from which it operated. In 2010, Mr Shah fell ill and began to organise his affairs and created two wills, one for the UK and one for India, as he was an Overseas Citizen of India.

Mr Shah had a number of relatives still living in India, though had only returned there twice in the intervening years since his arrival in the seventies. Mr Shah’s relatives argued that Mr Shah intended to retire back to India, providing a DOM1 form he had completed in earlier years showing him to be non-UK domiciled.

HMRC contested Mr Shah’s claim to be non-UK domiciled on the basis of his lack of travel to India and the extensive network he had here in the UK. Whilst his domicile of origin was certainly non-UK, they argued a domicile of choice had been acquired in England some time after his arrival in 1973.

In the end, given the facts provided, the FTT sided with HMRC, meaning that Mr Shah’s worldwide estate was subject to UK IHT. Various factors were considered, and this case reminds us of the importance of reviewing one’s domicile position together with collating a pack of evidence and a written statement to prove one’s domicile status.

Export system changes

HMRC has two systems for exporting goods, Customs Handling of Import and Export Freight (CHIEF), which is almost 30 years old, and the Customs Declarations Service (CDS). CDS is the new system and became mandatory for all import declarations from October 2022. It allows the uploading of documents, payment of import duties as well as enabling you to authorise your shipping agent, replacing CHIEF which was designed for people using paper records. The migration from CHIEF TO CDS for exporters is still in progress, with larger exporters being invited to trial CDS from November 2023 with a view that all other exporters will use the ‘new’ system from 1 April 2024.

The migration to CDS for importers seemed to go with few problems. We anticipate and hope that exporters will have a similar experience. Anyone who is affected however should bear in mind that there could be some disruption within the next six months, but as mentioned, we hope this this will be minimal.

VOICES FROM XLNC – OUR INTERNATIONAL ALLIANCE

Summary report on Chinese individual income tax policies

On August 28th, the Ministry of Finance and the State Taxation Administration of China introduced a slew of individual income tax policies designed to offer tax relief and stimulate economic activity. Among the key highlights are special tax treatments for residents with eligible annual one-time bonuses, flexible tax options for foreign residents, exemptions on comprehensive income tax settlements for specific earnings, and distinct tax policies for equity incentives from listed companies. Additionally, venture capital firms are given choices in determining personal income tax for partners, and foreign talents in the Guangdong-Hong Kong-Macao Greater Bay Area can avail of a tax-differential subsidy.

These tax reforms, which cater to a diverse set of taxpayer groups, will remain effective until December 31, 2027. For a more detailed analysis of these policies, readers are encouraged to refer to the Azure Group China blog, which can be accessed here.