The International Tax Round Summer 2023

Welcome to the Summer edition of The International Tax Round! From sunny Spain, Sonal Shah brings you information on the EU’s take on Beneficial Ownership Registers, whether the UK will follow the EU and trace crypto-transfers and the Northern Ireland Protocol.

Editor’s message

It would seem wrong not to start with ‘Hola’, as this summer’s note comes from none other than sunny Spain, atop a labyrinth of rugged rock high above a gorge in Ronda. The view is simply sublime and, as is often the case with my travels, mother nature has blown me away. We’ve based ourselves in one the many scatterings of spectacular whitewashed villages set across the Spanish hills of Andalusia, staying in what used to be a tile factory. Aside from stunning, Los Pueblos Blancos are dripping with centuries of history so there’s been plenty of learning along the way.

Prior to Ronda, we spent two nights in seductive Seville, steeped in tradition and full of charm. Winding down a perfect day of slow-paced exploration, gazing and grazing along the way, we found ourselves cocooned in a wonderfully small tapas restaurant. I couldn’t help but remark on the cost of our meal, with five tapas dishes and a bottle of Albarino coming in at under €25, all finished off with a complimentary sherry in what seemed like a test tube – both reasonable and memorable!

I know this trip will soon feel short and sweet, and given how sporadically internet access presents itself here, I’ll keep it at just that. Somehow we’ve reached the midpoint of the year which means we’ll soon be embarking on our first XLNC conference of the year in Amsterdam. As ever, I’m eagerly awaiting the opportunity to connect with colleagues, catch up and have great conversations. I’m also excited to chair the Women in Business Focus Group, as well as co-chair the Tax Focus Group.

For now, I’ll have to turn my attention to the ever-soothing aromas of rosemary and lavender, both sprawling up the walls of mi casa in abundance, pleading to be rustled up into a delicious lunch!

Let’s hope the sun sticks around this summer – hasta luego!

In this edition we bring you the latest on:

• EU’s take on Beneficial Ownership Registers
• EU to trace crypto-transfers – will the UK follow suit?
• Belize based companies named as promoters of Tax Avoidance schemes, harsher penalties in the works?
• Northern Ireland Protocol, hope for trade in the future?
• The Farhy Case, by Bilzin Sumberg Baena Price & Axelrod LLP

EU’s take on Beneficial Ownership Registers

The Court of Justice of the EU (CJEU) has recently ruled that similar regimes to the UK’s new Register of Overseas Entities (ROE) are unlawful as they breach Article 8 of the Charter of Fundamental Rights of the EU. Article 8 protects your right to respect your private life, your family life, your home and your correspondence.

Several member states of the EU have suspended their regimes, however as the UK is no longer a member state of the EU, they do not need to abide by EU rulings. The UK Government has now released a policy paper stating that they believe the ROE to be compliant with Article 8. It looks like the Government intends to keep the register, but it looks like the ROE may remain an outlier across the continent. The effect of this on overseas investment remains to be seen.

EU to trace crypto-transfers – will the UK follow suit?

The EU parliament has endorsed a new legal framework for crypto-asset transfers. The new laws will enable the tracing and subsequent blocking of suspicious transactions and will apply to transactions exceeding €1,000. These rules will not apply to transactions conducted between persons but only those involving crypto-asset service providers.

The UK to date has not yet made the same strides towards regulating the crypto market and it appears that the UK may be falling behind as UK crypto-asset service providers lack the certainty and security of their European counterparts.

Belize based companies named as promoters of Tax Avoidance schemes, harsher penalties in the works?

Two companies incorporated in Belize have been discovered by HMRC to be promoting a tax avoidance scheme that involved avoiding National Insurance contributions, Income Tax and Corporation Tax. The two firms who are both registered at the same address have been marketing a tax avoidance scheme that involved making contributions to an offshore trust and then claiming the payments as deductible for tax. The money was then subsequently repaid to the companies/sole traders often without tax implications.

HMRC continues to crack down on numerous tax avoidance schemes every year, with the current penalty of up to £100,000 for failure to comply with a ‘Stop Notice’. HMRC has released a new consultation to further escalate the punishment for Promoters of Tax Avoidance Schemes (POTAS). The new consultation seeks to make the failure to comply a criminal offence, perhaps the increase of severity may dissuade those who wish to promote such schemes. The consultation ends in June 2023, so watch this space.

Northern Ireland Protocol, hope for trade in the future?

The government has recently published what is known as the Windsor Framework in an attempt to address the Northern Ireland protocol. A protocol which has been an acute source of difficulty for the UK government. The government sets out three key objectives of this framework to be: Restoring the smooth flow of trade within the UK internal market, safeguarding Norther Ireland’s place in the union and addressing the democratic deficit that the old framework was based upon.

This new framework will affect numerous areas but most importantly the import/export of goods, with a ‘green lane’ for approved traders to streamline trade. Over 1,700 pages of EU law have been disapplied here in order to get this framework going. It will also bring Northern Ireland in line with the same VAT and alcohol taxes as the rest of the union. This is a promising document, and its effect on trade in Northern Ireland should be positive.

The Farhy Case

U.S. Taxpayers scored a big victory when the U.S. Tax Court issued its decision in Alon Farhy v. Commissioner, 160 T.C. No. 6 (April 3, 2023) (Farhy).

In short, the U.S. Tax Court declared that the IRS did not have statutory authority to assess penalties under section 6038(b) against a taxpayer who willfully failed to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for his 2003–2010 tax years. As a result, the IRS could not proceed with collection of such penalties from the taxpayer via the proposed levy. A more detailed discussion can be found here.