International Fiscal Association
Switzerland / UK meeting
Comparison and impact of anti-avoidance schemes /
CFC rules
Paul Smith
11th May 2012
IFA – Switzerland / UK meeting
Comparison and impact of anti-avoidance schemes / CFC rules
1. UK
1. UK current – various anti-avoidance measures
2. UK future – GAAR
3. Treaty – anti-avoidance
2. Switzerland – anti-avoidance measures
3. UK CFC rules – a new “improved” regime
UK anti-avoidance measures
1. Purposive interpretation of tax statutes
2. Specific anti-avoidance legislation / targeted anti-avoidance
rules (“TAARs”)
3. Disclosure of Tax Avoidance Schemes (“DOTAS”)
and the future?
1. General Anti-avoidance Rule (“GAAR”)
2. Reduced TAARs?
3. Simpler legislation?
UK anti-avoidance measures – 1
Purposive interpretation of tax statutes
1. Pre Ramsay v IRC [1982] AC 300
–
Literal interpretation of statute by UK Courts
–
If two interpretations – Courts erred in favour of taxpayer
2. Post Ramsay
–
Purposive interpretation of statute by UK Courts
–
Look beyond literal language to seek true meaning of a
particular provision
–
Courts possibly “stretched” interpretation to thwart tax
avoidance schemes – (uncertainty of taxation?)
UK anti-avoidance measures – 2
Specific anti-avoidance legislation
1. Early example
–
section 28 FA 1960 – dividend stripping & bond washing
provisions to stop the creation of tax losses where no
economic loss arose
2. Targeted anti-avoidance rules (“TAARs”)
–
More than 300 in UK tax legislation
–
TAARs within specific anti-avoidance legislation as well as
in their own right (e.g. draft UK CFC legislation)
UK anti-avoidance measures – 3
Disclosure Of Tax Avoidance Schemes (“DOTAS”)
1. Introduced in Finance Act 2004
–
For income tax (“IT”), corporation tax (“CT”) and capital gains
tax (“CGT”) applied to employment or financial products
–
Separate rules applied to VAT
2. Extended
–
From August 2006 extended to include any tax arrangements
relating to IT,CT or CGT. “Filters” replaced by “Hallmarks”.
“In house” arrangements to be disclosed within 30 days rather
than at tax return filing date
–
Extended to apply to SDLT (2005), NIC (2007), IHT (2007)
General Anti-Avoidance Rule (“GAAR”)
1. In place in a number of regimes: Canada, Australia, New
Zealand and Spain. Similar rules also introduced in France,
Ireland and South Africa. Countries considering a GAAR
include India and UK.
2. Last considered in UK in 1998, fully discussed and
abandoned as its catch all nature MIGHT harm business
planning and investment. Instead disclosure of tax
avoidance schemes (“DOTAS”) was introduced as a “miniGAAR”
GAAR dismissed? – yes but not really!
1. Jun 2010 – HM Treasury issues “Tax policy making: a new
approach” – GAAR mentioned
2. Dec 2010 – Graham Aaronson QC asked to lead a study to
establish whether a GAAR could be effective in UK
–
GAAR now being reconsidered in the light of an increasingly
complex UK tax system
3. Mar 2011 – HM Treasury issues “Tackling Tax Avoidance”
4. Nov 2011 – GAAR report issued with recommendation to
introduce a limited scope GAAR
GAAR Advisory Committee
Advisory Committee
Aaronson (QC) Agreed
Nolan (part time Judge ex S&M)
Agreed
Neutral
Agreed
Neutral
Agreed
Agreed
Agreed
Agreed
Bartlett (BP plc) Agreed
Freedman (Prof) Agreed
Tiley (Prof) Agreed
Hoffman (Judge) Neutral
Henderson (Judge) Neutral
GAAR Study - Conclusions
1. The most critical factor taken into account was whether
introducing a GAAR might erode the attractiveness of the UK
tax regime to business
2. The Advisory Committee concluded that a broad spectrum
GAAR would not be beneficial to the UK because there was
a real risk of undermining the ability of business and
individuals to do sensible and responsible tax planning –
which is entirely appropriate in a very complex tax regime
such as the UK’s
3. A broad spectrum GAAR would need a comprehensive
clearance system – too expensive!
GAAR Study - Conclusions
4. A moderate GAAR would be beneficial:
–
It would deter contrived and artificial schemes
–
Level playing field with responsible tax planning enterprises
–
Reduces temptation of Judges to “stretch” the interpretation
–
Enables future legislation to be simply drafted – no TAARs
–
Future programme to reduce TAARs should be possible
–
No need for a comprehensive system of tax clearances for
centre ground of responsible tax planning
–
Independent Advisory Committee should be a cost effective
way to help identify outer limit of responsible tax planning
–
Help public debate on boundaries between acceptable and
unacceptable behaviour
GAAR Study - Conclusions
5. Safeguards to ensure centre ground of tax planning is
protected:
1. Explicit protection for reasonable tax planning
2. Explicit protection for arrangements entered into without any
intent to reduce tax
3. Burden of proof on HMRC to prove an arrangement is not
reasonable tax planning
4. Advisory Panel to be established with relevant expertise
and a majority of non-HMRC members
5. Right to refer to material even if not admissible in a Court
6. GAAR application to be authorised by senior HMRC officials
GAAR Study - Conclusions
6. Concerns
1. Mission creep
2. Subsequent reduction in volume and complexity of specific
anti-avoidance rules does not happen
GAARs in other countries
1. Canada
–
Introduced in 1987 in response to Stubart case where
Supreme Court rejected the general application of a
business purpose test (broadly, following Ramsay)
2. Australia
–
Introduced against a background of highly literalist
interpretation of tax statutes
–
i.e. the Canadian / Australian Courts had not adopted a
purposive approach and they had no DOTAS arrangement
in place.
GAAR in the UK
Current Court interpretation of tax statutes
•
Purposive interpretation still applying
but
•
HMRC lost in Court of Appeal in SHIPS 2 case* because the
prescriptive nature of the statutory rules in question
prevented the Court from finding a purposive interpretation
____________
*
Commissioners for Revenue & Customs v Mayes [2011] EWCA Civ 407 - SHIPS 2 was marketed by Matrix
Tax Solutions and involved seven pre-ordained steps involving the purchase by a non-resident company of nonqualifying life assurance policies (AIG bonds) followed soon after by their partial surrender and withdrawal of
funds. The arrangement was designed to produce allowable deductions from total income on disposal of the
policies and capital sum allowable deductions in computing gains.
GAAR in the UK
Tax avoidance is firmly on the political agenda
George Osborne
“I’m going after the
wealthy tax
dodgers”
Telegraph
10/04/12
George Osborne
“ ‘shocked’ at level of tax
avoidance among wealthy”
Guardian 10/04/12
Treaty anti-avoidance
1. Anti-conduit provisions
–
dividend, interest and royalty articles

“The provisions of this Article shall not apply in respect of any
[interest] paid under, or as part of, a conduit arrangement.”
Swiss / UK treaty - protocol of 26/06/07 effective 22/12/08
2. Capital gains extended scope

“The provisions of paragraph 5 shall not affect the right of the UK
to levy according to its law a tax chargeable in respect of gains
from the alienation of any property on a person who is and has
been at any time during the previous six fiscal years, a resident of
the UK or on a person who is a resident of the UK at any time
during the fiscal year in which the property is alienated.”
Swiss / UK treaty - protocol of 26/06/07 effective 22/12/08
Treaty anti-avoidance
3. Holding companies

“This convention shall not apply to holding companies entitled to
any special tax benefit under the Luxembourg laws of 31st July
1929 or 27th December 1937 or any similar law …”
Article 30 Luxembourg / UK tax treaty
4. Limitation of relief / remittance basis

“Where … any income … is subject to tax by reference to the
amount thereof which is remitted to or received in the other
Contracting State and not by reference to the full amount thereof,
then the relief to be allowed under this Agreement in the first –
mentioned Contracting State shall apply only to so much of the
income as is taxed in the other Contracting State.”
Article 24 Singapore / UK tax treaty
Treaty anti-avoidance
5. Limitation on benefits




Need to be a “qualified person” to obtain treaty benefits; or
Satisfy a “derivative benefits” test – certain categories of income
may qualify for treaty benefits; or
Satisfy the “active trade or business test” – certain categories of
income may also qualify for treaty benefit s; or
Apply to Competent Authority
Article 23 UK / US tax treaty
International Fiscal Association
Switzerland / UK meeting
CFC rules
Paul Smith
11th May 2012
UK CFC Reforms
What: Reform of UK controlled foreign companies (CFCs) rules + extending
CFC rules to foreign branches
When: Views of business sought in 2006
Discussion document issued by Government in June 2007
Draft legislation issued 6 Dec 2011 (updated 31 Jan 2012 & 29 Feb 2012)
Finance Bill 2012 issued 29 Mar 2012
Effective: Proposed to be for accounting periods starting 1 Jan 2013
Why: To make the UK’s tax system competitive
Difficulties: Protecting tax revenues against a diversion of profits from the UK,
Government’s need to raise and collect taxes and to comply with EU law
Result: Very complex legislation – 98 pages and small print
UK CFC Reforms – the new rules
Agenda
1.Full exemptions: these are entity level exemptions
2.Exemption for specific profits
3.CFC charge Gateway
New CFC rules - full exemptions (entity level exemptions)
Temporary (exempt) period exemption (Chapter 10):
– A 12 months exemption period on, say, buying a new subsidiary provided
that the subsidiary is, essentially, restructured within 12 months so that no
CFC charge would arise for future periods
Excluded territories exemption (Chapter 11):
– CFCs resident in specified territories (broadly intended to be those with a
headline tax rate of more than 75% of UK CT rate) will be exempt provided
that their total income within certain categories (generally income that is
exempt or subject to a reduced rate of tax) does not exceed 10% of the
company’s pre-tax profits for the accounting period (or £50,000 if greater)
– But  exemption not be available where significant IP has been transferred
to the CFC from the UK in the prior 6 years
New CFC rules - full exemptions (entity level exemptions)
Low profits exemption (Chapter 12):
– accounting profits < £50,000 for an accounting period
– accounting profits < £500,000 and < £50,000 of non-trading income
Low profit margin exemption (Chapter 13):
– accounting profits do not exceed 10% of its relevant operating expenditure
Tax exemption (Chapter 14):
– Local tax paid is at least 75% of the corresponding UK tax that would be
payable - similar to the lower level of tax test used to define a CFC under the
current rules
New CFC rules – exemption of specific profits
1.
Capital gains [s371VD(2)(c)]
2.
Property business profits [s371VD(2)(b)]
3.
Business profits - except those passing through the “CFC charge Gateway”
4.
Trading finance profits - except those passing through the “CFC charge
Gateway”
5.
Non-trading finance profits – ¾ exempt if tax election / claim made [Chapter 9]
6.
Incidental (< 5%) non-trading finance income [s371CC & s371CD]
7.
Group treasury company finance profits – ¾ exempt if elect to treat as nontrading and elect for partial exemption [s371CE(2) & Chapter 9]
CFC charge Gateway
A CFC’s chargeable profits are defined to be so much of its assumed total
profits as pass through the CFC charge Gateway
– so pass through the Gateway at your peril!
[s371BA]
CFC charge Gateway
Apportionment of CFC’s profits to its UK parent will only arise where the CFC has:
1. For General Business (non-financial) profits (Chapter 4):
1. Tax purpose – UK tax reduction as a main purpose and expects CFC profits to be
bigger, or a person’s tax liability to be reduced.
2. UK activities – i.e. control & management of CFC’s assets/risks is carried on to a
significant extent in the UK;
3. Capability & commercial effectiveness – CFC has UK managed assets / risks and it
could not manage them on its own / by outsourcing to third party; or
2. Non-trading finance income (Chapter 5)
[n.b. 5% deminimis rule & 75% exemption]
3. Trading finance income with funds derived from UK connected capital
contributions (Chapter 6)
4. Other specific types of income arising to certain companies e.g. insurance /
banking (Chapters 7-8)
CFC charge Gateway
General Business (non-financial / non-property) profits
Re-calculate CFC profits excluding UK significant people function (“SPF”) profits
•
If no UK SPFs  No CFC charge
•
If some UK SPFs  CFC profits attributable to UK SPFs pass through the CFC
charge Gateway and may be apportioned and taxed in UK
Profits passing through the CFC charge Gateway are those left out of the recalculated CFC profits
•
Calculate profits by following OECD Report approach
•
But exclude all profits where:
1.
2.
3.
•
UK activities are a minority of total activities [s371DC];
The separation of assets or risks from activity does not give rise to substantial non-tax
value [s371DD]; or
Similar arrangements would be put in place if the UK SPFs were replaced by
independent companies [s371DE].
And exclude trading profits where five conditions (next slide) are satisfied
CFC charge Gateway
Trading profits exclusion
Trading profits – five conditions:
 Business premises condition: CFC must have premises in its territory
of residence where the CFCs business is carried on.
 Income condition: No more than 20% of the CFC trading income is
from the UK
 Management expenditure condition: No more than 20% of the CFCs
management expenditure relates to UK staff.
 IP condition: IP that has been transferred by a UK related party to the
CFC within the past 6 years has not resulted in a significant
reduction in value to that UK related party.
 Export of goods condition: no more than 20% of the CFCs trading
income arises from goods exported from the UK.
Effectively replaces the old exempt activities test (available effectively
where CFC carried on trading activities with third parties outside the UK)
CFC charge Gateway
Trading finance profits
Trading finance profits
– If the CFC has trading finance profits and has funds derived directly or
indirectly from UK connected capital contributions, then the CFC’s profits
pass the CFC charge Gateway and are potentially within the scope of a
CFC apportionment. [s371CE]
– If “free capital” of CFC (contributed by UK connected capital
contributions) does not exceeds arm’s length “free capital” then the
profits of the CFC do not pass through the CFC charge Gateway and are
not within the scope of the CFC regime. [Chapter 6 – step 3]
– Group Treasury companies can opt to be treated if their trading finance
profits were non-trading finance profits – and therefore entitled to elect for
the partial exemption to apply taxing only 25% of the its profits
New CFC rules - Finance Company Exemptions
Finance Company Partial Exemption (“FCPE”):
– Applies to non-trading finance companies (and Treasury companies if
an election has been made)
– 3/4 of CFCs “qualifying loan relationship profits” are excluded from the
CFC charge.
– “Qualifying loan relationships” include loans where the debtor is a
company connected with the CFC which obtains a UK tax deduction.
– CFC to have appropriate business premises in its territory of residence.
– Must make an election
CFC - Comparison - old and new rules
Now
Future
Lower level of tax
75% UK rate
75% UK rate
De minimis profits
£200,000
£500k and non-trading income < £50k
Control
50% and 40% tests
same plus FRS2 control
Exempt Activities Test
Gross receipts<50% from UK/group
N/A
Trading Income Exclusion
N/A
≤ 20% from UK of income / mgt/ exports to +
no IP transferred from UK for 6 yrs
Excluded Territories
Yes, 90% local source income req'd
Yes, similar but excludes Singapore + has
an IP condition
Motive Test
Yes, but used sparingly
N/A
Gateway Test
N/A
Need SPFs to be non-UK
Finance Co Partial exemption
N/A
¼ profits apportioned to UK
Low profit margin exemption
N/A
Profits ≤ 10% operating spend
Dual resident (UK inc, treaty,
non UK resident)
UK resident
Foreign resident
Foreign branches
not CFCs
CFC rules apply
New CFC rules – Final thoughts
Foreign Finance Companies: A very welcomed change and puts the UK on a
similar footing to US based groups when financing overseas expansion
Intangible Property: The rules are still very draconian in relation to IP. The
UK CFC rules are aimed at dissuading groups from transferring IP abroad.
There are other tax incentives for attracting IP to the UK (mainly R&D credits
and from 2013 the patent box rules) but they do not provide incentives for
acquiring or developing brands and trademarks in the UK.
Simplification: Not really. 98 pages of legislation have replaced 64 pages of
existing legislation. Some new provisions were required (e.g. finance company
partial exemption rules) and we will become familiar with the new rules in due
course.
TAARs: I counted 10 TAARs within the new legislation. This is not consistent
with the introduction of a GAAR.
Contact us
E: paul.smith@blickrothenberg.com
T: +44 20 7544 8823
12 York Gate, Regent’s Park, London NW1 4QS, United Kingdom
Telephone: +44 (0)20 7486 0111, Fax: +44 (0)20 7935 6852