Tax Talks

The Proskauer Tax Blog

UK Budget 2021

The UK has now been in lockdown, on and off, for the best part of a year. With the COVID-19 vaccination programme now in full swing in the UK, and hopefully with light at the end of tunnel, attention has inevitably turned to the question of “how are we going to pay for it all?”.  Sweeping and significant tax rises have been feared and, following last year’s Office of Tax Simplification (OTS) review into capital gains tax (CGT), it was thought that an increase in CGT rates could well be on the cards.

But in Rishi Sunak’s budget announcement yesterday, aside from the deferred increases in the rate of corporation tax (discussed below), there were no such immediate tax rises.  At least for now, the government’s predominant short term focus appears to be on policies intended to stimulate growth and investment – highlighted by the new super deduction for capital investment costs.

Although welcome, that is unlikely to be the end of the story.  On 23rd March 2021 the government will publish a range of tax-related consultation papers which may well set the tone for the future UK tax landscape.  It is quite possible that this will include a roadmap for CGT changes.  And while the chancellor yesterday confirmed the government’s intention not to raise rates of income tax, national insurance or VAT, that doesn’t completely rule out, for example, the possibility of aligning the national insurance treatment of the self-employed with the employed in the coming years.

So what was announced yesterday?

The April 2023 increase in corporation tax from 19% to 25% for companies with annual profits in excess of £250,000 (with a tapered rate between profits of £50,000 and £250,000) is obviously a key point.  On a positive note, there was the corporation tax 130% “super deduction”, i.e. a first year capital allowance of 130% for plant and machinery expenditure, for the next two years.  And also in the next two years UK companies will be able to carry back trading losses to not just the prior year but the three prior years, subject to a group-level cap at £2m of losses for each of the earliest two years.

As was widely trailed, furlough payments are extended to the end of September, with employees receiving 80% of salary for hours not worked due to COVID-19 during this time. Employers will be required to contribute 10% in July and 20% in August and September.

Outside these more mainstream announcements a few points jumped out.  Amendments will be made to the hybrid mismatch rules to correct certain technical issues in the current legislation which is welcome (and expected).  The detail of these changes will be included in the Finance Bill published on 11th March.  On the enterprise management incentive (EMI) front, a new consultation was published aimed at enhancing the effectiveness of EMI tax advantaged share options, and it was confirmed that until April 2022 HMRC will continue to disregard reduced working hours (e.g. in connection with furlough) in determining EMI option tax benefit eligibility. On research & development (R&D) tax reliefs, a consultation on extending and simplifying the existing regime has been announced.  Although no new announcement was made yesterday, we are also waiting for the response to the consultation on the proposed UK asset holding company regime and this is likely to be published on 23rd March.

Leaving the tax announcements to one side, other noteworthy points included the investment project announcements, including a new £22bn UK infrastructure bank which will invest in private and public infrastructure projects to help meet government objectives on climate change and regional economic growth, a £375m ‘breakthrough’ fund which the British Business Bank will invest in R&D-intensive businesses, and new designated “freeport” locations around England (with discussions ongoing about delivering these in Scotland, Wales and Northern Ireland) the businesses in which will benefit from enhanced tax reliefs including enhanced capital allowance deductions and SDLT relief.

Despite the early noise regarding the threat of CGT rises, in many ways yesterday’s budget announcement was entirely unsurprising given that we are still in lockdown.  However the papers which are unveiled on 23rd March are expected to give a clearer indication on the government’s longer term direction on increasing tax revenue and modernising the tax system to encourage growth. So expect more to come.

COVID-19: OECD updates its guidance on residence and permanent establishments

Background

From the beginning of the UK’s first lockdown in March of last year we have reported on the impact of the pandemic on individual and corporate tax residence and permanent establishment risk.

In April 2020 the OECD published guidance on the impact of COVID-19 on double tax treaties (DTTs), including in relation to tax residence, tie breakers and permanent establishments (reported by us in Tax Talks). When reporting on the previous guidance we noted that further consideration would be needed should the pandemic continue for a significant time. Accordingly, the OECD has recently updated its guidance to reflect the pandemic’s persistence and the risk that some measures taken in response to the pandemic may no longer be described as temporary. Key aspects of the latest guidance as regards residence and permanent establishments are set out below.

Corporate residence

The guidance states that the pandemic is unlikely to change an entity’s tax residence under a DTT, reaffirming that a temporary change in location of board members is an extraordinary and temporary situation in response to COVID-19.

In cases of dual residence, the guidance confirms that an entity’s place of residence under the tie-breaker DTT provision is unlikely to be affected where individuals are participating in the management and decision-making of an entity and cannot travel because of a COVID-19-related measure imposed (or recommended) by at least one of the relevant jurisdictions.

A particular issue faced by non-UK resident companies because of the travel restrictions was the risk that UK directors of non-UK companies who participate in board meetings and take decisions in the UK could cause those companies to become UK tax resident by virtue of “central management and control” in the UK. HMRC’s guidance in the immediate aftermath of the March 2020 guidance was limited to the short-term and there has been no updated guidance since then. Therefore, businesses should not ignore the potential effect of the long-term of impact of COVID-19 and related travel restrictions on the tax status of their activities outside the UK. For investment managers, a potential medium- to long-term approach may be to consider re-engaging with the UK as a holding company jurisdiction as discussed by us in our Financier Worldwide article. For further details of HMRC’s approach to company residence in light of COVID-19 see our Tax Talks.

To be a “fixed place” permanent establishment under a DTT, the relevant location must have a certain degree of permanency as well as being at the disposal of an enterprise. Therefore, an employee’s “home office” when working from home will usually not create a permanent establishment where such home working is an extraordinary event in response COVID-19 rather being a requirement of the employer. However, a certain degree of permanence may exist if the individual continues to work from home after the pandemic response measures are lifted. As regards being at the employer’s disposal, the guidance points to the OECD’s Commentary on the issue and distinguishes between circumstances in which it is clear that the employer has required an individual to work from home (for example, by not providing an office for the employee in circumstances where the nature of the employment requires one) and those in which the employee performs most of their work from their home situated in one jurisdiction rather than from the office made available to them in the other jurisdiction. The OECD concludes that the home office in the latter scenario should not be taken to be at the employer’s disposal whereas in the former it could be.

Individual residence

The revised OECD guidance also sets out two situations which might result in an individual’s tax residence changing during the pandemic.

Firstly, an individual may be temporarily away from their home jurisdiction (for example, on holiday or undertaking a temporary work assignment) and become stranded, and tax resident, in the other jurisdiction under its domestic law. The guidance notes that the individual is unlikely to be resident in the other jurisdiction under the tie-breaker provision in the relevant DTT.

The second situation envisaged is where an individual works in a jurisdiction and attains residence there but then temporarily returns to a previous home jurisdiction, meaning that they either lose their residence in their current home jurisdiction or regain their residence in the previous home jurisdiction. The guidance notes that it is unlikely that a person would regain residence status as a result of “being temporarily and exceptionally in the previous home jurisdiction”. Even if residence was regained under that jurisdiction’s domestic law, it is unlikely under a DTT that an individual would be resident because of such temporary dislocation if their connection to the current home jurisdiction was stronger than the connection to the previous home jurisdiction.

HMRC’s guidance on the UK’s statutory residence test (the test that applies to determine whether an individual is resident in the UK or not) states that days spent in the UK due to COVID-19 will be treated as “exceptional” for the purposes of the statutory residence test and under that test 60 days spent in the UK in exceptional circumstances are not counted under the test (reported by us in a previous Tax Talks).

Conclusion

The guidance reaffirms the OECD’s position of April 2020 and, in our view, should offer some comfort to businesses and individuals concerned about changes in residence and permanent establish risk arising from COVID-19. However, the guidance states that in many circumstances factual determinations by tax administrations will still be required and the guidance does not replace such determinations and, most significantly, each jurisdiction may adopt different interpretations. In particular, in our view, taxpayers should be cautious if setting up non-UK entities or businesses and assuming that they can be managed from the UK during the remainder of the COVID-19-related travel restrictions, since in those cases there will be no track record of overseas management to fall back on.

We will report on any HMRC updates.

Please contact us if you have any queries about how any of the above or how COVID-19 will affect your business.

Regulations on Executive Compensation Excise Tax (Section 4960) for Tax-Exempt Employer and Their Affiliates Finalized

Employers that are tax-exempt or have tax-exempt affiliates (for example, a foundation) should pay close attention to a 21% excise tax under Section 4960 of the Internal Revenue Code on certain executive compensation.  Final Regulations under Section 4960 are described here.  The discussion includes traps for the unwary.  Please reach out to your Proskauer contact to discuss how these rules affect your organization.

Section 1061 Final Regulations on the Taxation of Carried Interest

On January 7, 2021, the Internal Revenue Service (the “IRS”) and the U.S. Department of the Treasury (the “Treasury”) issued final regulations[1] (the “Final Regulations”) providing guidance on Section 1061 of the Internal Revenue Code (the “Code”).[2] The Final Regulations modify the proposed regulations[3] (the “Proposed Regulations”) that were released in July of 2020. We previously discussed the Proposed Regulations with a series of “Key Takeaways” in our client alert published here. This post highlights certain changes made to the Proposed Regulations, and certain important provisions of the Proposed Regulations that remain unchanged in the Final Regulations. Continue Reading

Narrowing of UK intermediaries’ DAC 6 reporting requirements

On 30 December, the UK government laid regulations that will significantly reduce the type of cross-border arrangement that will need to be reported by UK intermediaries under the so-called DAC 6 rules on 31 January 2021 and in the future.

In the last year or so, we have regularly written about DAC 6 in our Tax Talks blog and in our monthly UK Tax Round Up. As a reminder, DAC 6 is the wide ranging EU regime for reporting “cross-border tax arrangements” which requires certain “intermediaries” and taxpayers to report to HMRC a wide range of transactions entered into since 25 June 2018 that met a “hallmark” set out in the implementing EU Directive. In the UK the first reports in respect of reportable cross-border tax arrangements are due to be made by 31 January 2021.

As a result of finalising the UK-EU Trade and Cooperation Agreement (TCA) under which the UK and the EU have agreed how they will interact following the end of the Brexit transition period the UK’s obligation is solely to “not weaken or reduce the level of protection … below the level provided for by the standards and rules which have been agreed in the OECD … in relation to the exchange of information … concerning … potential cross-border tax planning arrangements [being the OECD’s Mandatory Disclosure Rules (MDR)]”. The UK has decided that compliance with the MDR reporting only requires reporting of cross-border arrangements meeting the conditions in the category D hallmarks under DAC 6, which relate to arrangements designed to circumvent reporting under the OECD’s Common Reporting Standards rules and/or to seek to hide the identity of the beneficial ownership of entities in the arrangements.

The new scope of DAC 6 reporting applies from 11 pm on 31 December 2020, so that the first reports (and future reports) under DAC 6 will only require reporting of these category D arrangements. This significantly narrows the range of transactions that might otherwise have had to have been reported on.

The government has also announced that it will consult on new reporting rules to implement the MDR as soon as practicable, and that these new rules will then replace DAC 6 in its entirety.

HMRC will update its guidance in due course to reflect these changes. Although the changes significantly narrow the scope of DAC 6 reporting requirements for the UK, the requirements set out in the applicable EU Directive continue to apply where an EU intermediary is involved in a transaction, so UK businesses (or their EU-based advisers) that are party to cross-border transactions involving the EU will still need to consider the full scope of DAC 6.

Coronavirus: President Trump Signs Consolidated Appropriations Act, 2021; Summary of the Tax Provisions

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “Act”).  The Act enhances and expands certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748).  This blog post summarizes the tax provisions of the Act.

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