Timothy Lyons, QC

Transfer of assets, gain attribution and corporate exit charges

2011-02-19T19:18:13Z

To say that tax practitioners in the UK have become familiar with the requirement to read tax law so that it conforms to the requirements of EU law is something of an understatement. The latest incentive to do this comes from a couple of recent press releases issued by the European Commission.

One press release issued on 16^th February 2011 (IP/11/158) makes it plain that the Commission considers that the transfer of assets abroad regime and the attribution of gains to members of non-resident companies restrict the free movement of capital and freedom of establishment. These provisions have long been regarded as vulnerable to attack in certain circumstances. The Commission's action is, no doubt, a good time to review current cases, but past cases should also be examined. Some claims for repayments in respect of certain past cases may also be anticipated.

Some practitioners have had to consider other gain attribution provisions, such as those affecting settlors with interests in non-resident settlements. These are also likely to face further scrutiny.

Another press release has attracted rather less attention. It was issued on 27^th January 2011 (IP/11/78) and relates to Ireland, but is likely to be important for the UK as well. The Commission has long been concerned about exit taxes imposed on companies. The area has been debated academically but the Commission is clear:

"Under the Irish tax law, a company is taxed on its unrealised capital gains when it transfers its place of central management or control to another Member State. However, comparable transfers within Ireland are not taxed for unrealised capital gains.

The Commission considers that such taxation serves as a discriminatory penalty on companies wishing to transfer their place of central management abroad. The rules in question are likely to dissuade companies from exercising their right of freedom of establishment and therefore constitute a restriction to the freedom of establishment as laid down in Article 49 of the Treaty on the Functioning of the European Union and Article 31 of European Economic Agreement."

Given the fact that the Commission has already decided to refer to the Court of Justice Portugal, Denmark, the Netherlands, and Spain over their exit taxes, practitioners will surely have to consider the scope of the UK's regime for deemed disposals of assets on companies ceasing to be UK resident.

Philips Electronics UK Ltd v HMRC

2010-10-21T16:34:28Z

Philips. British Tax Review.pdf

Tax, the WTO and public international law

2010-10-21T15:54:38Z

Territoriality and taxation may seem inevitably linked. Even the borderless EU has had to acknowledge a concept of territoriality in the free movement cases involving direct taxation - although "territoriality" there has a specific meaning. It's no surprise that the WTO also has to confront fiscal territoriality in its drive to facilitate international commerce.

No doubt it will take time for governments and taxpayers to recognise the potential effects on taxation of the WTO rules. Pascal Lamy recently said that: "The WTO's impact now goes far beyond the traditional scope of trade policy touching on core national and international interests." Taxation, both direct and indirect, is certainly a core national and international interest.

Of course, it has been clear for a long time that trade law affects taxation. A number of Panel decisions, adopted many years ago, showed that a country could not rely on territoriality to give favourable tax treatment to profits which were obtained outside a country and subjected to foreign taxation. Viewed from the perspective of trade law such treatment constituted a prohibited export subsidy. The scope for direct tax provisions to be treated as export subsidies was further shown in the dispute over the USA treatment of foreign sales corporations.

There are other examples of tax-based export subsidies. Take tax sparing. A country may agree, for example, to give its resident corporations a credit for foreign tax which the corporation would have paid but for an exemption or reduction in the country of source. Other countries may want to contend that an export subsidy has been provided.

And then there is the issue of the most favoured nation principle ("MFN"). A protocol to the UK/Argentina double tax convention, for example, requires Argentina to apply to that convention the benefit of any lower rate, or narrower tax base, that Argentina subsequently gives to any other OECD country. Sometimes this is referred to as the operation of MFN. It is no such thing. MFN seeks to ensure that a specific privilege is generalised so that limited advantages are prohibited. In contrast, provisions such as the one that applies to Argentina aim to maintain the value of a specific privilege.

Quite apart from WTO law, it is increasingly clear that tax lawyers have to re-consider the impact of public international law generally on states' rights to levy taxation. The arcane disagreements which have developed over the years in this area are rapidly attracting the attention of tax advisers anxious to ensure that they leave no stone unturned in challenging what their multi-national clients, families as well as corporations, may well regard as an unjustified exercise in extra-territorial taxation.

In short, what were once matters of exclusively academic interest are now becoming issues of great practical significance both for taxpayers and tax authorities.

Coalition government, direct taxation and the EU

2010-05-26T11:43:55Z

Governments of EU Member States always face choices over how they comply with the requirements of EU law. For example, following the early decision of ICI v Colmer [1998] STC 874, the UK simply removed the requirement of UK residence in the offending part of the group tax relief provisions. When it came to thin cap regimes, the fact that Germany extended its regime to domestic as well as non-resident companies was specifically noted by Geelhoed AG. He expressed some strong views regretting the position which he attributed to a lack of clarity in EU law (Case C-524/04 Test Claimants in the Thin Cap Group Litigation 29^th June 2006, paragraph 68).

The issue of how to react to EU law in the field of taxation is one which the new UK coalition government has to address early in its life. The provisions allowing landlords to be treated as trading in relation to income from letting furnished holiday accommodation in the UK, but not elsewhere, have long been questioned. In 2009, the Government stated an intention to repeal the relevant rules from 2010-11. In the meantime, in a technical note, dated 22^nd April 2009, HMRC indicated that the rules would apply to furnished holiday accommodation elsewhere in the EEA (ie the EU plus, Iceland, Norway and Liechtenstein).

The necessary measures did not make it into the Finance Act 2010. Now, in The Coalition: our programme for government (p31) the Coalition says:

"We will take measures to fulfil our EU treaty obligations in regard to the taxation of holiday letting that do not penalise UK-based businesses."

It will be interesting to see how it goes about this. Applying rules to the entirety of the EEA would be one way to approach the matter. The statutory draftsman frequently refers to the EEA in tax matters as a brief look at the Corporation Tax Act 2010, section 112, and the Taxation (International and Other Provisions) Act 2010, section 301, will confirm.

References to the entirety of the EEA can, however, have some disadvantages from the point of view of governments. These can be guessed at by looking at the new definition of "charity" in the Finance Act 2010, brought in to accommodate EU law. A "charity" under this legislation must, amongst other things, satisfy the "jurisdiction condition". This refers to a body of persons or trust which is subject to the jursidiction of a relevant UK court, or a court exercising its jursidiction under the law of a "relevant territory". A "relevant territory" which is not a member State is to be specified in regulations (FA 2010 Sched 6, paragraph 2(3)(b)).

A "relevant territory" could, of course, simply be defined as a territory within the EEA. That would necessitate including Liechtenstein. It appears that there is no enthusiasm for this. James Kessler QC has pointed out that in the Explanatory Notes to the Finance Bill, the Background Note to clause 31, Schedule 7, says, at paragraph 39, that Iceland and Norway will be specified as soon as possible. The failure to refer to Liechtenstein is, it may be assumed, significant and may give rise to some debate. Fortunately for the coalition and the legislative draftsman, there is unlikely to be any need to make specific provision for lettings of furnished holiday accommodation in Liechtenstein.

Current notes

2010-03-20T12:54:16Z

VAT

In his foreword to the new series of Simon's First-Tier Tax Decisions, Sir Stephen Oliver observes that "Value Added Tax law, when introduced in 1972, was mistakenly perceived to be dead simple and unproductive of legal principle."

An example of how wrong that perception was is given in Case C-29/08 Skatteverket v AB SKF (ECJ, 29.10.09). In issue was the deductibility of input tax on services supplied for the purposes of a share disposal. The right to deduct was held to exist where there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person.

The rules on deduction of input tax sometimes seem as if they were primarily concerned with the world of the peasant artisan. This judgment of the ECJ may be seen as a further step in facilitating the operation of VAT in economies where intangibles and services are vital.

Anti-Dumping Duty

Chinese imports have led to a considerable amounts of work in the field of customs and anti-dumping. In Case C-373/08 Hoesch Metals and Alloys GmbH v Hauptzollamt Aachen (ECJ,11.2.2010) imports of Chinese silicon were under consideration. The case demonstrates how important the burden of proof can be for an appellant alleging the invalidity of an EU regulation.

In deciding whether the silicon had undergone sufficient processing in India to have an Indian origin the judgment paid some attention to the "list rules". These contain the provisional results of negotiations under the auspices of the WTO. They were not fully set out in the judgment. Click here to see the current version. (If re-directed to general document search return to this page and repeat click.)

Savings Directive

Now that substantial progress has been made towards the final text (see the Council web-site) some further questions are attracting attention. Some of these are noted in the interesting editorial of Michel Aujean in the EC Tax Review 2010/1,pp 2-3; "Savings Taxation: Is Automatic Exchange of Information Becoming a Panacea?"

In relation to exchange of information he asks:

"Will the tax administrations be able to cope with such a flow of information? Will the quality of the information improve so as to make it easier for tax administrations to use it in the most effective way?

Then he puts two other questions:

"To what extent will the financial markets be able to innovate in new mechanisms that will once again permit some investors to escape their obligations? Finally, is the future of the single market for financial products compatible with the future of residence taxation for individuals?"

No doubt these questions will be asked in many quarters in the future.