HM Revenue and Customs (HMRC) has launched a consultation inviting input on proposals to tackle arrangements entered into by individuals, partnerships, or companies that aim to move UK profits outside the scope of UK taxation, typically through the use of offshore trusts and companies.
The new legislation, to be drafted in summer 2018 and proposed to take effect in April 2019, would bring these profits within the UK tax charge and require notification of the arrangements to HMRC and earlier payment of tax. The Government intends that any changes should apply from April 1, 2019, onwards for corporation tax and April 6, 2019, for income tax and Class 4 national insurance contributions (NICs – the UK's social security levy), and will apply to all profits diverted on or after that date. It will apply to all arrangements in existence at that date, whenever the arrangements were entered into.
HMRC said: "The measure will apply only to businesses that have deliberately set out to reduce UK tax by allocating excess profits to an offshore entity from which they or someone connected with them can benefit. It will have no impact on businesses that pay all UK tax correctly due on their profits."
The consultation notes that it is a general principle of UK taxation that a UK resident person (individual or company) is taxable in the UK on the full amount of profits from any trade or profession that they carry on, individually or with others, whether carried on in the UK or overseas. This applies unless one of the exemptions available for foreign profits applies (for example, the exemption for foreign permanent establishments or if the individual uses the remittance basis.)
A person who is not resident in the UK is taxable in the UK on any profits from a trade or profession carried on in the UK (and since 2016 on profits from trading or dealing in UK land even if that trade is not carried on in the UK).
According to HMRC, existing legislation, in particular the "transfer of assets abroad" legislation, can tackle many of these arrangements. Challenges are also possible under the rules relating to transfer pricing, disguised remuneration, and other legislation, it said. However, "this legislation can be difficult to apply as it requires the gathering of large amounts of information," HMRC explained, "and the users or promoters of the arrangements may seek to delay matters by arguing that HMRC has no right to force the production of relevant information held offshore."
"The amount of tax in dispute is normally substantial, but during the whole period of the inquiry, the user of the scheme benefits from cash flow advantages. Therefore, the Government believes that it would be preferable to introduce targeted legislation and to require the upfront payment of tax while the inquiries are undertaken," HMRC said.
"Some of the existing legislation which can be relevant to these arrangements, such as transfer pricing and Diverted Profits Tax, has specific exclusions for SMEs. The broad aim of any new legislation will be to target arrangements used by the types of business not covered by the existing rules," it said.
HMRC has put forward a two-part proposal. First, specific legislation would target arrangements with the following hallmarks:
These three conditions will be met by a relatively small subset of all UK businesses, HMRC said, adding there will be a final condition that is intended to give these businesses immediate certainty as to whether the legislation applies to them.
For the second part of the regime, legislation would be introduced to obligate taxpayers to notify the use of this type of arrangement, and to pay any tax relating to them at an early date. According to the consultation, if HMRC has reason to believe that an amount is chargeable under the new rules, HMRC will be able to issue a charging notice to the taxpayers stating that payment of the amount shown in that notice will be required within a fixed period – for example 30 days.
The consultation document discusses other key elements of the regime, including the "significantly less tax" condition, rules regarding excessive profits and substance, and on "connection rules" and a taxpayer's power to enjoy alienated profits.
Switzerland's lower house of Parliament on May 29, 2018, approved DTAs with Kosovo and Pakistan.
The Moroccan Government has approved for ratification a DTA with the Republic of the Congo, it announced on May 29, 2018.
Argentina has approved a protocol to its DTA with Brazil, the Argentinian Official Gazette reported on May 23, 2018.
Brazil's upper house of Parliament on May 30, 2018, approved a protocol updating the DTA with Norway.
Hong Kong and Finland on May 24, 2018, signed a DTA.
Legislation ratifying a new DTA between Russia and Japan was submitted to the Russian State Assembly (the Duma) for approval on May 22, 2018.
Vietnam and Macau signed a DTA on April 16, according to a statement released by the Vietnamese Ministry of Finance on May 11, 2018.
Talks are continuing on a DTA between Jordan and Switzerland, according to a statement released by Jordan's Foreign Ministry on May 14, 2018.
The Czech Senate approved a law to ratify the DTA with Ghana on May 17, 2018.
The Philippines-Thailand DTA entered into force on March 5, and the Philippines' DTA with Sri Lanka on March 14, the Filipino tax agency announced on May 17, 2018. They will be effective from January 1, 2019.
Jordan's Minister of Planning and International Cooperation met with Luxembourg's Finance Minister to discuss enhanced cooperation between the two countries in a number of areas and agreed to seek to conclude a DTA.
Uzbekistan and Lithuania are to engage in talks towards a DTA, Uzbekistan's state news agency reported May 9, 2018.
Two Georgian committees approved the text of a DTA with Saudi Arabia and forwarded it for ratification, according to a May 17 announcement on the Georgian parliament's website.
Hong Kong gazetted an order to ratify its DTA with Saudi Arabia on May 18, 2018.
Talks are continuing on a DTA between Turkey and Afghanistan, according to a statement released by Turkey's Ministry of the Interior on May 11, 2018.
A new DTA between Finland and Spain will enter into force in January 2019, according to a May 18, 2018, announcement from the Finnish tax authority.
Andorra and Cyprus have signed a DTA, Andorra's Government announced on May 18, 2018.
Singapore and Brazil signed a DTA on May 7, 2018.
A DTA between Morocco and the Congo was signed on April 30, 2018.
The Mauritius Revenue Authority on March 19, 2018, published Government Notice No. 36 of 2018, confirming the entry into force of a Protocol updating its DTA with Barbados.
Legislation allowing for a DTA between the Netherlands and Malawi was ratified on April 30, 2018.
Switzerland and Brazil signed a DTA on May 3, 2018.
Slovakia on April 27, 2018, published Notice 123/2018 confirming the entry into force of its DTA with Ethiopia.
The Indian Government on May 7, 2018, announced that the DTA Protocol signed with Kuwait entered into force on March 26, 2018. A notice was published in India's Official Gazette on May 4, 2018.
The DTA between Slovakia and Iran became effective on May 1, 2018.