Heather Self, Pinsent Masons LLP Suzannah Crookes, Pinsent Masons LLP 11 June 2015 GEO UK Chapter Meeting What’s on the Horizon?

What’s on the Horizon? The international agenda Key points from BEPS UK Diverted Profits Tax UK Government Plans What else might happen? 2

What is BEPS and why is it happening? Base erosion and profit shifting (BEPS) is a global problem which requires global solutions. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. 3

What is BEPS and why is it happening? "Recently more and more enterprises organised abroad by American firms have arranged their corporate structures aided by artificial arrangements between parent and subsidiary regarding intercompany pricing, the transfer of patent licensing rights, the shifting of management fees, and similar practices […..] in order to reduce sharply or eliminate completely their tax liabilities both at home and abroad.“ President Kennedy,

Summary of the Action Plan Action 1: the digital economy Actions 2-5: gaps and mismatches Actions 6-10: aligning income with economic activity Actions 11-14: disclosure, methodology and disputes Action 15: multilateral instrument 5

Key Deliverables Transfer pricing documentation and country-by- country reporting Align transfer pricing with value creation Make dispute resolution more effective Multilateral instrument 6

Progress since September 2014 Over 40 press releases by OECD Feb 2015 – initial mandate on multilateral instrument, CBCR and patent box assessment Transfer pricing – profit splits, risk, re-characterisation Artificial avoidance of PE CFCs Interest deductibility Dispute resolution 7

Artificial avoidance of PE Discussion draft 15 May 2015 Widens definition of PE – particularly “dependent agent” Restricts “preparatory or auxiliary” activities Tougher anti-abuse rules Will this collect more tax, or just move it around? 8

Country-by-country reporting Revised standards for transfer pricing documentation and template for CbC reporting Report revenue, profits, income tax paid and taxes accrued, employees, stated capital and retained earnings, and tangible assets annually for each tax jurisdiction in which they do business Jurisdiction by jurisdiction rather than entity by entity basis To tax authorities in all countries where business done Transfer pricing master file (separate) UK Treasury has “formally committed” to CbC template 9

Multilateral instrument Significant advantages for swift implementation of the treaty-related BEPS outputs OECD has agreed this is feasible Urgent – International Conference in Feb 2015 agreed mandate – time limit 2 years Moving towards binding arbitration – likely to be an option; 20 countries in favour 10

UK Diverted Profits Tax Unilateral move: pre-empts BEPS? Political: pre-Election - rushed in New tax: not CT Rate of 25% Pay now, argue later Applies to profits from 1 April

When does DPT apply? UK entity with arrangements with entities which lack economic substance Avoided PE – tax avoidance purpose, or arrangements with entities which lack economic substance Tax mismatch test – tax is less than 80% of what it should have been 12

Summary – avoided PE UK activity in connection with a foreign trade Designed to ensure there is no UK CT charge Tax avoidance purpose, or Tax reduction of at least 20%, and insufficient economic substance 13

Example 1 – international supply chain 14

DPT pitfalls Legislation is complex and was drafted in a rush Risk of application to “innocent” arrangements Notification requirements What is the “reasonable alternative transaction”? Scope includes property traders e.g. offshore developer Lack of Treaty protection Parent may not be able to claim credit for DPT? Draconian enforcement 15

What will be the reaction to DPT? Better to pay UK CT at 20% than DPT at 25% Robust transfer pricing (especially APA) likely to be a defence Pay more UK tax to be on the safe side Australia has announced similar measure; others considering it – what if everyone has DPT? 16

UK Government policies Increase personal allowance to £12,500 Higher rate threshold to £50,000 Restrict pension contributions for high earners £5bn savings from anti-avoidance Triple lock on Income Tax, NIC and VAT £12bn benefits savings? 17

Some questions Why raise personal allowance and not NIC threshold? Complexity – and more complexity Some specific cliff edges: £50k; £100k; £150k What is to be done about pensions? What will be defined as “avoidance”? Where will the money come from? 18

Crystal ball-gazing Avoidance – IR35 revisited? Pensions – restriction on lump sum? NICs – employers; self-employed; pensions? Will salary sacrifice survive? 19

The Share Plans Perspective In the UK, recent period of significant change: –Corporate governance –Tax and administration Corporate governance – focus of a separate session Tax: –few developments on the horizon which are specifically aimed at share plans and equity compensation –period of consolidation for new administration regime, new UK IME rules –BUT… 20

The Share Plans Perspective What will be the impact of other changes on the implementing and operation of share plans? Share plans can be “caught” within more general anti-avoidance initiatives: –Disguised remuneration –FATCA 21

What will be the impact for share plans Transfer pricing - recharge arrangements Country by country reporting Diverted profits tax 22

UK government changes Income tax –No rate changes NIC –No rate changes for employees –Changes to employer’s NICs? Pensions –The bigger picture – pensions and share plans as part of the overall package 23

Avoidance “Aggressive” tax avoidance motive unusual in the share plans world Will there be more scrutiny going forward? Particular “watch” points on the agenda: –Transfer pricing –Dual-contracts –Employee trusts –Contractors Careful implementation 24

Compliance KYC visits New online filing regime –More information – including on sales –Potential for matching of company and individual returns –General compliance context IMEs –New UK approach –Tracking –Reporting 25

What it means for us Key driver – to reward and incentivise New challenges –Increased compliance –Increased complexity New approaches Revised solutions 26

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