Tax transparency - the UK goes the extra mile

Public Country By Country Reporting

The Finance Act 2016 allows the Treasury to require by regulations that multinational enterprises (“MNEs”, ie groups with more than £200m turnover and/or more than £2bn of balance sheet total) make public their Country by Country Report (“CbCR”).

The CbCR rules require MNEs to make an annual CbCR, usually in the jurisdiction where they are headquartered (for UK-headed groups this will be to HMRC), showing details including their revenues, gross profits, assets and taxes paid per jurisdiction of operation. Please see the following link to our previous CbCR publication: BEPS – First steps in the implementation of the Country-by-Country reporting.

The UK is the first country implementing a legislative option for such CbCRs to be made public. It was initially proposed that all CbCRs made to HMRC would be made public. However, this initiative has been defeated and under the Finance Act 2016 it is left to the option of the Treasury to require the public disclosure of CbCRs.

CRS: Client Notification

The Common Reporting Standard (“CRS”) is a G20/OECD initiative requiring financial institutions to report to tax authorities certain information on their foreign account holders for exchange with the home country tax authorities of such account holders. The list of countries that have agreed to share information under CRS is available here. Our previous CRS-related publications are available here:

• Common Reporting Standard ('CRS') Update
• FATCA and CRS - What financial institutions should be doing
• FATCA and CRS – New HMRC Guidance

The UK’s International Tax Compliance (Client Notification) Regulations 2016 (the “Regulations”) were published on 8 September 2016 (available here) requiring (i) certain financial institutions, and (ii) advisers that have provided, or referred clients for, offshore (ie non-UK) advice or services (eg tax, legal and financial) to:

(a) identify clients within the scope of this new measure. These will be certain UK resident clients holding an account with the financial institution or having received certain advice regarding their personal tax affairs from the adviser, and

(b) before 31 August 2017 provide such clients with information about CRS, opportunities for disclosure and penalties for non-compliance. This will have to be in the form of an HMRC letter included in the Regulations (available here) accompanied by a cover letter from the financial institution/adviser.

The scope of exceptions to the Regulations is limited, for example: (i) where the adviser has no expectation of a future relationship, or (ii) for reporting in 2017, taxpayers not expected to be UK tax resident for the 2015/16 and 2016/17 tax years.

The Regulations will: (i) apply to financial institutions, tax advisers and other providers of financial/legal services, (ii) create an administrative burden for financial institutions and others required to undertake due diligence to identify and notify clients, and (iii) increase the discovery risk for international tax avoiders/evaders.

The penalty for non-compliance with the Regulations is up to £3,000.

International Exchange of Tax Rulings

HMRC published further guidance (available here) on 6 and 7 September 2016 regarding the international exchange of tax rulings.

The EU and OECD framework for automatic exchange of tax rulings applies from April 2016 (OECD) and January 2017 (EU).

The further HMRC guidance discusses:

1. the UK tax rulings (ie HMRC clearances) in scope, for example: transfer pricing, thin capitalisation, foreign branch exemption and permanent establishment (profit attribution) related rulings, and

2. procedural matters, for example: timings for first exchanges and information not to be exchanged (eg commercial secrets or processes).

The exchange of tax rulings will increase the likelihood and HMRC efficiency of enquiries into cross-border tax matters and has the potential to expose the tax ruling policies and practices of tax authorities in other jurisdictions.