International Tax update

The UK Finance Bill arising out of the Spring Budget is going through Parliament. Here is a brief summary of the provisions that might affect you in the international tax environment.

This bulletin contains updates for

• charities abroad,
• companies with turnover exceeding €750m,
• transfer pricing documentation,
• Non-doms, and
• offshore trusts with UK beneficiaries.

Charities

Historically the UK has allowed a tax deduction to charities in the UK, the EU and by specific application by the countries concerned, Iceland and Norway. The Finance Bill amends the definition of charity to only those established in, or with a branch in, a part of the UK. The argument is to only allow tax deductions where the money is being used for the benefit of the UK, but the law does not prevent UK charities, such as OXFAM from working abroad or spending their funds overseas.

Accordingly, those wishing to donate for charitable purposes abroad, you might need to use an existing UK charity (which might, in turn have to change its objects) or use one of the charity providers such as CAF.¹

Pillar II – Multi-national Top-Up Tax (MNTUT) and Qualifying Domestic Top-Up Tax (QDTUT), i.e. TUTs

Pillars I and II are the latest OECD recommendations to prevent global tax avoidance by multi-nationals. However, they apply to corporate groups with a turnover in excess of €750m² in two of the last four years (on a rolling basis) which includes companies other than Apple and Google. 191 sections of the Bill are devoted to introducing the TUTs but their effectiveness depends upon whether Joe Biden will adopt Pillar II in the USA.

In short, this complex new regime, which includes the UK’s first check the box rules, calculates the group’s effective tax rate globally, and to the extent that it is under 15%, the balance is due from the parent company. This is the allocated around the group.

These rules apply to accounting periods starting after 31 December 2023.

At present, a group is defined as an IAS accounting group, but there are special provisions for companies which have linked shares, e.g. two separate corporate groups operating as one, often through linked shares on different stock exchanges, e.g. Unilever plc and Unilever NV.

Transfer pricing (TP) Clause 37 of the Bill

Aligned to the new TUTs, the rules on transfer pricing documentation are being tightened including a requirement to correct existing documentation.

As a reminder, small entities, i.e. those with fewer than 10 employees and either a turnover below €10m or gross assets below €10m, are exempt from TP in the UK and EU. Medium companies, i.e. those with fewer than 50 employees and turnover or gross assets below €50m, are subject to TP but do not have to self assess (although they ought to have TP documentation in place). Large companies have to self-assess to TP.

New rule for UK resident non-domiciled individuals and share for share exchanges

If a UK resident individual exchanges shares in a company incorporated in the UK for shares in another company, and has more than 5% of the share capital of that company, then that exchange is a disposal for capital gains tax purposes (CGT). However, relief might be available under s135 TCGA 1992³, for which a clearance under s138 TCGA from HMRC in advance is advisable.

If such an individual were non-UK domiciled and exchanged shares in his UK company for a non-UK incorporated company, then relief might not be forthcoming as one of the effects of the exchange would be to convert his UK situs assets to a non-UK situs asset, and therefore a future gain by him could benefit from the remittance basis.

Clause 36 changes this for closely held companies but only for CGT. Going forward, shares in a non-UK situs company acquired in such circumstances will be deemed to have a UK situs for both CGT and for remittance basis purposes whilst it is held by the individual or his / her spouse.

However, inserting a UK resident but non-UK incorporated holding company for an IHT or stamp taxes benefit is still effective, but the question then is would you obtain HMRC clearance for CGT purposes to prevent a disposal occurring?

Our view is a qualified yes. The test for refusing a clearance has not changed, the transaction still has to be bona fide commercial and not done for the purposes of avoiding CGT, but if the only reason for doing this was to gain an IHT advantage, then is it bona fide commercial? However, with a possible Labour government due next year, then there may be other reasons to move assets out of the UK jurisdiction?

Offshore trust, UK beneficiaries and tax credits

If a non-UK resident trust receives income which has a tax credit which, if it were UK resident, it could use, then prima facie that credit is lost. However, by concession⁴, HMRC allow that credit to be used by a UK resident beneficiary to the extent that an amount of income is distributed to them.

In the case of Murphy & Anor v R & C Commrs [2023] BTC 14, the Court of Appeal rejected HMRC’s contentions that any claim was restricted to a six year time limit, even though ESC B18 did not say this whereas similar concessions did.

A useful reminder of the use of ESC B18 but also how HMRC like to spend our money rather than amending the terms of the concession. NB the use of extra-statutory concessions by HMRC was cast under serious doubt in R v Inland Revenue Commissioners, ex parte Wilkinson. [2005] BTC 281⁵ and there is a programme to put them all on to the statute books.

References

1. Or for clients who are orthodox see Asserbishvil.org.uk.
2. Even though we have left the EU, this is apparently the OECD (based in Paris) chosen amount.
3. Transfer of Chargeable Gains Act 1992.
4. Extra-statutory concession B18.
5. This was a case where the taxpayer, Mr Wilkinson, sued IRC for his widow’s allowance, to which he said he was entitled to as IRC could not discriminate on the grounds of his gender.