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International Standards

Under the TCA, the UK and the EU have committed to maintaining in law the OECD’s Base Erosion and Profit Shifting (BEPS) minimum standards – that is Actions 5, 6, 13 and 14 dealing with Harmful Tax Practices, Preventing the granting of Treaty Benefits in inappropriate circumstances, Country by Country Reporting and Mutual Agreement Procedures.

The UK and the EU have also committed to promoting good governance in tax matters, improving international cooperation in the area of taxation and facilitating the collection of tax revenues.

Moreover, both the UK and the EU have agreed not weaken or reduce the level of protection against BEPS as provided for in their tax legislation at the end of the transition period below the level provided for by the standards and rules which have been agreed in the OECD at the end of the transition period. This relates to:

a)       the exchange of information, whether upon request, spontaneously or automatically, concerning financial accounts, cross-border tax rulings, Country by Country reports between tax administrations, and potential cross-border tax planning arrangements;

b)      rules on interest limitation, controlled foreign companies and hybrid mismatches.  These are not BEPS minimum standards, but they are best practices that both the UK and the EU implemented into legislation through the Anti-Tax Avoidance Directive (ATAD).

The TCA also provides that neither the UK nor the EU can weaken or reduce the level of protection as provided for in their legislation at the end of the transition period in respect of public Country by Country reporting by credit institutions and investment firms, other than small and non-interconnected investment firms.

These provisions are not subject to the general dispute settlement provisions of the TCA.

Harmful Tax Regimes

The commitments on tax between the UK and the EU are also captured in a stand-alone Joint Political Declaration on Countering Harmful Tax Regimes. This is a political commitment to the principles of countering harmful tax regimes and reflects the work done by the OECD in this area.

The UK and the EU have affirmed their commitment to applying the principles on countering harmful tax regimes set out in Article 5 of the OECD’s BEPS Action plan. Harmful tax regimes cover business taxation regimes that affect or may affect in a significant way the location of business activity, including the location of groups of companies, within the UK or the EU. Tax regimes include both laws or regulations and administrative practices. If a tax regime meets the gateway criterion of imposing a significantly lower effective level of taxation than those levels which generally apply in the UK or the EU, including zero taxation, it should be considered potentially harmful. 

Subsidies

The TCA includes details on the types of tax measures that could be considered a subsidy for the purposes of the agreement – which is relevant to assessing whether a tax measure could be considered an illegal subsidy under the terms of the agreement.

The types of tax measures that could be considered a subsidy include those where:

  1. certain economic actors obtain a reduction in the tax liability that they otherwise would have borne under the normal taxation regime; and
  2. those economic actors are treated more advantageously than others in a comparable position within the normal taxation regime.

Tax Conventions

A number of provisions throughout the TCA provide that where the terms of the TCA are inconsistent with the terms of a Double Tax Agreement (DTA) or any other international agreement or arrangement relating wholly or mainly to taxation (collectively defined as tax conventions), the tax convention shall take precedence.  Bilateral tax Conventions between the UK and EU Member States continue to apply.

It is worth noting that the TCA provides that “with regard to a tax convention between the [ European ] Union or its Member States and the United Kingdom, the relevant competent authorities under this Agreement and that tax convention shall jointly determine whether an inconsistency exists between this Agreement and the tax convention.”

In practice, this could potentially lead to a prolonged and lengthy process to resolve inconsistencies.

Social security

DAC 6

The UK has announced that it will not be applying all aspects of DAC 6 (the EU’s Mandatory Disclosure Regime) from 1 January 2021. DAC 6 applies to reportable arrangements with a nexus to an EU Member State, the first step of which was implemented on or after 25 June 2018. The first reporting deadline for the UK (and most Member States, including Ireland) is at the end of January 2021.

HMRC has confirmed that it will not require the reporting of arrangements that arose in the period from 25 June 2018, notwithstanding that the UK was / was treated as a Member State of the EU throughout that period up to 31 December 2020.

The above does not apply to arrangements that are reportable under Hallmark D of DAC 6 – broadly speaking, these are arrangements that seek to undermine the disclosure and exchange of financial account and beneficial ownership information.  The UK will continue to require reporting of such arrangements.  It is understood that this is on the basis that the UK considers that it has committed to the mandatory disclosure of such arrangements at OECD level.

Given that DAC 6 can be said to be a relatively minor matter, it was quite surprising that the UK announced that it would not apply it almost as soon as the TCA was agreed.  It will be interesting to see the level of UK divergence that arises in the area of taxation and beyond in the coming months and years.  In particular, with regard to larger policy areas, for example the ongoing work at the OECD on BEPS 2.0.

EU Directives and laws

From 1 January 2021, EU directives will no longer apply to the UK, including those in the area of direct tax:

  • the Parent-Subsidiary Directive – aimed at exempting dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and eliminating double taxation of such income at the level of the parent company;
  • the Interest and Royalties Directive – aimed at ensuring fair taxation of interest and royalty payments made between associated companies in different EU countries, while avoiding double-taxation between EU countries by abolishing taxes levied at the EU country of source, while the EU country of receipt taxes the same payment;
  • the Merger Directive – aimed at removing fiscal obstacles to cross-border reorganizations involving qualifying companies situated in two or more Member States;
  • the Directive on Administrative Cooperation (DAC) – the framework for, among others, automatic exchange of information among Member States on certain categories of income and assets, on cross-border tax rulings, advance pricing arrangements and reportable cross-border arrangements. Much (though not all) of the information exchanged under the DACs is automatically exchanged / available on request through other fora, e.g. through OECD equivalent mechanisms or under Double Tax Agreements.
  • the Anti-Tax Avoidance Directive (ATAD), which contains legally binding anti-abuse measures, which all Member States apply, including controlled foreign company rules, exit taxation, interest limitation provisions and anti-hybrid rules (though the UK has committed to applying most of the provisions of ATAD in the TCA); and
  • the Directive on tax dispute resolution mechanisms in the EU, which has the objective to establish an effective and efficient procedure to resolve disputes in the context of a well-functioning EU internal market.

In addition to the above, decisions of the European Court of Justice will no longer apply to the UK.

As a result of the above, the tax treatment of certain matters, for example intragroup payments of dividends, interest and royalties between residents of EU Member States and the UK may change from 1 January 2021.  Double Tax Agreements between the UK and EU Member States will continue to apply, and such matters may be governed by them or the domestic legislation of the relevant countries.  Comments on the impact for certain transactions between Ireland and the UK are discussed in more detail here.

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