Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

United Kingdom

The United Kingdom has met all aspects of the terms of reference (ToR) for the calendar year 2017 (year in review) except for collecting and exchanging information on new assets of existing taxpayers benefitting from the grandfathered IP regime (ToR I.4.1.3). This recommendation was also included in the prior year peer review report. As in the previous report the United Kingdom is recommended to identify and exchange relevant information on new assets of existing taxpayers benefitting from the grandfathered IP regime.

The United Kingdom can legally issue three types of rulings within the scope of the transparency framework.

In practice, the United Kingdom has issued 599 past rulings; for the period 1 April 2016 ‑ 31 December 2016, the United Kingdom issued 71 future rulings and for the year in review, the United Kingdom issued 16 future rulings within the scope of the transparency framework.

Peer input was received from four jurisdictions in respect of exchanges of information received from the United Kingdom. The input was in general positive, noting that information was complete, in the correct format and received mostly in a timely manner. One peer noted that it received one past rulings and one future ruling after the respective timeline.

Introduction

1318.  This peer review covers the United Kingdom’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

1319.  The United Kingdom can legally issue the three following types of rulings within the scope of the transparency framework: (i) rulings related to preferential regimes1; (patent box and shipping); (ii) cross-border unilateral advance pricing agreements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles; and (iii) permanent establishment (“PE”) rulings.

1320.  Rulings on preferential regimes are issued by specialist team in the tax administration (HMRC). Rulings on APAs are issued by a Delegated Competent Authority in HMRC’s Head Office Transfer Pricing Team, and rulings which are Advanced Thin Capitalisation Agreements (a form of unilateral APA for financing issues) are generally signed by a HMRC International Tax Specialist or a Customer Relationship Manager in the field office, normally in the Large Business team. PE Rulings are issued by the Tax Specialist who has reviewed the application, whether on a Customer Team, one of HMRC’s Specialist Units or Head Office Functions.

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

1321.  For the United Kingdom, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2014 but before 1 April 2016; or (ii) on or after 1 January 2010 but before 1 January 2014, provided they were still in effect as at 1 January 2016.

1322.  In the prior year peer review report, it was determined that the HRMC’s undertakings to identify past rulings and all potential exchange jurisdictions were sufficient to meet the minimum standard. In order to identify relevant exchange jurisdictions for past rulings the Delegated Competent Authority now may also use third party data sources and consult with the HMRC caseworker in cases where it seems appropriate to verify the information provided by the taxpayer. As the HRMC further enhanced their system to identify past rulings and all potential exchange their undertakings continue to meet the minimum standard.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

1323.  For the United Kingdom, future rulings are any tax rulings within scope that are issued on or after 1 April 2016.

1324.  In the prior year peer review report, it was determined that the United Kingdom’s implementation of a new system to identify future rulings and all potential exchange jurisdictions was sufficient to meet the minimum standard.2 The United Kingdom’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Review and supervision mechanism (ToR I.4.3)

1325.  In the prior year peer review report, it was determined that the United Kingdom tax administration’s review and supervision mechanisms were sufficient to meet the minimum standard. The United Kingdom tax administration’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard. Furthermore the United Kingdom is currently undertaking a full review of all exchanges of past and future rulings to date which could lead to an adjustment of the figures provided for the year of review and the prior year. This procedure is expected to be completed by June 2018.

Conclusion on section A

1326.  The United Kingdom has met all of the ToR for the information gathering process and no recommendations are made.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

1327.  United Kingdom has the necessary domestic legal basis to exchange information spontaneously. United Kingdom notes that there are no legal or practical impediments that prevent the spontaneous exchange of information on rulings as contemplated in the Action 5 minimum standard.

1328.  The United Kingdom is a party to international agreements permitting spontaneous exchange of information, including (i) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”), (ii) the Directive 2011/16/EU with all other European Union Member States and (iii) double tax agreements in force with 121 jurisdictions.3

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

1329.  In the prior year peer review report, it was determined that the United Kingdom’s completion and exchange of templates were sufficient to meet the minimum standard.

1330.  Furthermore, the United Kingdom has confirmed that it completes the summary section in section 7 in Annex C of the 2015 Action 5 Report (OECD, 2015) as prescribed in the instruction to the section. The United Kingdom uses the Annex C template and its notes for completion. Caseworkers, who complete the template, receive guidance how to complete the summary section including referring to the internal FHTP suggested guidance.

1331.  For the year in review, the timeliness of exchanges is as follows

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	23	0	N/A	This relates to the exchanges with new members of the IF that joined in 2017
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	22	16	Resources focused on meeting EU Directive	All future rulings have been exchanged; a new procedure was implemented and additional staff have been recruited, trained and allocated to prevent further delays
Total	45	16

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	2	40 days	0

1332.  The United Kingdom experienced delays exchanging information on future rulings. It states that the delays appeared due to changes in key personnel and pressure on resources due to the implementation of a new system to meet the requirements of the EU Directive. This issue has been addressed by the development of an “end-to-end” process maps, the establishment of a Single Point of Contact (SPOC) Network within the relevant lines of business in HMRC and the recruitment and training of additional staff.

Conclusion on section B

1333.  The United Kingdom has the necessary legal basis for spontaneous exchange of information, a process for completing the templates in a timely way and has completed all exchanges on time. The United Kingdom experienced delays in the exchange of future rulings but has addressed the reasons for the delays, which are considered not to be a recurring issue. The United Kingdom was able to complete all outstanding exchanges within the year in review. The United Kingdom has met all of the ToR for the exchange of information process and no recommendations are made.

C. Statistics (ToR IV)

1334.  The statistics for the year in review are as follows:

 

Category of ruling	Number of exchanges	Jurisdictions exchanged with
Rulings related to preferential regimes	18	Australia, France, Japan, Luxembourg, Netherlands, Norway, Spain, United States
Cross-border unilateral advance pricing agreements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles	38	Canada, France, Hong Kong (China), Ireland, Japan, Luxembourg, Netherlands, Sweden, Switzerland, South Africa, United States
Cross-border rulings providing for a unilateral downward adjustment to the taxpayer’s taxable profits that is not directly reflected in the taxpayer’s financial / commercial accounts	N/A	N/A
Permanent establishment rulings	5	Canada, Germany, Ireland, Malta, United States
Related party conduit rulings	N/A	N/A
De minimis rule	N/A	N/A
IP regimes: total exchanges on taxpayers benefitting from the third category of IP assets, new entrants benefitting from grandfathered IP regimes; and taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption	0	N/A
Total	61

D. Matters related to intellectual property regimes (ToR I.4.1.3)

1335.  The UK offers an intellectual property regime (“IP regime”) that is subject to transparency requirements under the Action 5 Report:4

• New entrants benefitting from the grandfathered regime: in the prior year peer review report, it was determined that the United Kingdom’s implementation regarding matters related to intellectual property regime was sufficient to meet the minimum standard except for identifying and exchanging information on new IP assets of existing taxpayers benefitting from the grandfathered IP regime. The United Kingdom was recommended to exchange such information.

  The United Kingdom notes that this information has not become available since the prior year peer review report and could therefore not be provided for the year in review. The United Kingdom is currently evaluating ways to collect alternative information for the purpose of exchanging under the transparency framework.

  The United Kingdom stresses that information is not sought when conducting regular field audits, as making use of the IP regime is usually not in the scope of regular subjects of the audits and that it would not be in line with the United Kingdom’s legislation to open an enquiry into every company electing into the Patent Box. An enquiry is generally opened because there is a risk that tax has been underpaid, with inquiries limited to that risk. The UK states that it would not be able to use an enquiry procedure to obtain information on new assets without reason to believe that the Patent Box computation had been submitted incorrectly, and that the uses of enquiry powers for this purpose could render the tax administration liable to judicial review. As existing taxpayers in the patent box were not prohibited from bringing new assets into the regime for the period covered by the transparency obligations (i.e. 6 February 2015 - 30 June 2016), there would not be a tax liability at risk. As such, the recommendation to exchange information on new assets brought into the grandfathered regime is unlikely to be able to be addressed. The United Kingdom is therefore proposing to develop a different approach to gather alternative available information which would be exchanged under the transparency framework.5

  In order to ensure that profits from new qualifying IP assets do not benefit from the grandfathered regimes after 30 June 2016, the United Kingdom introduced provisions. This includes an enhanced risk assessment of existing taxpayers benefitting from the grandfathered regime.

  It is noted that in early 2018 the United Kingdom conducted 38 exchanges of information with 13 jurisdictions on new taxpayers who entered the grandfathered regime between 6 February 2015 and 30 June 2016. This information is based on data about elections made in the tax returns up to December 2017, which is identified by the HMRC by using a profiling tool (iXBRL) that detects when a Patent Box election is made in the tax return. As the election can either be made in the tax returns (within a time limit of 12 months from the end of that accounting period) or in amendments to the tax returns (within two years from the end of the accounting period), elections in respect of periods before 30 June 2016 can be made up to 30 June 18. The United Kingdom will update the total number of new entrants in the subsequent peer review report.

• Third category of IP assets: not applicable, as this option has not been incorporated in the United Kingdom IP regime.

• Taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption: the United Kingdom confirms that no taxpayer elected to treat the nexus approach as a rebuttable presumption.

  As the United Kingdom’s implementation regarding matters related to intellectual property regimes remains unchanged the United Kingdom continues to meet the ToR with respect to intellectual property regimes except for identifying and exchanging relevant information on new assets of existing taxpayers benefitting from the grandfathered IP regime. The United Kingdom should exchange this information to the extent that such information or alternative information does become available in the future.

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
The United Kingdom experienced some delays exchanging information on future rulings.	No recommendation is made because the United Kingdom completed the exchange of all future rulings in the year of review, implemented new procedures and hired additional staff to prevent further delay, therefore it is considered not a recurring issue.
The United Kingdom has not exchanged information on new assets of existing taxpayers benefitting from the grandfathered IP regime, as this information was still not available. The United Kingdom is currently evaluating ways to collect alternative information on new IP assets for the purpose of exchanging under the transparency framework. This is a continuing recommendation from the prior year peer review.	The United Kingdom is recommended to identify and exchange alternative information on new assets of existing taxpayers benefitting from the grandfathered IP regime.

Jurisdiction’s response and recent developments

1336.  In relation to the recommendation on the exchange of information for the grandfathered IP regime, the United Kingdom undertook additional efforts during 2018 to collect relevant information on new IP assets of existing taxpayers benefitting from the grandfathered IP regime. The United Kingdom has now collected all relevant information and has exchanged this information with the relevant jurisdictions.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  With respect to the following preferential regimes: 1) Patent box and 2) Shipping regime.

← 2.  In addition to the system in place, the United Kingdom developed and introduced a new internal database to capture, store and transmit all categories of rulings in scope in line with the ETR XML schema to facilitate the identification and exchange of future rulings. The new database will be in use as of the second quarter of 2018.

← 3.  Parties to the Convention are available here: www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm. The United Kingdom also has bilateral agreements with Albania, Algeria, Antigua and Barbuda, Argentina, Armenia, Australia, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belize, Bolivia, Bosnia and Herzegovina, Botswana, British Virgin Islands, Brunei, Bulgaria, Cayman Islands, Chile, China (People’s Republic of), Colombia, Côte d'Ivoire, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Falkland Islands, Faroe Islands, Fiji, Finland, Former Republic of Macedonia, Gambia, Georgia, Ghana, Greece, Grenada, Guernsey, Guyana, Hong Kong (China), Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Jamaica, Japan, Jersey, Jordan, Kazakhstan, Kenya, Kiribati, Korea, Kosovo, Kuwait, Latvia, Lesotho, Libya, Lithuania, Malawi, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Montserrat, Morocco, Myanmar, Namibia, New Zealand, Nigeria, Norway, Oman, Pakistan, Panama, Papua New Guinea, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Senegal, Serbia, Sierra Leone, Singapore, Slovak Republic, Slovenia, Solomon Islands, South Africa, Spain, Sri Lanka, Saint Kitts and Nevis, Sudan, Swaziland, Chinese Taipei, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Tuvalu, Uganda, Ukraine, United Arab Emirates, United States, Uruguay, Uzbekistan, Venezuela, Viet Nam, Zambia and Zimbabwe.

Note by Turkey: The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

Note by all the European Union Member States of the OECD and the European Union. The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

← 4.  The Patent Box.

← 5.  Further information on this proposal will be included in the next version of this report.