Ongoing regulatory change and the current economic situation are bringing new tax challenges for firms. Martin Killer looks at operational tax risks and what to think about for Q4.
While firms balance their COVID-19 response, cost reduction initiatives and regulatory change programmes, managing operational tax risk remains an ongoing challenge. New DAC 6 rules on tax disclosures, qualified intermediary recertification and changes in HMRC powers have dominated the tax agenda this year. Let's take a closer look at what these updates mean for you and how to manage the risks.
While the process of filing FATCA/CRS returns should now be the norm for most financial institutions (FIs), FIs are increasingly required to demonstrate compliance by documenting the end-to-end process by written policies and procedures.
For example, FIs in Guernsey and Luxembourg are now required to put in place policies, procedures and controls to demonstrate compliance and some jurisdictions have introduced increased penalties where FIs are not compliant.
Separately, as a result of COVID-19, most filing deadlines for the 2019 calendar year have been extended. While this gives FIs the much needed time to prepare and file the returns remotely, FIs are under increased pressure to comply with the various deadlines as they enter Q4, since the various compliance requirements that would otherwise have been spread out throughout the year are now all required in a short period.
What to do now?
Creating a template for procedures can help you prepare and file your returns, taking into account the subtle differences in each jurisdiction. Gaining external assurance over existing policies, procedures and controls can be beneficial.
Increased HMRC powers
Draft legislation covering proposed changes to HMRC’s information powers were recently released, which would enable HMRC to issue a financial institution notice (FIN) requesting information regarding a specific taxpayer without the need to obtain tribunal approval.
One of the drivers for this change is the number of information requests that HMRC receives from overseas tax authorities in relation to Common Reporting Standard (CRS) data. An FI would be able to share the notice with its customers unless HMRC is able to prove that providing this would prejudice the collection of tax. FIs that don't comply with the terms of the FIN would be subject to penalties.
What to do now?
Develop a robust process for dealing with HMRC information requests, liaising with customers and linking this to existing FATCA/CRS reporting controls and reviews.
The Internal Revenue Service (IRS) Qualified Intermediary (QI) Agreement included in Revenue Procedure 2017-15 imposes a series of compliance obligations on those institutions that have registered as QIs in the USA, including periodic certification to the IRS. Qualified Intermediary firms must periodically certify compliance to the IRS. For most firms this will be due in 2021.
Where a certification is not submitted in time, or it is subsequently determined that the QI has not complied with the requirements of the QI Agreement, the IRS can penalise the QI under the terms of the QI Agreement. Further information can be found in a previous article, regarding what a QI should consider as part of its periodic review and Responsible Officer certification.
What to do now?
Prior to conducting the periodic review, a health check can help identify any issues and remedy them before the periodic review. Following a targeted approach, a health check can focus on known problem areas or those that carry higher risk of error.
DAC6 regulations are now in force in the UK and guidance has been issued by HMRC.
Originally, reportable cross-border arrangements (RCBAs), where the first step of their implementation took place in the period from 25 June 2018 to 30 June 2020 (the ‘look-back period’), should have been reported by 31 August 2020. However, as a result of COVID-19 and following agreement at the EU Council in June 2020, EU member states were given the option to defer reporting deadlines by six months, which the UK has agreed to.
Reporting for the look-back period is, therefore, not due in the UK until 28 February 2021. For RCBAs that take place between 1 July 2020 and 31 December 2020, reporting is due by 30 January 2021, and for any RCBAs that are implemented or ready to be implemented on or after 1 January 2021, these will be reportable within 30 days.
The deferral has not been applied by all EU member states, and Germany and Finland are notable exceptions, where the original deadline to report by 31 August 2020 for RCBAs in the look-back period was retained and the 30-day reporting window for new RCBAs started 1 July 2020.
What to do now?
An impact assessment can identify any key risks, with areas for greater risk controls or additional procedures. Further training can support DAC 6 implementation and the transition to business-as-usual.
Corporate Criminal Office
While the Corporate Criminal Office (CCO) regime is not new, having been in force since 30 September 2017, there has been an increased number of investigations in this area and an increased focus by HMRC on compliance by FIs.
With the potential for unlimited penalties, public convictions and reputational damage, it is important for entities to conduct risk assessments and update these regularly. If an entity is found to be non-compliant with CCO, the only defence is if they had reasonable procedures in place or that it was reasonable for them not to have any procedures.
Reasonable procedures will differ from entity to entity, and HMRC will consider CCO compliance on a case-by-case basis. It is important to note that HMRC will not review and sign off on procedures to confirm that they are reasonable.
What to do now?
A regular impact assessment will help identify areas of CCO non-compliance to improve mitigating controls. Existing procedures for CCO or anti-bribery and corruption monitoring may need updating, using HMRC’s six guiding principles as best practice.
Withholding tax changes
There are increased reclaim opportunities for funds this year, following the recent successes for certain US funds claiming refunds on tax suffered in Spain and Sweden that are comparable to Spanish and Sweden funds.
There is also an opportunity for funds comparable to French Undertakings for the Collective Investment in Transferable Securities (UCITS) to obtain relief at source in France. The basis for these reclaim opportunities and access to relief at source would be based on the principles set out in the EU Treaty governing the free movement of capital.
Claimants argue that as they suffer higher rates of withholding tax, they have been subject to discrimination as compared to an equivalent domestic investor. Claims can be made by EU/EEA investors or those in a third country. From a UK perspective, basis for claims will, therefore, change from an EU/EEA claimant to a third-country claim.
In addition, the impact of COVID-19 on businesses has meant that documentation that requires wet signatures has not been completed and filed with the relevant tax authorities in time. As a result, we are seeing investors suffer additional tax at source, compared to previous years, on their global investments. While custodians may offer a tax service in certain jurisdictions and assist with filing reclaims, some jurisdictions will not be supported.
Most reclaims tend to have a filing deadline of 31 December. Therefore, it is important to determine as soon as possible whether there is an opportunity to reclaim any taxes incurred. Otherwise, there is, potentially, a year of reclaims that would fall out of statute if not filed by the end of this year.
Other notable changes include Finland’s adoption of the Organisation for Economic Co-operation and Development's (OECD) Tax Relief and Compliance Enhancement (TRACE) model, which will come into force from next year.
Under TRACE, there is the concept of an Authorised Intermediary (AI), who will be able to claim at source exemptions or reductions in withholding tax rates on behalf of investors. This will however be subject to the investor providing certain documentation to the AI to support their tax position.
The AI will have the responsibility with the local tax authority with regards to ensuring that withholding is applied at the appropriate rate, based on the documentation provided by the end investor. While the issuer will remain the withholding agent, under TRACE, the AI will confirm to the withholding agent the WHT rate that should be applied.
What to do now?
Investors may want to review withholding tax on global investments, check for tax leakage, consider any relief at source and see if the custodian has filed timely reclaims. Some investors may need to file a reclaim, on the basis of domestic exemptions or reduction, any relevant treaties or under the Article 63 Treaty on the Functioning of the European Union.
Contact Martin Killer for further information on operational tax.