Horwath Clark Whitehill - Corporate Taxes Update - 27 May 2008

Apr 5, 2009 | Publisher: CroweClarkWhitehill | Category: Business & Jobs |  

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A summary of the latest UK tax news www.horwathcw.com Corporate Taxes Update 27 May 2008 In this issue: • Lidl case in Europe – company cannot use losses of branch • Chancellor reacts to concern over foreign profits condoc • UK GAAP is the tie-breaker Lidl case in Europe – company cannot use losses of branch On 15 May 2008 the European Court of Justice (‘ECJ’) gave its judgment in the case of Lidl Belgium GmbH & Co. KG (‘the company’), a company tax resident in Germany. This case related to a claim in 1999 by the company to offset losses of its branch which was based in Luxembourg against profits in Germany. The German authorities denied relief for the losses; however had the branch been based in Germany the losses would have been relievable against profits of the German company. The German authorities justified their treatment on the grounds that under the double tax treaty between Germany and Luxembourg, where a German company had a branch based in Luxembourg, the profits of the branch were only taxable in Luxembourg. Accordingly therefore the German company should not be able to utilise the losses. The case before the ECJ was therefore to consider whether Germany could deny relief for losses of foreign branches but allow losses of German branches – i.e. was such treatment contrary to the European principle of freedom of establishment. This case follows a string of earlier cases on the subject of freedom of establishment, most notably perhaps the case of Marks and Spencer which also related to losses. The decision of the ECJ in the Lidl case focused on two key issues: • Whether the approach of the German authorities was justifiable • Whether the approach was proportionate For justification they used the three principles laid down in the Marks and Spencer case. Tax authorities had to demonstrate that that they were: • Preserving the allocation of taxing rights • Preventing ‘double dipping’ – where the same losses could be used twice • Preventing tax avoidance – avoid ‘loss shopping’ In Marks and Spencer the court decided that all three provisions had to exist, but the Advocate-General and the ECJ in the Lidl case followed the decision in the case of Oy AA where only two of the provisions were needed to justify the tax treatment. The ECJ found that the first two provisions had been proved and therefore the German authorities were justified in denying the losses. The ECJ also concluded that the German authorities had been proportionate – i.e. the double tax treaty only taxed profits of a branch in the jurisdiction in which the branch is located and losses arising from that branch could be used by the branch in the future. The Advocate-General in Lidl disagreed on proportionality due to cashflow – the company could only receive relief for the losses in a later period. She suggested that ‘deduction and recapture’ would be more appropriate – give relief for losses up front and tax later if the losses are used in the foreign jurisdiction. These cases provide key principles for companies to consider when setting up business in another member state– whether via a branch or a subsidiary. Corporate Taxes Update A summary of the latest UK tax news www.horwathcw.com This information is published without responsibility on our part for loss occasioned to any person acting or refraining from acting as a result of any information published herein. © Horwath Clark Whitehill LLP May 2008 27 May 2008 For more information please contact: Chris Denning Tax Partner chris.denning@horwath.co.uk Stuart Weekes Senior Tax Manager stuart.weekes@horwath.co.uk Horwath Clark Whitehill LLP Aquis House 49-51 Blagrave Street Reading, RG1 1PL Telephone: 0118 959 7222 Fax: 0118 958 4640 Chancellor reacts to concern over foreign profits condoc As mentioned in the last issue of Corporate Taxes Update concern over the impact of the consultation document (condoc) regarding the taxation of foreign profits has led some multi-national businesses to reconsider the location of their holding companies. The proposals in the condoc seek to exempt from UK taxation dividends received by UK companies from overseas subsidiaries. The government believe that this will reduce tax revenue into the UK and as their stated intention is that this provision should be tax- neutral, they are seeking to identify opportunities to recover tax from elsewhere. The concern of many multi-nationals is that the government will seek to tax in the UK income arising from mobile sources such as financing and intellectual property (IP) wherever it is located across the world. The reaction of multi-nationals led the Chancellor to announce the creation of a multi- national forum on tax. Nine industry representatives (including the head of the CBI) and four economists have joined the forum. Their objective will be to discuss ways in which the tax system can provide long-term certainty for multi-national companies against increased competitiveness and other challenges facing business and government. To address fears about the proposals the Chancellor announced at the CBI annual dinner that changes to the rules will be made in close consultation with business. However he also said “Government and industry both have difficult decisions to make.” Time will tell how this forum and the changes to make a tax-neutral adjustment will impact on multi-nationals and the strategic decisions that they take. UK GAAP is the tie breaker Under the UK’s tax law rewrite project the law relating to the use of different accounting practices within a group of companies has been republished. If two or more companies in a group are involved in transactions and they prepare their accounts in accordance with different standards this can present an imbalanced tax position - e.g. one company could prepare their accounts using international accounting standards and the other using UK GAAP. As a result the timing of the taxing of income and deductibility of the corresponding expense may arise in different periods. It has been confirmed that in such cases both companies must apply UK GAAP for UK tax purposes. Groups using different standards should take note for their UK tax returns. Other matters • Income tax: the Chancellor has announced an increase of £600 in the personal allowance and reduction of £1,200 in the higher rate threshold for 2008/09. • HMRC has issued form P11D(b) to employers - this must be returned to HMRC with forms P11D by 6 July 2008. Class 1A NIC on the benefits is due 19 July. • Draft double tax conventions with Moldova, New Zealand and Slovenia have been published.

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