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What *could* the EU-UK Trade and Cooperation Agreement mean for UK Tax Avoidance Legislation?


Unfathomably the “Brexit was about tax avoidance” conspiracy theory continues. This article won’t stop the conspiracy theory continuing – conspiracies, by their nature, don’t rely on evidence but personal belief; the flat-Earthers of the Brexit debate. The reason why people believe the Earth is flat is because it looks flat. They have already decided that the Earth is flat, the shape is no longer in question, now we need stories (not evidence, beyond perspective there is no evidence) which are cherry-picked because they justify our stance. A source says there is 150-foot-tall wall of ice at the edge of the world, and it’s a story which satisfies our perspective, so it becomes a sort of pseudo-evidence. So the purpose of this article isn’t to prevent or discourage the conspiracy, anyone who still believes the conspiracy will most likely always believe it, but to rather to look beyond it.


A tweet which simply said, “As from 1st January the UK is no longer covered by the EU Anti-Tax Avoidance Directive.” gains 600 RTs. Why would the UK be covered by Directives? From here on in the UK will once again be covered by Acts of Parliament.


Sometimes, of course, international agreements of various flavours will require Parliament to agree to domestic legislative changes. The OECD Base Erosion and Profit Shifting (BEPS) Project was one such agreement.


The Anti Tax Avoidance Directive (ATAD)/OECD BEPS Project


The history of the OECD BEPS Project and how it led to the ATAD (both ATAD I, EU 2016/1164 and ATAD II, EU 2017/952) is covered in this article. In brief, BEPS was the result of unprecedented global cooperation in the field of corporate tax avoidance, which led to 15 Actions for cooperative jurisdictions to implement.


In turn, this led to the EU’s ATAD initiative. OECD Actions 2 (Hybrid Mismatch), 3 (CFCs) and 4 (Interest Limitation) are covered by the ATAD, but the ATAD also includes a General Anti-Abuse Rule (GAAR) and Exit Tax rules.


So what does the TCA say about the continued obligations to comply with the ATAD? You can click on the link if you wish and find Chapter 5 on page 199, but the relevant section is copied here in full.


Chapter five: Taxation


Article 5.1: Good governance


The Parties recognise and commit to implementing the principles of good governance in the area of taxation, in particular the global standards on tax transparency and exchange of information and fair tax competition. The Parties reiterate their support for the OECD Base Erosion and Profit Shifting (BEPS) Action Plan and affirm their commitment to implementing the OECD minimum standards against BEPS. The Parties will promote good governance in tax matters, improve international cooperation in the area of taxation and facilitate the collection of tax revenues.


Article 5.2: Taxation standards

1. A Party shall not weaken or reduce the level of protection provided for in its 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, in relation 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.

2. A Party shall not weaken or reduce the level of protection provided for in its 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.


Article 5.3: Dispute settlement

This Chapter shall not be subject to dispute settlement under Title I [Dispute settlement] of Part Six [Dispute settlement and horizontal provisions].


There are some useful aspects in 1(a), which includes CbCR and with the “potential cross-border tax planning arrangements” allows for the continuation of DAC6 (UK: International Tax Enforcement (Disclosable Arrangements)) which should be welcomed. However, I want to concentrate on 1(b), which is the provisions contained within the ATAD, with the notable exclusion of the GAAR and Exit Tax rules.


Clearly, since the GAAR and Exit tax are not in BEPS what this section is committing both sides to is adherence to the international standards.


Now, there are two glaring features of this section that will be leapt upon by all conspiracy theorists but also by some more sensible commentators. Firstly, there is no guarantee that the UK will retain the GAAR or Exit Tax rules and secondly the “Chapter shall not be subject to dispute settlement” so the UK has freedom to diverge seemingly without repercussion (which of course ignore the fact that the rules are an international standard, so there would undoubtedly be repercussions).


My wording is deliberate here. Perhaps there’s something in the British sense of fair play that means people must, on occasion, take the opposing team’s side. Why would we think the UK would diverge? Why not the EU? After all, the UK’s GAAR predates the EU’s GAAR by about 7 years and, unlike the EU GAAR, is not limited to Corporate tax liability. As well as Corporate tax the UK’s GAAR includes Income Tax, CGT, Petroleum Revenue Tax, Diverted Profits Tax, the Apprenticeship levy, inheritance tax, SDLT and ATED.


Just a note here to say I am not the GAAR’s biggest fan. For me it is a cumbersome tool and tax authorities should instead (or even in addition) analyse the specific reason they want to use the GAAR and formulate policy to meet each specific even if that means forgoing the odd general. The GAAR is most effective as a deterrent rather than an enforcement tool. Just my opinion. All that said, I find it very unlikely that the UK will remove the GAAR, notwithstanding its exclusion from the TCA. People may point to the TCA and say the UK is now free to remove it, but, of course, the UK was entirely free to implement it – there was no obligation of any kind on the UK to introduce one in 2012. Even though I am sceptical of its usefulness, it is still a tool and I can see no merit in removing it – unless it is replaced with an improvement.


The Exit Tax is another exclusion that people may think we’re going to just repeal since it is not a requirement in the TCA. The UK Exit Tax was first introduced in the Finance Act in 1988, but is found in its current form in TCGA 1992 s185-187. So the UK has had Exit tax rules for roughly 30 years, and for 30 years we had them without any requirement to – it doesn’t make logical sense for the UK to remove them now, just because the EU has recently introduced them.


Indeed, this brings me to the central point of the article. The opposition in the UK seems to have spent the majority of its time in the last four and a half years opposing the Government’s Brexit policy, and Brexit in general, and has lost the initiative on policy. Brexit, certainly since December 2019, has been an absolute certainty to happen – there are still too many people arguing about whether we should leave the EU long after that argument has been made redundant, by the UK actually leaving the EU. We should, surely, be debating what we are going to do with tax avoidance policy after leaving the EU - perhaps by starting with examining the effect of EU membership.

The European Court of Justice judgment in the case of National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond C-371/10 (NGI), for example, weakened our Exit Tax rules. This was a Netherlands case, but as this was an ECJ judgement it impacted any EU member state that had Exit Tax rules, including the UK of course. The judgement basically said that if you are charging an Exit Tax on a company that is migrating to an EU member state you must give the company an option of deferring the Exit Tax due. As a result of this ruling the UK Finance Act 2013 included an amendment to TMA 1970 introducing a 10 year deferral option to our Exit Tax rules (reduced to 5 years in the ATAD). Is there anyone from opposition parties stating we should use the opportunity of Brexit to repeal the payment deferral option and returning UK Exit tax rules to their pre-NGI standard?


Controlled Foreign Company rules - Cadbury Schweppes vs HMRC case.


The UK has had CFC rules since 1984, but in around 2004 we ran into a problem. Cadbury Schweppes had a subsidiary in the International Financial Services Centre in Dublin called Cadbury Schweppes Treasury International (CSTI). HMRC imposed a CFC charge on Cadbury Schweppes based on profits made by CSTI in 1996 but found itself in court in probably the most famous CFC case in Europe.


The complaint, notably mirroring the Netherlands’ NGI case, was that HMRC’s CFC charge was contrary to the Freedom of Establishment principle in the Treaty of Rome. HMRC, they contended, could not impose a tax which could impede Cadbury’s ability to set up operations in any EU member state. Not so, said HMRC, if the purpose of the subsidiary was to avoid tax, then Member States are permitted to impose measures to protect their tax base. Setting up a subsidiary in another member state in order to avoid UK tax was an abuse of the Freedom of Establishment and the charge should be allowed to stand. So the case went to the ECJ in 2006.


The EU case if you want to see the full details is “C-196/04”. The ECJ decided that member states could not impose CFC charges based on profits made anywhere in the EEA even if the purpose of the subsidiary was primarily to avoid tax. This is an extract from that Opinion:


“…the establishment by a parent company of a subsidiary in another Member State for the purpose of enjoying the more favourable tax regime in that other State does not constitute, in itself, an abuse of freedom of establishment.”

This meant you could create a subsidiary in the EU “for the purpose” of avoiding UK tax and there was precious little HMRC can do about it. It would only be possible to impose a CFC charge if the arrangements are “wholly artificial” – so basically a brass plate.


This ruling is contained in the ATAD in Article 7(2)(a), where it says of CFC rules:


This point shall not apply where the controlled foreign company carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances.

Where the controlled foreign company is resident or situated in a third country that is not party to the EEA Agreement, Member States may decide to refrain from applying the preceding subparagraph.”


Now, there is an argument that since ATAD gives member states the option of implementing article 7(2)(b), it has superseded and made redundant Cadbury Schweppes, but as this article points out, that isn’t the end of the story.


Whatever your argument on that, there is no doubt that the UK’s CFC rules following Cadbury Schweppes and the ATAD are weaker than the UK CFC rules of 2004.

To be clear, I’m not personally advocating returning to the CFC rules of 2004 which led to WPP and Experian amongst others re-domiciling elsewhere.


Surely, though, rather than argue about the rights and wrongs of Brexit, or worse that the whole thing was a stitch up by tax avoiders, it’s now time for the opposition parties to move on an regain the policy initiative. Examine National Grid Indus and Cadbury Schweppes and how our tax avoidance rules have been weakened. Can we restore some of these rules?

There is nothing in the TCA that says we can’t strengthen our tax avoidance rules. If a company moves to Ireland, would you like an Exit charge to be made payable before the company leaves and not deferred? Would you like the profits of Luxembourg subsidiaries of UK parent companies to be assessed in the UK if the purpose of the location was to avoid UK tax?


Why aren’t the opposition parties getting to grips with the fact that leaving the Single Market opens up opportunities to strengthen our tax avoidance legislation? The role of the opposition parties is not just to oppose whatever the Government is doing, but to drive the debate and force policy. The Government could weaken some of these standards, but are far more likely to if there is an opposition which makes itself irrelevant.


Instead of making vague commitments to “go after tax dodgers”, why not make specific commitments to go through NGI, Cadbury Schweppes and any other aspect of tax policy made weaker by EU membership and reverse them?


The Brexit debate is over. It's time to see what we do next.

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