UK: The OECD's Report 'Progress In Identifying And Eliminating Harmful Tax Practices'

Last Updated: 12 July 2000

The OECD has published a report under the above title, outlining the work carried out to date by the Forum on Harmful Tax Practices which was set up in 1998 as a result of the earlier report 'Harmful tax competition: an emerging global issue'.

Preferential tax régimes: The report lists 47 preferential tax régimes in member countries which are seen by the Forum as 'potentially' harmful. The key features of harmful régimes were identified in the 1998 report as a low (or nil) effective rate of taxation on mobile financial and other services income, coupled with a lack of effective information exchange with other countries, lack of transparency (in tax or regulatory laws and practices), or the 'ring-fencing' of the régime from the domestic economy.

It is proposed that the Forum will develop guidance to assist member countries in, firstly, determining whether their potentially harmful régimes are actually harmful, and secondly, determining how to remove the harmful features of such régimes.

Under guidelines set out in the 1998 report, such harmful features must be removed by April 2003 (or 31 December 2005 for taxpayers benefiting from such régimes on 31 December 2000).

Tax havens: Similarly, the 1998 report identified the key features of a 'tax haven' as: nil or only nominal taxes; lack of effective exchange of information; lack of transparency; and absence of substantial activities.

The 2000 report lists 35 jurisdictions found to meet these criteria (excluding some which have already made a public political commitment to eliminate their harmful tax practices and to comply with the principles of the 1998 report). Such 'advance commitment' jurisdictions must develop an acceptable plan of action with the Forum by 31 December 2000 to eliminate their harmful practices by 31 December 2005.

The list of tax havens is not intended to be used immediately as the basis for co-ordinated defensive measures by member countries. A further list is due to be completed for this purpose by 31 July 2001.

The OECD's Committee on Fiscal Affairs has recommended that member countries adopt a general framework which will facilitate their ability to take defensive measures against such unco-operative jurisdictions in due course. A long list of possible measures includes the termination of existing double tax treaties and the imposition of withholding taxes or onerous reporting requirements on transactions with tax havens.

Goodwill and other intangible assets

A technical note has been published by the Inland Revenue, giving further details of the Budget announcement on the review of the taxation of intellectual property.

The reforms set out in the note would modernise the existing rules giving relief for expenditure on intellectual property and also introduce a new relief for purchases of goodwill and other intangibles (with profits on sale taxed as income). It is suggested that the tax treatment of all intangibles be aligned with the accounting treatment under FRS 10.

Adopting an accounts basis of taxing intangibles would eliminate the capital/revenue divide, and give tax relief for 'intangible nothings' (business expenditure on intangibles which currently attracts no tax relief at all). It would also accelerate tax relief for expenditure which is currently not tax-deductible unless and until the company disposes of the capital asset on which the expenditure was incurred. On the other hand, the existing capital gains reliefs would be withdrawn - notably rollover relief on goodwill.

The technical note highlights the problem that, if tax relief for expenditure on intangibles followed the accounts, companies could be tempted to adopt unduly prudent amortisation policies in order to defer their tax liabilities. This could undermine FRS 10. The note invites suggestions on ways of safeguarding against this abuse - for example, the possible use of benchmark rates of commercial amortisation.

The taxable entity for UK corporation tax purposes is the company and not the group. The technical note accordingly makes it clear that the taxation of intangibles will follow the accounting treatment in the company's accounts rather than the group accounts. There will therefore be no tax relief for amortisation of goodwill arising on consolidation - only for goodwill arising on the acquisition of the net assets of a business.

However, the note envisages that anti-avoidance legislation may have regard to the treatment in the group accounts - for example, to prevent groups from writing off assets at a faster rate in the company accounts than the consolidated accounts.

The note suggests that the intangibles régime might include a general anti-avoidance rule, which could be based on the 'loan relationships for unallowable purposes' rule in para 13 Sch 9 Finance Act 1996. It envisages special rules to cover intra-group transfers and cross-border transactions. It also contemplates an exit charge to deal with the possibility that having obtained relief a company might attempt to realise the value of its intangibles outside the UK tax net.

The note also discusses detailed issues arising on the transition to the new régime, the taxation of income, and deduction of tax from royalties at source.

Press releases - w/e 30.6.00

26 June 2000 - Inland Revenue - UK welcomes OECD report on harmful tax practices

The OECD report discussed above was welcomed by the Paymaster General.

27 June 2000 - Inland Revenue - Tightening up on income tax fraud

A new statutory offence of evading income tax will come into force from 1 January 2001 under a new clause tabled to the Finance Bill.

28 June 2000 - Inland Revenue - Help for disabled workers: revised extra-statutory concession A59

A revised and more generous concession deals with contributions by an employer to the cost of a disabled employee's home-to-work travel.

28 June 2000 - Inland Revenue and Customs & Excise - E-commerce: addressing the taxation challenges

Speech by the Financial Secretary at the OECD's 'Forum 2000'.

30 June 2000 - Customs & Excise - Business Brief 9/2000

This Business Brief outlines a revised policy on the VAT treatment of supplies through UK undisclosed agents, and gives further details of the application of the 5% reduced rate of VAT to women's sanitary products from 1 January 2001.

30 June 2000 - Customs & Excise - Paymaster General announces independent investigation into excise control régimes

A full independent investigation has been commissioned into the collection of excise duties, following the identification of serious weaknesses - in particular in the control of bonded warehouses.

For further information, or assistance, please speak to your usual KPMG tax contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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