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This week in tax: Barclays faces tax scrutiny

Business man using magnifying to review balance sheet annual with using  laptop computer to calculating budget. audit and Check integrity before investment concept.

This week Barclays’ tax affairs came under scrutiny after claims the bank avoided paying UK corporate tax via a Luxembourg structure, while the European Commission put forward its long-awaited proposal for an equity tax incentive.

Barclays is under scrutiny for claims it has avoided paying UK corporate tax via Luxembourg. The Guardian reported that the bank may have avoided paying up to £1.8 billion ($2.1 billion) in UK corporate tax. The bank has gained tax benefits from booking profits in a Luxembourg structure for more than a decade.

The Luxembourg arrangement goes back to 2007, however, the sale of Barclays Global Investors (BGI) in 2009 was a key moment for the bank. Barclays sold BGI for $15.2 billion and structured the sale through Luxembourg and gained a long-term tax cut as a result.

The Luxembourg arrangement allowed Barclays to offset losses against the profits of the 2009 deal. The bank denies it did so to secure a tax cut.

“The structure of the BGI sale was not aimed at securing a tax reduction but intended to secure a simpler and more certain tax treatment and avoid volatility in the bank’s regulatory capital,” said Barclays in an official statement.

Barclays stressed that it has paid more than £14 billion in taxes in the UK over the last 10 years. Yet The Guardian’s analysis found that the Luxembourg arrangement allowed the bank to pay less than 1% in tax on its profits in Luxembourg since 2009.

Meanwhile, the European Commission has finally proposed a directive on the debt-equity bias reduction allowance (DEBRA). The Commission issued the final DEBRA proposal almost a year after it announced the tax incentive for equity in its corporate tax roadmap the Communication on Business Taxation for the 21st Century in May 2021. 

The May 11 proposal addresses a long-standing debt-equity bias in corporate tax by granting equity the same tax treatment as debt, which should provide extra funds to several EU businesses still recovering from ongoing supply chain issues tied to the COVID-19 pandemic. 

“The debt-bias means that companies have a preference for funding subsidiaries with debt rather than equity because interest is generally deductible and return on equity is not,” said one head of tax at an investment management company in the Netherlands.

“Countries have done several experiments to fix this, but they were all abandoned… and during the BEPS project everyone agreed that imposing a limit of interest deduction at 30% of EBITDA is the way to go,” added the head of tax. 

However, the European Commission is re-addressing the bias by proposing to allow increases in a taxpayer's equity to be deductible from its tax base every year. 

In other news, ITR highlighted the increasingly important role of tax data. Tax directors have called on EU regulators to harmonise data processing and exchange requirements in member states, whereas TP directors have simplified benchmarking with real-time information exchange under blockchain.

Tax data, tax transparency, and blockchain information exchange

Tax data is becoming increasingly important in international tax and representatives from European tax administrations attending ITR’s Indirect Tax Forum in Brussels note an increase in the number of joint audits to fight against the €5 billion EU VAT gap. 

The EU-Norway agreement on information exchange, for example, is the most recent extension to the cooperation pact signed by member states in 2018 that enables tax authorities to share information following the outcomes from joint VAT audits.

The EU-Norway agreement introduces law enforcement tools to enhance tax data sharing and tax enforcement efforts. These include providing Norway with access to the Eurofisc network that enables joint processing and analysis of corporate data across the EU.

The cooperation pact from 2018 to increase joint audit activity between member states is part of the European Commission’s wider policy to harmonise VAT administration with other countries too.

However, in-house tax directors also told ITR Reporter Siqalane Taho at the Indirect Tax Forum that the EU needs to harmonise tax data in the bloc first and ensure that data collection does not exceed authority expectations to avoid misaligning information in member states. 

“I am afraid harmonisation will come too late if things carry on at this rate as it will take another 10 years for it to take effect,” said Francois Herbecq, Benelux tax director at L’Oréal.

There are strong business and political wills for more harmonisation of tax data in the EU as individual member states increase digitalisation requirements and begin implementing their own unique systems.

Senior reporters Danish Mehboob and Leanna Reeves also report this week that several in-house tax teams and regional tax administrations are benefitting from using blockchain for tax data management including real-time information exchange and authenticating tax payment.

Reeves covered how in-house TP directors’ enhance data accuracy and minimise time-consuming processes by using smart contracts – a program that is stored on the blockchain – to incorporate the business’s pricing terms and policies in customer agreements and log completed transactions.

“Blockchain could definitely be of great help to secure inter-company transaction for both tax administrations and taxpayers’ purposes,” said Marc Mokrab, group tax director at Verisure.

“It would authenticate the primary source of the data and could be used to reconcile and cross check information easily, especially in the TP environment where data comes from everywhere,” said Mokrab.

Blockchain’s distributed ledger technology’s (DLT) key benefit is to provide tax administrations with more original data, meaning less uncertainty around information. This leads tax administrations to challenge fewer documents.

Mehboob covered the European Commission’s proposal for a revised EU withholding tax system (WHT) by Q4 2022 that will use DLT to seamlessly transfer tax data between member states.

The Commission is combining DLT with the treaty relief and compliance enhancement (TRACE) initiative to simplify the approval process for WHT claims. A corporate consultation about using TRACE functions on blockchain is ongoing and submissions are due by June 26.

Meanwhile in Asia-Pacific tax developments, deputy editor Josh White covers the Japanese government proposal for a carbon tax of $56 per tonne of CO2 emissions, which targets the country’s vast shipping industry. Yet the proposal may not tax carbon high enough to raise industry prices.

The Japanese proposal means higher costs for businesses amid rising inflation. Yet global tax directors from businesses in the shipping sector say that the industry can manage any price under $100 per CO2 tonne emitted without passing on the tax to customers.

Next week in ITR

Our reporters will continue to offer in-house insights from ITR’s exclusive events including follow-up coverage from the Women in Tax Forum in New York and the Indirect Tax Forum in Brussels. Tax directors discussed such issues as the tax treatment of non-fungible tokens (NFTs), as well as risk management.

Mehboob will summarise feedback on the OECD’s Crypto Asset Reporting Framework (CARF) and the drawbacks tax directors envisage under the incoming framework ahead of the OECD consultation on May 22.

Reporters will also cover how the European Commission’s work on regulating advice in the tax market could simplify DAC6 compliance too. Feedback from a public consultation on the regulation of tax advisors on May 12 will complement the Commission’s ongoing investigation into the impact of DAC6. The Commission plans to publish its findings in Q1 2023.

Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.

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