News & Views

International Tax Matters for SMEs

08/08/2011

I’m sure you have all kept up with the case of Manfred Bog. Our friend Manfred was a seller of high quality German sausages. Now I don’t know about you but my main association with German sausages comes from my formative years and ‘Allo Allo’ (some of you will be with me....some not), and so one has to ask what German sausages has to do with a tax blog.

Well I want to show you how the EU (European Union) regularly impacts upon UK tax law, and Manfred’s dispute with the German tax authorities about a VAT liability was decided by the ECJ (European Court of Justice). I also wanted to grab your attention, and a guy with the surname ‘Bog’ selling German sausages was bound to do the trick.   

The EU (or EEC) has developed over the last fifty years following the end of World War Two. It has similarities with the OECD, but it goes beyond mere co-operation. For many in Europe this means political, legal and economic integration. A very sensitive topic in almost every country in the EU, one of the by products of being ‘in Europe’ is that we have to adhere to a number of rules and laws which have a direct impact on our tax system here in the UK.

The core principles of the EU are based on the four freedoms of movement – goods, capital, services and people. This is underlined by the specific freedom of business establishment, and the concept of non-discrimination. These fundamental concepts directly affect whether existing UK tax legislation is actually legal. Lots of particular aspects of the UK tax code have been challenged in recent years (see more on cases below), but there is still a lot of legislation which is likely to be unlawful, but has yet to be challenged by a taxpayer with the required deep pockets and confidence.

In addition to the core principles, EU members have signed up to ‘directives’. The key directives in the tax world include:

  • Parent / subsidiary directive – allows EU subsidiaries to pay dividends to EU parent companies without the imposition of withholding taxes.
  • Interest & royalties directive – allows the payment of interest and royalties between EU companies to be made without the imposition of withholding taxes.
  • Savings directive – the disclosure of interest earned by an individual by each EU member state to ensure that the individual pays the right amount of tax in his home jurisdiction.
  • Mergers directive – allows the tax neutral reorganisation of businesses cross border where there is a bona fide commercial purpose. 
  • Mutual assistance directive – member states sharing information relating to taxpayer activity and behaviours.

These directives override existing tax treaties between EU countries in some respects, which were signed before the EU directives were introduced. As a result a DTC can provide for a 10% withholding tax rate, but in reality the WHT rate will be zero.

As an interlude, care needs to be taken however in terms of assuming which jurisdictions are in the EU and those that are not. If you are looking at any form of ‘territory’ which is attached to a member country (e.g. in the UK – Isle of Man, Jersey, Guernsey, Gibraltar), then you need to look really hard. Some are in for certain purposes and certain directives, some are out completely. Don’t assume that these territories are in the EU just because the UK is. 

VAT has a special status in the EU. It is the only tax which is really a European Union tax. The core principles are set by the EU, and administered by the national tax authorities. Much of our VAT law is set out in EU directives. All of the member countries have to make sure their indirect tax systems operate within the parameters laid down by the EU directives.

Both direct and indirect (VAT) taxes have been shaped by the EU system. The ECJ is the court of the EU and opines on tax disputes (between taxable persons and national tax authorities), which can’t be solved domestically. From a direct tax point of view we have seen a German / Dutch case which resulted in the introduction of new transfer pricing rules in the UK in 2004, we have also seen Marks & Spencers attempt to rewrite the UK’s group loss regime single handed with a series of cases, plus Cadbury Schweppes (now Kraft of course), who challenged the UK tax authorities in the complex world of the controlled foreign company and questioned how well the CFC legislation sat with the freedom of business establishment principle. There have been many many others too.......which brings us back rather nicely to Manfred Bog and his hot German sausages.

Manfred knew that VAT was due where he was conducting a catering activity, but he just couldn’t accept that simply heating some ‘Knackwurst’ (I checked Wikipedia) constituted catering. And so he challenged the German tax authorities and won..... So now in the UK tax advisers have been looking closely at whether their clients’ activities similarly fall outside of ‘catering’ for these purposes with a view to claiming back VAT previously paid over to HMRC. So that’s a German tax case, heard by the ECJ, and that is potentially affecting the VAT liability of a fish and chip shop in Swange, Dorset.

International tax matters do get everywhere, not just the big cities.

Next time I’m going to take a closer look at withholding taxes on dividends, interest, royalties and technical services.  

 

Stuart Rogers

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