www.pwc.com/im

Annual Tax Conference 2016

PwC

Agenda

Introduction and Overview – Kevin Cowley

VAT Update – Charles Coué

The UK Budget 2016 – Kevin Cowley

Domicile and IHT – Andrew Cardwell

VAT and Information Reporting Update – Phil Morris

BEPS and DPT – Robyn Brewster

Questions?

PwC

Introduction and overview

PwC

The current climate

Wealth management

Substantive business operations

Entrepreneurial Activity

Asset classes e.g. Commercial property

The Current Times27 April 2016

The Future? Read all about it……..

by our financial staff

Substantive

business

operations

Wealth

managementEntrepreneurial

Activity

Asset classes

e.g.

Commercial

property

FINAL EXPENDITURE REVENUE SHARING ARRANGEMENT

(FERSA)

CHARLES COUÉCOLLECTOR, TREASURY, CUSTOMS & EXCISE DIVISION

PwC Tax Conference - 27 APRIL 2016

Letter 1 - HMRC

In 2005 HMRC wrote to the IOM –

This letter outlines the basis for our conclusion that there is a significant and material distortion in the operation of the VAT revenue sharing arrangements between the Isle of Man and UK; and our proposals for how we might proceed, through negotiations, to correct that distortion.

The First Tranche of RSA Revisions

Year and date change agreed Name of RSA Basic Description

Up to and including 2006/07 Own Trade Code Output tax retained from supplies in

designated trade classes, balance of

remaining joint revenue pool shared on a

population basis

2007/08 (17 July 2007) GNP Growth Agreed ‘base year’ shares are indexed by

reference to relative changes in economic

growth

2008/09 - 2009/10 (5 August

2008)

GNP Growth

(revised)

As GNP Growth model but modified in

relation to mechanics of cash flow between

IOM and UK

2010/11 (15 October 2009) Share of GNI Joint revenue pool shared in direct

relationship to sizes of IOM / UK economies

measured in comparable GNI terms

Letter 2 – HM Treasury

In 2011 HMT wrote to the IOM –

It has become clear that significant structural

differences exist between the UK and the IoM

economies.

For example, your financial services sector

is almost three times bigger than the UK’s

(as a proportion of the economy).

Second Tranche of RSA Revisions

2011/12 - 2012/13 (17 October

2011)

TBMM Transitional Fixed basic share agreed £227m) to which

transitional payments added (£45m in

2011/12 and £25m in 2012/13)

2013/14 – (essentially 17

October 2011)

TBMM IOM share based on VAT generating ability

of its individual economic sectors based on

GDP as a proxy for consumption

2013/16 – (1 June 2015) Transitional RSA Set out provisional shares for 2013/14

(£270m), 14/15 (£278m) and 15/16

(£286m) pending introduction of the Final

Expenditure RSA to be known as ‘FERSA’

FERSA BASICS

FINAL EXPENDITURE REVENUE SHARING ARRANGEMENT

KEY COMPONENTS

• BASED ON “STICKING VAT” IN IOM FINAL EXPENDITURE

• REQUIRES INCOME AND EXPENDITURE SURVEYS EVERY 5 YEARS

• INTERIM YEARS INDEXED AT 4.5%

• OTHER DUTIES SHARED ON AVERAGE OF VAT AND POPULATION

FRACTIONS

MAIN ADVANTAGES

• THE MOST ACCURATE METHOD SO FAR

• CAPTURES VAT ON ALL IOM SPENDING (BOTH ON AND OFF ISLAND,

INCLUDING VIA THE INTERNET)

• DECOUPLES IOM VAT SHAREAPRIL 2016 1• FROM UK ECONOMIC GROWTH

• LESS MISSING IOM DATA, SO LESS RELIANCE ON UK PROXIES

Significance of IOM Exempt Sector

In 2011 HMT wrote to the IOM –

It has become clear that significant structural

differences exist between the UK and the IoM

economies.

For example, your financial services sector

is almost three times bigger than the UK’s

(as a proportion of the economy).

Where the Sticking VAT Comes From

THANK YOU

PLEASE ADDRESS ANY QUESTIONS TO THE

PANEL FOLLOWING TODAYS

PRESENTATIONS

PLEASE SEND YOUR SURVEY IDEAS TO ME

charles.coue@gov.im

UK Budget2016: Overview

Kevin CowleyPwC Isle of Man

PwC

UK Budget 2016: Overview

A significant budget for the IoM

UK competing on tax: Tax haven UK

Non-dom changes and IHT

Facilitating criminal offshore evasion

TAARS to end ‘problem areas’

BEPS implementation

Climbdown on pensions

PwC

Profits from trading in and developing UK Land (1)

Non-UK resident owner

OffshorePropCo

Contractor

UK property

PropCo pays

UK Tax if………

• UK resident or

• UK PE or

• Trading profitsand no treaty protection

Common structure

Undertake works

Appoint contractors

Avoid UK tax on large slice of development profit

PwC

Profits from trading in and developing UK Land (2)

1. Legislation comes into effect from report stage of Finance Bill 2016, effective immediately

2.

Anti-avoidance from budget day to counter arrangements made in the interim (fragmentation and disguised trading via enveloping)

3.

NOT dependent on existence of UK PE. Instead CT payable where trade comprises dealing in UK land or developing UK land with a view to disposing of it

4.

Ensure no DTA over-ride via treaty changes IOM: Guernsey: Jersey:

PwC

Disguised remuneration and historic loans to employees (1: Overview)

Technical Note

• The government is committed to ensuring it is clear to promoters and users that these schemes don’t work…..

• Taking action if it becomes aware of new schemes - this could be retrospective where appropriate.

• Make sure users don’t “get away with it”.

“EMPLOYER”

THIRD PARTY

EMPLOYEE/CONTRACTOR

PaymentRe: Services

“Loan”

PwC

Disguised remuneration and historic loans to employees (2: The background)

Approach Problem? Scope Intention

A new approach to tackling what they describe as ‘disguised remuneration schemes’

Schemes that seek to pay an individual in the form of a loan that is not subject to IT and NICs (via perceived weakness of PART 7A ITEPA 2003)

Schemes include employed and self-employed individual contractors, small business and highly paid individuals

Commitment to tackle:

• The continued use of disguised remuneration schemes; and

• The use of disguised remuneration schemes to date

PwC

Disguised remuneration and historic loans to employees (3: How to proceed)

1. FB 2017 to counter the continued use of DRS arrangements and equivalent ‘contract loan scheme’ arrangements [retrospective application possible ‘where appropriate’]

Collect PAYE from employees ‘where appropriate’ [consultation]

Investment returns taxable as employment income

Tackle historic positions: new tax charge on 5 April 2019 on unpaid loans

PwC

UK budget 2016: Pension

But: pushback from a number of areas meant instead, Lisa was born!

Lifetime ISA:

• For under 40’s• Save up to £4,000 per year• 25% government top-up• Cash to spend on first home or aged 60+• Early withdrawal? Bonus refund + 5pc penalty

What was the point?

First step to true pension ISA?

Step towards flat (BR) relief

We are countingdown to change…

Recent Developments Non-UK Domiciliaries

Andrew CardwellPwC Isle of Man

PwC

Recent Developments – Non-UK Domiciliaries

Residential Property & IHT

Changes to Deemed Domicile Rules

Deemed Domicile: Impact on Offshore Trusts

UK Residential Property - Refresher

ATED Regime - Refresher

Structures providing IHT protection

• UK residential property held by ‘non-natural persons’• Valued > £500,000• Not held for investment (i.e. not a letting business)

Three Charges:

• Annual Charge – based upon M/V within bandings• CGT charge – if annual charge applies• Punitive SDLT charge (on acquisition)

April 2013 - Annual Tax on Enveloped Dwellings (‘ATED’)Extended - April 2015 & 2016

UK Residential Property

Non-Resident CGT

New CGT charge w/e/f April 2015

To ensure all UK residential property caught by CGT

1

2

34

Overlap with ATED CGT

Owned by all non-residents

Individual Trustee Company Ltd PartnershipFoundation….

All values All uses

UK Residential Property - Refresher

Impact of ATED Regime now

For property holding companies/LPs within regime:

Ultimately….

• SDLT costs of de-enveloping – external debt

• CGT cost on de-enveloping

IHT ProtectionOngoing Costs (ATED/Corporate)

-v-

UK Residential Property - Refresher

Example:

Wealthy ND/NR - aged 80s£10m London property via IoM Co - used casuallyChildren (50s) Grandchildren (20s)

ATED: £54,450 (2015/16)IHT: c. £3.75m

Actuarial estimate: 10 years ATED c. £550k

• Continue to hold till second death• Leave shares to children/grandchildren in will • Dissolve company and distribute assets

UK Residential Property - IHT

April 2017 – IHT protection to be removed

How will it be effected?

Problems of implementation for government

Offshore Companies,

LPs and similar?

Offshore Trusts

10 Year Anniversary

regime?

UK Residential Property - IHT

What advantages remain?

Tax:

• Income tax – for high rental values only• Offshore companies @ flat 20% rate• Individuals at progressive UK income tax rates

Other:

• Confidentiality for very wealthy clients

PwC

Recent Developments – Non-UK Domiciliaries

Changes to Deemed Domicile Rules

Deemed Domicile: Impact on Offshore Trusts

Deemed Domicile Changes

Domicile Changes

Deemed Domicile

Two concepts:

Domicile can be retained for the long-termSubjective – case law – residence & intention

‘Deemed Domicile’ is a strict tax year count

• Domicile – concept general law

• Deemed domicile – specific tax meaning in legislation

Domicile Changes

UK tax advantages for Non-Doms:

• Remittance basis – foreign income/capital gains - free to use for 7 years, then escalating RBC

• No IHT exposure on foreign situated assets, but only if not ‘deemed domiciled’ – no IHT on:

• Death• Transfer of foreign assets

Non-Doms - Current Position

Domicile Changes

Non-Doms - Current Position

Approaching deemed domicile status?

• Settle an offshore trust – transfer foreign assets

• Trustees not exposed to IHT on foreign assets

• Hold UK assets via IoM Co

• IHT status preserved – dom/deemed dom of settlor at date when assets are settled on trust

Domicile Changes

The Changes

Announcements - Emergency Budget (Summer 2015)Consultation (September 2015)

The ‘Deemed Domicile’ rule – changes in:

• Calculation basis• Tax impact on Non-Doms

Domicile Changes

Current & Proposed Rules

Current:17/20 Rule – including current tax year

April 2017: 15/20 Rule – looking back to prior tax year

Tax years of residence – one tax year could be a handful of days of physical residence

Domicile Changes

Deemed Domicile - Current & Proposed Rules

Different Emphasis on the year count leads to slightly odd results…

• Recent UK leavers - 2012/13 tax year - lose deemed dom in 2016/17, but would be again in 17/18 & 18/19 tax years

• Leavers from 2017/18 onwards – may not be deemed dom in tax year they leave, but could be in following tax year

Domicile Changes

Deemed Domicile - Current & Proposed Rules

UK nationals returning to UK for temporary purpose:

• Can retain foreign domicile of choice – case law supports this conclusion

• Under proposals, automatically deemed domiciled on return if:• Born in UK• UK Domicile of Origin

Domicile Changes

Impact of Changes

Deemed Dom individuals:

Fully within scope of IHT

at earlier stage

Rebasing of

foreign

assets

No different to rank-and-file of UK taxpayers

No longer able to claim

remittance basis

Domicile Changes

Potential Action?

UK Leavers

Falling back into deemed dom for year or two….

• Avoid settling funds on trust – chargeable to IHT @ 20%

• Within scope of IHT on worldwide assets – insure the risk in short-term?

UK Arrivers

Heading towards 16th year of tax residence….

• Leave UK for 6 complete tax years - re-set the clock

• Settle a trust – effective as form of remittance basis??

Domicile Changes

Deemed Domicile & Trusts

Consultation - Impact on ‘Excluded Property Settlements’

Trusts settled by non-doms prior to deemed domicile -some measure of protection

Settlor later becomes deemed domiciled:

• Settlor – unclear – arising basis or distribution basis??

• Other Beneficiaries – distribution basis

Domicile Changes

Deemed Domicile & Trusts

Suggests that distributions/benefits will be taxed as income

No need for lengthy calculations – relevant income & stockpiled gains

Much simplified – records/history

Could it be any distribution – including original capital? HMRC have relented

Domicile Changes

Deemed Domicile & Trusts

Formerly Domiciled Residents• UK Birth & • UK Dom of Origin

Trusts settled whilst non-dom– lose preferential IHT status whilst settlor deemed domiciled

Temporary return – becomes IHT inefficient:

10 Year regime?

Settlor’s estate on

death

Domicile Changes

Offshore Trust

Settlor Other Beneficiaries

(Family)

Investment Portfolio

UK Investment

Property

IoM Co

Settlor fast approaching

DD status after 5 April

2017

BEPS

Robyn BrewsterPwC Isle of Man

PwC

What is BEPS?

• OECD action plan backed by G20 to address Base Erosion and Profit Shifting

• Areas of focus

- Countering base erosion and arbitrage between territories

- Jurisdiction to tax, with particular focus on the digital economy

- Transfer pricing, analysing issues related to the arm’s length principle

• 15 actions with 5 key themes

- Coherence – Improving interaction of corporate tax in different territories

- Substance – Realignment of taxation and substance

- Transparency – Tax reporting and disclosure

- The digital economy

- A multilateral treaty – To implement certain BEPS recommendations.

PwC

What is driving the change?

Prior initiatives:

• OECD reports and discussion drafts

- Harmful Tax Regimes (1998)

- Intangibles Discussion Draft (2013)

- Interpretation and Application of Article 5 on PE (2012)

• UN transfer pricing manual

• EU – e.g. Commission Double Taxation Convention, Common consolidated Corporate Tax Base, Code of Conduct Group

Public perception and politicalpressure:

• Austerity programmes magnified low tax paid by MNCs

• Increased use of tax havens and discretionary tax rulings deemed unfair on domestic businesses

• Impact in the context of social welfare of developing countries

• Media attention

• Tax morality

Stakeholders:

• Supranational organisations – EU, OECD, UN, G20

• Media

• NGOs

• National governments and tax authorities

Change in trading environment:

• Globalisation pressures for MNCs

• Need for integrated vs. Country standalone business models

• Digital environment and emergence of profitable MNCs in part due to unrewarded externalities

• Shift of economic power from developed to developing countries (BRICS)

Drivers for BEPS

PwC

BEPS time line

The OECD action plan was launched in July 2013 and was backed by G20.

Ambitious schedule for completing reports on all 15 Action Items by December 2015.

Final reports were issued in October 2015

Discussion and agreement on implementation taking place during 2016.

PwC

BEPS action points

Action 1:Address the challenges of the digital economy

Action 2:Neutralise the effect of hybrid mismatch arrangements

Action 3:Strengthen CFC rules

Action 4:Limit base erosion via interest deductions and other financial payments

Action 5:Counter harmful tax practices more effectively

Action 6:Prevent treaty abuse

Action 7:Prevent the artificial avoidance of PE status

Action 8:Assuring that TP outcomes are in line with value creation: Intangibles

Action 9:Assuring that TP outcomes are in line with value creation: Risks & Capital

Action 10:Assuring that TP outcomes are in line with value creation: Other high-risk transactions

Action 11:Establish methodologies to collect and analyse data on BEPS and the actions to address it

Action 12:Require taxpayers to disclose their aggressive tax planning arrangements

Action 13:Re-examine transfer pricing documentation

Action 14:Make dispute resolution mechanisms more effective

Action 15:Develop a multilateral instrument

PwC

The UK’s Diverted Profits Tax

Announced in Pre-Budget Report in December 2014

Introduced in March 2015

Enacted in Finance Act 2015 before parliament was dissolved for the general election

Came into effect in 1 April 2015

Minimal parliamentary scrutiny

Widely criticised at the time for poor drafting and incomprehensible wording, but with hindsight has had good results

Designed to attack two specific types of arrangement

• Transactions lacking economic substance• Avoidance of permanent establishment

but can be construed as having far wider application

PwC

UK Budget – 16 March 2016

Announced new UK measures relating to

The government also took the opportunity to reaffirm its commitment to the OECD’s BEPS project and set out a summary of the actions taken by the UK to date.

Hybrid mismatches (Action 2)

Interest deductibility

(Action 4)

Royalty withholding tax

(Action 6 )

Transfer pricing (Actions 8-10)

PwC

What does it mean for us?

Profits will increasingly be taxed where business is carried on, i.e.

Substance and transparency are the keys – it will be harder to pretend where a business is carried on and it will be harder to hide what’s really happening.

Good news for the Isle of Man?

• where people are employed and

• where sales are made / where customers live

VAT and Information Reporting Update

Annual tax conference

Phil Morris

PwC

Agenda

• The future of VAT

• Insurance intermediaries

• Sale of goods into the UK

• VAT recovery and holding companies

• Common Reporting Standard

• 2016 reporting

PwC

The Future of VAT

• Recent EU Commission review of the EU VAT system.Concerned about the “VAT gap” - almost €170 billion in 2013 and cross-border fraud contributed c. €50 billion.

• A future definitive EU VAT system for cross-border trade to reduce opportunities for fraud.

• Immediate measures to tackle VAT fraud under the current rules.

• More autonomy for Member States to choose their own rates policy.

• More support for e-commerce and SMEs.

PwC

Insurance Intermediaries

Potential changes impacting the VAT exemption for insurance intermediary services.

Recent European VAT case may mean that HMRC come under pressure to review the scope of the VAT exemption.

Could impact certain outsourcing arrangements of insurers which are currently exempt from VAT.

Nothing certain at this stage, but one to watch.

PwC

Sale of goods into the UK

Announcement in UK budget impacting non-EU online suppliers of goods into the UK market.

HMRC will be also able to inform online marketplaces of the traders who have not complied.

If traders continue to evade VAT and no action is taken to prevent the fraud, then online marketplaces can be made liable for the

VAT.

Aimed at protecting the UK market from unfair online competition.

Non-compliant overseas traders may need to appoint a UK tax representative.

PwC

VAT Recovery and holding companies

Several cases in 2015

Depends what the holding company does

Holding companies which actively manage all their subsidiaries are entitled to recover the input VAT incurred in relation to that activity

Ongoing saga of when holding companies can recover VAT

Can include administrative, financial, commercial and technical services

Those which are 'passive' in relation to some subsidiaries must apportiontheir VAT recovery

PwC

Common Reporting Standard (“CRS”)Overview

• Model Agreement and Commentary published

• Global forum meeting in Berlin 29 October 2014

• Nearly 100 jurisdictions committed to adopting CRS

• Over 50 jurisdictions acting as “early adopters” of CRS

• Start date of 1st January 2016

What does this mean for you?

Financial institutions resident in CRS countries should report account holder information to their local tax authorities who will then exchange such information with countries where account holders are tax residents

What is CRS? Where are we? What is next?

• Domestic legislation will need to be implemented

• A number of countries may still join CRS

• First reporting by 30 June 2017.

• Global standard for automatic exchange of financial account information between Governments.

PwC

Common Reporting Standard (“CRS”) Selected Changes

Scope

• Definition of Financial Institution

• No “regularly traded” exemption

• Passive NFE definition

• US is an “observer”

Enforcement

• No withholding under CRS

• Local entity level penalties for non compliance

Due Diligence

• More self certification

• Based on tax residency

• Pre-existing accounts simplification (address test)

• Changes to thresholds

Reporting

• Report to local authorities

• Exchange with partner jurisdictions

• Based on FATCA data elements

• Jurisdictional variations

PwC

Reporting

What

• Reporting under the US and UK IGAs

• Likely to impact more FI’s and more to be reported

Technology

• Information to be reported using IRS schema – Gibberish!

• Be prepared to report all necessary information.

• Reporting needs to be in XML format – argh, how to do this?

Testing

• ITD encouraging test submission – high take up for 2015

• Helps identify errors at an early stage - country codes, date formats etc

Timing and the future

• Be prepared - Allow plenty of time

• Online portal for 2016 reporting – validation and submission

Thank you and any questions…

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLC, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2016 PricewaterhouseCoopers LLC. All rights reserved. 'PwC ' refers to PricewaterhouseCoopers LLC (a limited liability company in the Isle of Man), and may sometimes refer to the PwC network. Each member firm is a separate legal entity.

Andrew CardwellTax Director

Phil MorrisVAT Senior Manager

Robyn BrewsterSenior Tax Associate

Kevin CowleyTax Partner

Please contact us on: +44 (0) 1624 689689