THE MO

A Well-Earned Break

August is for the important decisions: whether to sit by the pool or the beach, whether to have that extra scoop of ice cream or whether to enjoy that glass of wine in the pub garden on a summer evening. So as to allow sufficient time for life’s weightier matters to be considered properly, we’ve kept the MTN short this month.

In this edition, we start with a reminder about the Requirement to Correct and the impending closure of the last chance saloon. We then briefly discuss a potential issue for owners of real estate in South Africa, who are no doubt hoping that Zimbabwean history is not going to repeat itself. Our final article this month covers a Brexit related issue we mentioned in an article last month, that of withholding taxes.

  1. Requirement to Correct – HMRC relax the deadlines, sort of.
  2. South African Real Estate – Going, going gone.
  3. Brexit – to withhold or not to withhold, that is the question.

Do you have a Requirement to Correct?

As we mentioned in June, HMRC is set to put the final nail in the coffin for offshore tax non-compliance on 1 October 2018 with the introduction of its revamped offshore penalty regime. The rules form part of the Requirement to Correct (RTC) that offers taxpayers (both UK and non-UK resident) with undeclared UK income tax, capital gains tax or inheritance tax liabilities, until 30 September 2018 to make a disclosure to HMRC about their affairs.

Up to 30 September 2018, taxpayers can use the Worldwide Disclosure Facility (WDF) to rectify historical unpaid tax liabilities with HMRC. Typical penalties due under the WDF range from just 10%-40% of the tax unpaid.

Originally, HMRC required taxpayers to make a full WDF disclosure of their affairs prior to 30 September 2018, otherwise the higher RTC penalties would apply. However, it appears that they have since seen sense and in a recent press release adjusted the obligation such that the taxpayer must only notify HMRC of their intention to make a declaration by 30 September. Taxpayers will then have 90 days to make a full disclosure to HMRC and pay any tax due.

If a taxpayer fails to meet the 30 September 2018 deadline, they will be subject to the following (stricter) penalty regime:

If within the scope of the RTC, a taxpayer’s only defence is that they acted in accordance with qualifying tax advice. This RTC defence is narrow and doesn’t cover all the professional tax advice a taxpayer may have received. We strongly suggest that those with offshore income and assets, use the time prior to 30 September 2018 to review their arrangements. With the RTC, doing nothing is not an option.

If you would like to discuss the Requirement To Correct and the defence to the provisions, please contact Andrew P at andy@milestonetax.com +44(0) 20 7534 7182 or Rozi at rozi@milestonetax.com on +44(0) 20 7534 7186.

 

South Africa’s land expropriation bill and the exit tax

If Foreign Direct Investment (FDI) is the lifeblood of emerging markets (EM), then South Africa (SA) has to be in serious jeopardy. Between 2013 and 2017, SA’s FDI declined from USD $8.3bn to USD $1.3bn and given current EM volatility there seems to be no end to this downward trend. To top it all off, SA’s President, Cyril Ramaphosa, recently added fuel to the fire by proposing controversial land reform that, if implemented,-would allow land expropriation without compensation. Land reform is obviously a hot topic in post-Apartheid South Africa given that over 70% of farming land is owned by white farmers. And with local municipal elections coming up, the new ANC President wants to be seen as a champion of land reform. It’s therefore no surprise that the ANC government recently began legal proceedings to expropriate land where negotiations with targeted white farmers had reached deadlock. As recently as this month, the ANC government was reported as having ordered the white owners of a £10m game farm to hand over their keys after talks to buy it at a 10th of its value broke down. The owners of the game farm have, in the meantime, obtained a court injunction to prevent their eviction until the court rules on their case.

The land reform proposals, along with the recent land seizures, have no doubt alarmed potential foreign investors in SA real estate. What’s worse is that this is now an increased incentive to unwind real estate structures, potentially fuelling the downward trend in FDI.

So, what are the options?

For foreign investors, SA’s double tax agreement (DTA) network provides some relief for those looking to exit the SA real estate market. Interestingly, some of SA’s DTAs do not give taxing rights on disposals of SA ‘property-rich’ companies to SA. A property-rich company for SA domestic law purposes is defined as a company that has 50% or more of its market value attributable to SA immovable property. This means that under some DTAs, a non-SA tax resident / foreign investor could dispose of shares in a SA property-rich company without incurring SA capital gains tax (CGT), assuming of course the shareholder qualifies for treaty relief.

For SA tax residents disposing of SA real estate, the landscape is not as friendly. Domestically, SA’s CGT rate on the disposal of real estate is typically an effective tax rate of 18% for individuals and 22.4% for corporates. This assumes that the land disposed of is held on capital account and is therefore subject to CGT. If the land is held on revenue account then income tax rates would apply. Complex rules apply in determining whether an asset is held on capital account or revenue account.

Moreover, if a SA tax resident emigrates he will be deemed to have disposed of his worldwide assets at market value on the day before he emigrates, triggering a SA exit tax. Because a SA resident is deemed to have disposed of his assets before he emigrates, he effectively ends his SA tax year before becoming resident in his new home country. The effect of all of this is that a SA tax resident cannot access the SA / New Home Country DTA to mitigate his exit charge because he only becomes treaty resident in the New Home Country after the exit charge arises. Moreover, unlike EU countries, SA does not have a regime whereby payment of the exit tax can be deferred until gains are realized or the assets are actually disposed of, meaning it is a tax on phantom gains. Interestingly, the actual exit charge does not apply to SA immovable property or an interest in SA immovable property (like shares in a SA property-rich company). However, an eventual disposal of  SA real estatewill be within the scope of SA tax unless the owners are  able to claim DTA relief once tax resident  in their new home country. Careful consideration should therefore be given to the SA tax implications of leaving SA.

Of course, for those SA residents whose land has been appropriated without compensation, there will be no tax to pay.

If you would like to discuss the SA exit tax, please contact Andy M at andrew@milestonetax.com +44(0) 20 7534 7182 or Geoff at geoff@milestonetax.com on +44(0) 20 7534 7188.

 

Brexit – a problem withheld

In our case study last month we briefly mentioned that following Brexit, withholding taxes (WHT) will be affected. The subject came up again this month for a different client and their circumstances neatly shows how even the slightest difference in facts can produce significant tax outcomes.

At the moment, the EU’s Parent Subsidiary Directive stops any WHTs being levied upon dividends paid by a company to a corporate shareholder that holds at least 10%. The Interest and Royalty Directive similarly stops any WHT on intra-group payments where the shareholding (direct or indirect) is at least 10%. It is highly likely that these directives will cease to apply following Brexit, possibly from the 29 March 2019, if we leave without a deal

For outbound payments, companies will now have to consider if UK tax should be withheld on royalty or interest payments (as there is no UK WHT on dividends we can safely ignore them). For interest payments, this is likely to lead to pressure on HMRC’s Treaty Passport Scheme (that allows cross-border interest to be paid with the treaty rate of WHT deducted where a “passport” has been issued), but unfortunately there is no equivalent comfort for those making royalty payments. Here, a company has to decide for itself if the reduced treaty rate of WHT is due, with the threat of penalties if they get it wrong.

For inbound payments, the tax consequences will depend on what is being paid and where it is being paid from. For our client, they will be in receipt of dividends from Ireland, the Netherlands and Germany. As we set out last month, Ireland has a domestic exemption from WHT that can be relied upon, provided that the company paying the dividends is not controlled by Irish shareholders and the payment is to a shareholder in a country with which Ireland has a double taxation agreement (DTA).

In respect of dividends from the Netherlands, we do have some good news. From 1 January 2018, an exemption from Dutch withholding tax is available where the parent company is resident in a country that has a DTA with a dividend article (providing the parent has substance). The Netherlands/UK DTA has such an article, and under that article the rate of WHT on a dividend to a parent company is 0% anyway! This example shows that DTAs can be used to exempt payments from WHT.

With regard to dividend payments from Germany, there is no domestic exemption and so reliance has to be on the Germany/UK DTA. However, this DTA is not as beneficial as the Netherlands/UK one. Under the Germany/UK DTA, WHT is reduced but not eliminated. The rate under the DTA is 5% and, on the basis that the UK distribution exemption will apply, that 5% is a hard cost.

There are still some months before Brexit, and we recommend that cross-border dividend, royalty and interest routes be examined for WHT consequences.

If you want to know more about how Brexit will affect cross-border dividends, royalties and interest please contact Miles at miles@milestonetax.com or +44(0) 20 7534 7181 or Andrew P at andy@milestonetax.com or +44(0) 7534 7184.

 

Happy Reading!

The Milestone Tax Team