I joined KPMG at the start of the year, and the team was very busy with profit diversion enquiries involving a range of international tax issues, stemming from HMRC’s focus on diverted profits tax.
The launch of the profit diversion compliance facility signals the clear direction of travel – enquiries of this nature will be a really hot topic for the foreseeable future. The practical aspects of producing a report for the facility – how far back are you investigating, who are you going to interview, how are you going to access information stored in an IT system you upgraded from five years ago – should be grappled with as early as possible. Consistency of approach is critical, ensuring that the same position is taken regarding profit allocation to all taxing authorities and across all taxes. For example, a significant claim for R&D allowances on the one hand, may not sit well with a low royalty payment, on the other.
If you could make one change to tax, what would it be?
The prevalence of main purpose tests in domestic legislation, and now principle purpose tests in double tax treaties, leads to real uncertainty for taxpayers. The bar for the application of main purpose tests has primarily been set by cases involving marketed avoidance – which means that translation and application of those authorities to commercial transactions can be challenging. In today’s environment of increasingly forensic investigation, everyone should properly document decision making at the time of undertaking any transaction or restructuring where ‘purpose’ may be relevant. What’s the alternative? I think that when the GAAR was introduced all advisers hoped that TAARs would stop multiplying – and of course, that has not happened. I remain convinced, though, that a more formulaic approach to targeted anti-avoidance rules, together with the GAAR, would produce a better balance between protection of revenue and taxpayer certainty.
And if I can sneak in a second change, the First-tier Tribunal should be given jurisdiction to hear judicial review. It makes no sense for a modern legal system not to allow all relevant matters to be heard together.
What advice would you give to a trainee tax lawyer?
You need to be a good general lawyer to be a good tax lawyer. Time and again in reported cases you see examples of the tax analysis being applied before the legal reality of the transaction is properly understood.
Has a recent case has caught your eye?
Trigg involved the taxpayer presenting arguments relying on the purposive construction of the qualifying corporate bond (QCB) legislation, and HMRC arguing for a literal, restrictive interpretation of the pure statutory construct of a QCB. This is a reversal of the more usual positions of taxpayers and HMRC on purposive construction. At the Court of Appeal, the taxpayer was ultimately successful, but that success was not on the purposive construction points. Although that may be the right outcome in Trigg, it does seem to me that the courts need to take care to ensure that HMRC are not perceived to have more success in purposive construction arguments.
What should we be looking out for in 2019 in the disputes arena?
We are encountering more challenges in settling ‘business as usual’ tax disputes. It does feel that there is a change in approach from HMRC at an operational level with a greater focus on taxpayer behaviour and HMRC internal governance. Perhaps this is a function of the ‘more forensic’ approach to enquiries that HMRC publically state is here to stay. In terms of areas, other than profit diversion, allowances and incentives for companies seem to be a particular focus.
You might not know this about me but...
I have practiced yoga for a long time, which teaches great patience, a much underestimated virtue. Plus, there is nothing like standing on your head to give you – quite literally – a different perspective on something!
I joined KPMG at the start of the year, and the team was very busy with profit diversion enquiries involving a range of international tax issues, stemming from HMRC’s focus on diverted profits tax.
The launch of the profit diversion compliance facility signals the clear direction of travel – enquiries of this nature will be a really hot topic for the foreseeable future. The practical aspects of producing a report for the facility – how far back are you investigating, who are you going to interview, how are you going to access information stored in an IT system you upgraded from five years ago – should be grappled with as early as possible. Consistency of approach is critical, ensuring that the same position is taken regarding profit allocation to all taxing authorities and across all taxes. For example, a significant claim for R&D allowances on the one hand, may not sit well with a low royalty payment, on the other.
If you could make one change to tax, what would it be?
The prevalence of main purpose tests in domestic legislation, and now principle purpose tests in double tax treaties, leads to real uncertainty for taxpayers. The bar for the application of main purpose tests has primarily been set by cases involving marketed avoidance – which means that translation and application of those authorities to commercial transactions can be challenging. In today’s environment of increasingly forensic investigation, everyone should properly document decision making at the time of undertaking any transaction or restructuring where ‘purpose’ may be relevant. What’s the alternative? I think that when the GAAR was introduced all advisers hoped that TAARs would stop multiplying – and of course, that has not happened. I remain convinced, though, that a more formulaic approach to targeted anti-avoidance rules, together with the GAAR, would produce a better balance between protection of revenue and taxpayer certainty.
And if I can sneak in a second change, the First-tier Tribunal should be given jurisdiction to hear judicial review. It makes no sense for a modern legal system not to allow all relevant matters to be heard together.
What advice would you give to a trainee tax lawyer?
You need to be a good general lawyer to be a good tax lawyer. Time and again in reported cases you see examples of the tax analysis being applied before the legal reality of the transaction is properly understood.
Has a recent case has caught your eye?
Trigg involved the taxpayer presenting arguments relying on the purposive construction of the qualifying corporate bond (QCB) legislation, and HMRC arguing for a literal, restrictive interpretation of the pure statutory construct of a QCB. This is a reversal of the more usual positions of taxpayers and HMRC on purposive construction. At the Court of Appeal, the taxpayer was ultimately successful, but that success was not on the purposive construction points. Although that may be the right outcome in Trigg, it does seem to me that the courts need to take care to ensure that HMRC are not perceived to have more success in purposive construction arguments.
What should we be looking out for in 2019 in the disputes arena?
We are encountering more challenges in settling ‘business as usual’ tax disputes. It does feel that there is a change in approach from HMRC at an operational level with a greater focus on taxpayer behaviour and HMRC internal governance. Perhaps this is a function of the ‘more forensic’ approach to enquiries that HMRC publically state is here to stay. In terms of areas, other than profit diversion, allowances and incentives for companies seem to be a particular focus.
You might not know this about me but...
I have practiced yoga for a long time, which teaches great patience, a much underestimated virtue. Plus, there is nothing like standing on your head to give you – quite literally – a different perspective on something!
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