Anti avoidance rule in UK country-by-country tax reporting rules may be unlawful, says committee

Regulation 21 in the Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) Regulations 2016 which is entitled “Anti-avoidance” provides that “If….a person enters into any arrangements; and….the main purpose, or one of the main purposes, of the person in entering into the arrangements is to avoid any obligation under these Regulations, these Regulations are to have effect as if the arrangements had not been entered into.”

Andrew Scott, a tax expert at Pinsent Masons, the law firm behind Out-law.com said "The government is making something of a habit of running into trouble with its regulations for implementing its international transparency agenda. The first set of FATCA regulations were reported, and now the CbC reporting regulations have hit a bump in the road."

Once the regulations come into force, UK headed multinational groups or UK sub groups of multinational enterprises will be required to make an annual CbC report to HM Revenue and Customs (HMRC) showing for each tax jurisdiction in which they operate certain information including the amount of revenue, profit before tax and tax paid, and their total employment, capital, retained earnings and tangible assets.

The information will be exchanged with tax authorities in the relevant countries. It will not be made publicly available, although the European Commission is proposing that the information should be made public.

The introduction of a system of CbC reporting was one of the minimum standards that countries, including the UK, which are members of the Organisation for Economic Cooperation and Development (OECD) agreed to implement. It was recommended as part of the OECD's base erosion and profit shifting (BEPS) project, designed to prevent international tax avoidance.

Andrew Scott said: "The lack of power to include regulation 21 ought not to be critical, though, as it seems likely that the government will bring forward an amendment to the current Finance Bill fixing the problem in plenty of time before the regulations are likely to have any substantive effect.”

The committee considers statutory instruments made under acts of Parliament. It can draw the special attention of both Houses of Parliament to an instrument on certain grounds, including whether the regulations are 'intra vires' or within the powers granted by an act of Parliament.

HMRC said to the committee that provisions in the Finance Act 2015 permit regulation 21 as they permit implementation of the OECD recommendations “to any extent, subject to such exceptions or other modifications as the Treasury consider appropriate”. HMRC said regulation 21 was merely a modification of the OECD’s guidance aimed at making CbC reporting more effective by capturing any arrangements deliberately designed to avoid reporting obligations. The legislation also permits regulations dealing with contravention of the regulations or non-compliance and HMRC argued that arrangements to avoid obligations under the regulations would be a form of contravention or non-compliance and so were permitted.

The committee said in its report that it did not accept HMRC's arguments. It said that including in the regulations matters which were outside the OECD guidance did not fall naturally within the notion of implementation “to any extent” with or without modifications as this was "not implementing what the guidance does provide for, but adding matters that it might have provided for but chose not to". It said "regulation 21, which in effect imposes additional obligations without any specificity or any limitation except for motive, cannot in the Committee’s view be securely regarded as a non-radical departure from the guidance document".

The committee also criticised the fact that regulation 21 does not expressly identify who is to decide whether the “main purpose, or one of the main purposes, of the person in entering into the arrangements is to avoid any obligation under these Regulations”.

"In practice, what seems likely to happen is that HMRC will assess a penalty against a person under regulation 16 in reliance on regulation 21, and the person will have a right of appeal to the First-tier or Upper Tribunal under regulation 18. So the potential effect of regulation 21 is that people who are satisfied that the terms of the regulations do not apply to them will be at constant risk of HMRC initially concluding that they have attempted to avoid the regulations and that the regulations therefore apply anyway – that being the default position in the absence of an appeal. It is unclear that such a result, which breaches the principle of certainty, would be within the contemplation of enabling powers that do not contain express provision for the type of anti-avoidance provision used." the committee report said.

It added "The fact that Parliament has, notably in [the general anti-abuse rule (GAAR) legislation], enacted anti-avoidance provisions which are similarly imprecise or discretionary is irrelevant to the security of such provisions in subordinate legislation, in the absence of express enabling powers."

The GAAR came into force in July 2013 and is designed to prevent artificial and abusive tax avoidance schemes that fail to pass a 'double reasonableness' test.