UK Tax Update – December 2022

Following the reversal of many of the measures announced in the Growth Plan 2022, the government delivered its Autumn Statement, which provided for the alteration of a number of tax thresholds as part of a plan which aims to repair public finances whilst tackling the cost of living crisis.

The income tax Personal Allowance, the higher rate threshold and the National Insurance contributions (NICs) upper earnings and upper profits limits are to be fixed for a further two years until April 2028. Additionally, the NICs primary threshold, the lower profit limit and the NICs secondary threshold will be fixed until such date. Further, the income tax additional rate threshold will be reduced from £150,000 to £125,140 from April 2023. The government has legislated for the income tax measures in the Autumn Finance Bill 2022 and will legislate for NICs changes in affirmative secondary legislation in early 2023. The government also announced that the dividend allowance will be reduced from £2,000 to £1,000 from April 2023, followed by a further reduction to £500 from April 2024. Similarly, the capital gains tax annual exempt amount will be reduced to £6,000 from April 2023 and £3,000 from April 2024.

Following the decision to proceed with the increase of the main rate of Corporation Tax to 25% from 1 April 2023, as initially announced in the Spring Budget 2021, the government confirmed that the bank Corporation Tax Surcharge will be reduced from 8% to 3%. In addition, it was announced that the rate of Diverted Profits Tax will be increased from 25% to 31%. Further announcements included the fixing of the inheritance tax nil-rate bands for a further 2 years until April 2028, and confirmation that the previous increases to the nil-rate thresholds of Stamp Duty Land Tax for all purchases of residential property and residential purchases by first-time buyers will be reversed from 31 March 2025.

Following the significant hike in oil and gas prices at the end of 2021 and in early 2022, and to help fund more cost-of-living support for UK families, on 26 May 2022 the government announced a new EPL, being a new 25% surcharge on the extraordinary profits made in the oil and gas sector. Subsequently, it was announced in the Autumn Statement that the EPL will increase to 35% from 1 January 2023 and will remain in place until 31 March 2028,  representing a change from the initial proposed end date of 31 December 2025. The EPL is in addition to the 30% Ring Fence Corporation Tax and the 10% Supplementary Charge paid by in-scope energy companies, taking the combined rate of tax on profits for such companies to 75%. The aim of this measure is to ensure that oil and gas companies that will continue to benefit from a prolonged period of increased prices will be taxed accordingly. Additionally, the IA, which was initially introduced by the government to provide an incentive for the oil and gas sector to invest in UK extraction, has been reduced from 80% to 29% for all investment other than decarbonisation expenditure. The purpose of this reduction is to ensure that, under the increased levy rate, the existing cash value of the IA is broadly maintained. Decarbonisation expenditure will continue to qualify for an IA rate of 80%, a measure aimed to support the sector’s target to reduce carbon emissions by 50% by 2030 and key commitments in the North Sea Transition Deal in the transition to Net Zero.

The government announced in the Autumn Statement that for expenditure incurred on or after 1 April 2023, the R&D credit rate will increase from 18% to 20%, the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. These measures have been largely introduced to improve the competitiveness of the R&D scheme and underpin a move towards the development of a simplified, single scheme, the design of which the government intends to consult on. Additionally, the government has stated that, ahead of the Budget, it will work closely with industry to understand whether further support is necessary for R&D intensive SMEs without significant change to the overall cost for supporting R&D. As initially announced in the Autumn Budget 2021, qualifying expenditure under the R&D scheme has been extended to include data and cloud computing costs.

The doctrine of sovereign immunity derives from principles of international law, and is not codified in UK law. Currently, the UK government’s interpretation of the doctrine exempts sovereign states (and, potentially, the funds and bodies through which they act) from direct UK tax. As a practical matter, the immunity is typically availed of through bilateral, confidential correspondence between the UK and the sovereign recipient in question, with HMRC considering whether the exemption should apply to particular bodies/entities on a case-by-case basis. Paragraph INTM860180 of HMRC’s International Tax Manual notes, however, that a “legal entity that is separate and distinct from the foreign Government [cannot avail of the immunity] even though that government may own the whole of the share capital”.

The consultation includes the following proposals:

• Eligibility: Governments (including the states of a federation, but not including municipalities) should be eligible for the exemption. Views have been invited as to whether entities controlled by governments should be exempt.
• Scope: The exemption would be limited to UK-source interest only, to the extent “not related to trading activities” (a proviso on which no detail is offered). Rebasing to the date the proposals are introduced would apply for non-resident capital gains tax purposes. By way of justification, the consultation: (i) acknowledges the material cost of the exemption (particularly in light of the expansion of the non-resident capital gains tax charge in 2019); and (ii) draws comparisons with other jurisdictions, noting that the proposed limitations “are comparable to the approach taken by other countries such as the US and Australia”. Significantly, this comparison is based on an overly broad (and, some might say, simplistic) view of other regimes, in particular the tax exemption afforded by section 892 of the US Internal Revenue Code, which in the context of US real estate investments for example, may allow a qualifying section 892 investor to enjoy tax exemption in relation to certain sales of shares in a US real property holding company or a REIT, and in relation to certain qualifying income from a REIT.
• Administration: Each sovereign body would only be granted (the revised narrower) immunity following a formal application to, and approval from, HMRC. Irrespective of whether granted, tax registration, reporting and payment rules would apply to sovereigns in the same way as they apply to non-UK residents currently.
• Commencement: It is proposed that the changes would apply: (i) for income and gains recognised, for corporation tax purposes, in accounting periods ended on or after 1 April 2024; and (ii) for natural persons, from 6 April 2024.

Input is also sought regarding difficulties that would be faced if a sovereign’s “qualified” or “institutional” investor status elsewhere in the UK tax code was removed e.g. for the purposes of reliefs, such as the substantial shareholding exemption, the UK Real Estate Investment Trust rules and the Qualifying Asset Holding Company regime, which may be dependent on a taxpayer’s shareholders having such status. In this context, the consultation notes that “the government is not minded to change how all of these areas of the tax code operate in relation to sovereign persons”.

In addition to increasing the tax costs for sovereigns investing in the UK, the proposals may have wider implications for investors into the UK. For example: (i) if a sovereign’s status as a qualified or institutional investor was lost, this could impact the tax position of the UK taxpaying groups into which the sovereign invests; and (ii) funds that have feeder funds (or other structural divisions) specific to exempt investors may (absent generous transitional rules) need to restructure to move sovereign capital into non-exempt pools. These concerns have been raised by various respondents to the consultation. The consultation closed on 12 September 2022. The proposals in the consultation pre-date the current government’s tenure. However, given the potential tax revenue that the proposals would generate, it is expected that the current government will be similarly interested in taking this forward.

The government has recently published a consultation on the VAT treatment of fund management services. This forms part of a wider focus towards developing the UK’s framework for financial services regulation in order to support a dynamic, stable and increasingly competitive financial services sector.

The VAT treatment of fund management services in the UK is largely derived from EU law. Specifically, Article 135(1)(g) of EU VAT Directive 2006/112/EC (the “Directive”) provides for the VAT exemption of the management of SIFs, while the management of funds that do not qualify as SIFs are subject to the standard rate of VAT (currently 20%). The Directive was transposed into domestic law, with Items 9 and 10 of group 5 of  Schedule 9 to the VAT Act 1994 (“VATA 1994”) listing specific types of exempt funds. On the basis that there is no definition of a SIF in existing legislation and considering the wider uncertainty that this causes to businesses, the government intends to codify both existing UK exemptions and retained EU law into UK statute. This is intended to provide further clarity in relation to the VAT treatment of fund management in the UK and consequently simplify the decision-making process involved in identifying the VAT liability of a supply of fund management services for stakeholders. These developments also reflect the government’s wider agenda to remove retained EU law post-Brexit (see below for further discussion on this).

The government has stated in its consultation that it intends to retain the list of exempt fund types currently comprising Items 9 and 10 of group 5 of Schedule 9 to the VATA 1994 (to ensure the continuity of treatment of existing funds), but also intends to introduce relevant case law and guidance into UK law in order to establish defined criteria to determine which funds fall within the SIF exemption. Notably, it is proposed to break from the criteria set out in the European Commission’s EU VAT Committee guidelines by excluding the existing requirement that funds qualifying as SIFs must be subject to “State Supervision”. The government’s reasoning is that this requirement is unnecessary given that such funds must be intended for retail investors and simplifying the policy is also of wider interest. Additionally, the government intends to ensure the correct interpretation of the requirement that such funds must be a collective investment vehicle by providing a clear definition of “collective investment” in the legislation. It is understood that this definition will broadly mirror that provided within the Financial Services and Markets Act 2000, which the industry is familiar with.

It is clear that the government’s approach is intended to broadly maintain the scope of the current VAT exemption. However, it may be disappointing for some stakeholders that zero rating of fund management services has not been considered. This may not be surprising given the current environment. Nevertheless, such a development would further strengthen the position of the UK’s financial services sector.   

Transfer pricing has been receiving a lot of attention in the last few months. Perhaps most importantly, the Court of Justice of the European Union (“CJEU”) has given its judgement in the long running ‘Fiat’ Case (Case C-885/19).

To recap, in 2015 the European Commission (“EC”) concluded that Fiat had been granted unlawful state aid by Luxembourg in respect of a finance company within the Fiat group. The EC’s decision centred on the transfer pricing principles used to support the arm’s length return received by the finance company from other Fiat group members. Fiat challenged the EC’s decision but the General Court of the European Union (“GCEU”) dismissed the appeal in 2019. On 8 November 2022 the CJEU overturned the 2015 and 2019 decisions.

In doing so, the CJEU’s key finding was that the GCEU and the EC had wrongly considered the general objectives of corporate income tax. Rather, they should have considered Luxembourg’s application of the arm’s length principle solely by reference to Luxembourg’s domestic laws and guidance. Implicit in this conclusion is that the arm’s length principle is not inherent in the prohibition on state aid itself.

The impact of the CJEU’s decision could have wide ramifications for a number of clients. We know of at least three cases pending before the CJEU where the EC has adopted similar reasoning to that which was dismissed by the CJEU in ‘Fiat’. There are several others we are aware of which are under investigation by the EC. The impact of the Fiat decision could be helpful to the taxpayers in these cases.

On a related note, the CJEU has also given its decision in another transfer pricing case: X GmbH (Case C-431/21). The decision was made on 13 October 2022 and, at first glance, the conclusions appear reasonably innocuous. In summary, the CJEU concluded that German laws relating to transfer pricing record keeping and documentation in respect of cross-border transactions did not violate freedom of establishment principles. These laws imposed penalties and surcharges for non-compliance with transfer pricing documentary requirements which were the subject of the case before the CJEU.

While the legality of the penalties and surcharges is of some consequence, probably the more interesting point for most arising from this case is a reminder of the inherent conflict between transfer pricing and freedom of establishment. Many jurisdictions consider that intra-jurisdiction transfer pricing rules would be redundant and simply an administrative burden. There is some sense in this point of view: there is very little reason for a tax authority to object to returns being artificially increased and taxed in one company in its jurisdiction at the expense of another in the same jurisdiction. In theory, the taxable profit for that jurisdiction should, in the round, be the same notwithstanding a non-arm’s length transaction between two entities within that jurisdiction. The result is that many jurisdictions only apply transfer pricing rules to cross-border transactions and this is where the conflict arises. Any rule which applies to (and potentially penalises) taxpayers undertaking cross-border transactions but not domestic transactions is at risk of challenge on the grounds of being an obstacle to freedom of establishment.

The CJEU has had a number of opportunities (including in the case of X) to determine that transfer pricing rules are not contrary to freedom of establishment principles simply by virtue of applying to cross-border transactions only. However, the CJEU has declined to make such a determination and instead has considered whether the measures (the penalties and surcharges in the case of X) are appropriate and proportionate (if they are, they are permissible notwithstanding that they hinder freedom of establishment). The result is that many (if not all) cross-border transfer pricing measures within the EU remain liable to challenge and may need to be shown to be appropriate and proportionate on a case by case basis.

On the topic of transfer pricing documentation, new rules will come into force in the UK to align its documentation requirements with the OECD’s recommendations. Current UK rules do not require a ‘master file’ (containing information required by all members of a multinational group) and a ‘local file’ (relating to transactions of the UK entity only), while the OECD’s guidance requires both. From April 2023, UK taxpayers which are large multi-national businesses (those with turnovers above €750 million) will be required to maintain both and to provide them to HMRC for inspection on 30 days’ notice. However, the UK’s rules are expected to go further than their OECD equivalents by further requiring evidence of how the local file is prepared. This is referred to as a ‘summary audit trail’ and further consultation and regulations are expected in due course.

“Retained EU Law” refers to law created at the end of the “Brexit” transition period and consists of EU-legislation that was implemented in our domestic legislation in the European Union (Withdrawal) Act 2018, to avoid significant gaps appearing in the UK legal system due to a potential mass exodus of previously applying EU law. However, in order to allow the UK to adapt these “inherited” laws, the Retained EU Law Bill (the “Bill”) was published, with the principal effect being that any retained EU law contained in EU-derived secondary legislation and retained direct EU legislation will expire on 31 December 2023 (although certain pieces of retained law may be extended to 2026) unless otherwise specifically preserved. This will not impact the Northern Ireland Protocol which shall continue to apply as regards Northern Ireland.

The intention of this is to allow the Government to repeal and replace retained EU Law more easily. Any preserved EU Law that remains in force after the sunset date will be assimilated into the domestic statute book of the UK. Accordingly, the principle of the supremacy of EU law and directly effective EU rights will end on 31 December 2023, meaning that no general principle of EU law will be part of domestic law after 31 December 2023.

The Bill does not impact the current position whereby, when interpreting retained EU law, rulings of the CJEU will be binding when they were made prior to 31 December 2020, and “advisory” (i.e. they can be applied by the courts if the CJEU ruling matches the facts at hand) following this date. However, the Bill does allow lower courts to make references to the higher courts (e.g. the Court of Appeal or Supreme Court) to ask them to reconsider a binding CJEU ruling where they believe it is of general public importance to do so. This will allow lower courts that currently must follow pre-31 December 2020 rulings to effectively draw any inconsistencies to the attention of higher courts to allow a quicker transition away from EU case-law “supremacy”. Additionally, Devolved Law Officers will be given a procedure to refer or intervene in cases regarding retained case law.

The full extent of the impact of the Bill is yet to be seen. While there is support for the Bill by allowing the Government to finally move away from EU rules (almost three years after Brexit actually occurred), there is concern that the government has not announced a key list of legislation that it wishes to reform, suggesting that the sunset date of 31 December 2023 may have been an arbitrary date which may be pushed back further.

In a statement made by the Chancellor on 9 December 2022, it was announced that the tax rules for REITs would be amended with effect from April 2023. Firstly, the new rules will remove the requirement for a REIT to own at least three properties to qualify as having a tax-exempt business in respect of its property rental business, where the REIT holds a single commercial property worth at least £20 million. This is a welcome measure, particularly for smaller companies and start-ups as it should facilitate their access to the REIT regime. Secondly, the government intends to amend the rule that provides that a property is deemed to be sold in the course of a trade if it is sold within three years of significant development activity, although it has not yet been confirmed what this amendment will be. Where this rule currently applies, the property is treated as having been disposed of in the course of the residual business of the REIT and therefore any gain arising on the disposal is subject to corporation tax. The government has stated that such change is designed to ensure that this rule operates in line with its original intention.

The intention of BEFIT is to reduce compliance costs, and complexity, by introducing a single, coherent, tax base across EU Member States (with a view to increasing EU competitiveness).

The BEFIT Consultation illustrates that the BEFIT proposal is still in its infancy, and that the EC is still in an exploratory phrase. The BEFIT Consultation notes that potential policy choices open to Member States range from maintaining the status quo (effectively shelving the project) to adopting a Directive mandating the material features of the proposed common tax base (including, following in the OECD’s Pillar 1 footsteps, rules for the allocation of taxing rights between EU Member States). If action is to be taken, the BEFIT Consultation posits a number of potential options in formulating a proposal:

• “In-scope” taxpayers: The proposal could: (i) mirror the OECD’s Pillar 2 proposals by limiting the application of BEFIT to multinational groups with annual global revenues in excess of €750 million; or (ii) adopt a wider scope, so that small and medium enterprises could (either on a mandatory, or an “opt-in” basis) benefit from the enhanced simplicity the proposal aims to offer. The BEFIT Consultation notes, in particular, the EC’s preference for any measure not to exclude particular sectors from its scope.
• Calculation of tax base: The proposal could: (i) use the consolidated financial accounts as a starting point, and introduce limited adjustments thereto; or (ii) introduce prescriptive and detailed rules for calculating the tax base (akin to the approach adopted by most EU Member States under their existing local rules).
• Allocation of the tax base: As with Pillar 1 rules, the BEFIT Consultation contemplates that, once calculated, the consolidated tax base would be allocated between the EU Member States in which the group has a (yet to be defined) taxable presence. It is contemplated that rules determining the “taxable presence” in this context would “reflect the source of the underlying income generation”. The most significant nexuses for this purpose are considered to be the location of labour, tangible assets and sales by destination (although it is noted that intangible assets could present a fourth nexus by reference, for example, to where research and development and marketing costs are incurred).
• Interaction with non-EU tax systems: The proposal recognises that transfer pricing rules would still be necessary to the extent that the taxpayer group includes EU and non-EU members that transact with one another. In this respect, the BEFIT Consultation contemplates that existing transfer pricing rules could be maintained, or guidance could be produced for Member States with a view to applying transfer pricing rules on a simplified basis.

It remains to be seen whether BEFIT will gain wider traction. It is notable, for example, that it would require unanimous approval from all Member States and that the EU’s previous attempts to create a consolidated tax base, in 2011 and again in 2016, have failed. In addition, developments since the proposal was first mooted in 2021 may encourage caution, including: (i) a worsening economic background (which could render Member States reluctant to cede control over taxing rights); and (ii) the increasing complexities that have mired the OECD’s BEPS 2.0 project. Against that background, it remains to be seen whether the BEFIT will succeed where its predecessors have failed. While the EC has indicated that it is targeting Q3 2023 for adoption, it seems likely to be longer before clarity emerges.

In May 2022, CEMA recommended that ATAD III’s proposed effective date be pushed back (from 1 January 2024 to 1 January 2025, respectively). Other key amendments proposed by CEMA included: (i) widening the exemption applying to “regulated financial undertakings” (to similarly exempt their subsidiaries); and (ii) permitting an entity to outsource day-to-day operations to associated enterprises in the same jurisdiction without this causing the former to  be an “at risk” (i.e. an entity that is required to positively confirm, in its annual return, that it meets specified substance requirements).

However, in September 2022, different CEMA members/sub-groups proposed (at times contradictory) amendments to the draft ATAD III directive:

• Some proposed amendments strengthen the scope and requirements of the directive, e.g. by removing the exemption for regulated financial undertakings entirely (in contrast to the approach in May).
• Other amendments ease the practical burden and cost of the directive, e.g. by deleting the requirement that entities should have at least one local director that is not a director of any other unconnected entity (a requirement that would materially restrict the ability to engage local corporate service providers to assist with governance).
• Timing wise, the amendments reflected the proposed effective date of 1 January 2025 recommended in May 2022. However, elsewhere, amendments propose that an entity’s substance is assessed over a two year look-back period starting, for the first time, on 1 January 2024 (which may suggest a 1 January 2026 effective date).

While CEMA was due to vote on the proposed amendments on 30 November 2022, the outcome is yet publicly available.

Depending on the final form of the directive, it is conceivable that an entity’s income and activities from 1 January 2023 onwards could determine whether it has sufficient substance and is capable of accessing treaty reliefs (e.g. if the proposed two year look-back is implemented and the directive takes effect on 1 January 2025). It is hoped that greater clarity about the scope of, and timing for implementation of, the rules is available before then, so taxpayers can plan their affairs accordingly.

Historically, Brazil has been one of very few major jurisdictions that did not have a DTT with the UK. However, on 29 November 2022, following just 3 months of formal negotiations, the UK and Brazil (the “Contracting States”) entered into a DTT, which will come into force once both countries have complied with their respective domestic procedures to implement such treaty.

Assuming no further amendments are made to the DTT before it is implemented, the DTT shall apply to income tax, corporation tax and capital gains tax in the UK (and federal income tax and social contribution on net profit in Brazil). Generally, the DTT is a comprehensive DTT, and includes a number of bespoke provisions, including an “offshore activities” clause, a limitation of benefits clause and a mutual agreement procedure (“MAP”).

The treaty will act to reduce, rather than eliminate, withholding tax rates on both interest and royalties (albeit having a greater effect on payments from the UK where the “pre-treaty” headline rate is higher (at 20%) than Brazil (at 15%)). One notable exception to this is for pension schemes, in relation to which interest (and dividends) paid by a company resident in either Contracting State to a pension scheme established in the other state are exempt from tax in the jurisdiction of residence of the payor. Additionally, as a result of the DTT including a non-discrimination article, it brings interest payments made between the Contracting States within the scope of the qualifying private placement (“QPP”) exemption. The QPP exemption is an exemption from paying UK withholding tax on interest paid on certain unlisted debt securities, but requires the creditor to be resident in a “qualifying territory” (being a territory with which the UK has a double tax treaty). The QPP exemption is particularly useful where a double tax treaty reduces withholding tax on interest, as opposed to eliminating it (as is the case here), providing an alternative method to be able to pay interest free from UK withholding tax.

The treaty also includes provisions relating to withholding tax on dividends, although as neither Contracting State currently imposes withholding tax on dividends, this provision appears to be “future-proofing”.  That said, article 10(5) of the treaty introduces a bespoke provision, which states that where a resident of a Contracting State has a permanent establishment in the other Contracting State, that permanent establishment may be subject to a tax withheld at source in accordance with the law of that other Contracting State, but at a rate not to exceed 10 per cent of the gross amount of the profits of that permanent establishment determined after the payment of the corporate tax related to such profits.  Thus, Brazil or the UK would theoretically be permitted to impose tax withholding at source on the after tax profits of a permanent establishment of a resident of the other state, which raises several practical and procedural questions (notably, on how such taxation would be collected in practice).

The “offshore activities” clause expands the scope of a permanent establishment to include activities which are carried on offshore in either Brazil or the UK in connection with the exploration, exploitation or extraction of the seabed and subsoil and their natural resources situated in that state. It is likely this clause was introduced due to the “Blue Amazon”, an area off the coast of Brazil that is known to be abundant in natural and mineral wealth, and an increase in attention that such area is receiving from companies who want to engage in deep-sea mining in international waters. The result of the “offshore activities” clause in the treaty is that any profits that a UK company makes from engaging in such activities will be taxable in Brazil.

Article 9 of the treaty enshrines a customised transfer pricing related provision for associated enterprises in Brazil and the UK, broadly allowing either Contracting State to override non-arm’s length arrangements between associated enterprises in Brazil and the UK and tax their profits accordingly (with express recognition of the need to respect corresponding adjustments in the other Contracting State).

It is also worth noting that the treaty allows for withholding on fees for technical services, which is presumably to accommodate the existing Brazilian domestic withholding tax on payments to non-residents with respect to certain managerial, technical and/or consultancy services.  Interestingly, the treaty provision (article 13) institutes a ‘sliding scale’ approach, with the treaty rate of withholding on such fees reducing from 8% to 4% and then to 0% at the end of two years and four years respectively.

As noted above, the treaty also includes a bespoke limitation on benefits clause which must be complied with in order for the benefits of the treaty to apply. Companies that are resident in either Contracting State are only entitled to benefit from the DTT if such person is a “qualified person” (which includes, among others, individuals, the relevant state itself and traded companies). Additionally, a resident of a Contracting State is entitled to benefit from the DTT with respect to income derived from the other Contracting State, regardless of whether the resident is a qualified person, if the resident in engaged in the active conduct of a business in the first Contracting State and the income is derived from that business. Additionally, there is a carve-out for any transaction if it is reasonable to conclude that obtaining the benefit of the DTT was one of the principal purposes of the transaction.

The DTT also includes a MAP, whereby any taxpayer shall have three years to present any issues that arise as a result of the interpretation of the DTT.  Such taxpayer must present their case to the competent authority in the Contracting State in which the taxpayer is resident, following which both Contracting States shall work together to resolve such issue.

Pillar 1

As we reported previously, the members of the OECD’s Inclusive Framework on Base Erosion and Profit Sharing have reached high-level agreement for changes to international tax-nexus rules under the so-called “Pillar 1” rules, which provide for a new right for “market jurisdictions” to tax “Amount A” (being 25% of profits that exceed a normal rate of return (10%)), and a new standardised methodology for taxing, on a fixed-return basis, marketing and distribution activities (so-called “Amount B”), although this has received limited consideration since its announcement, up until the release of a consultation in December 2022 (see below).

In March 2022, the EC released a draft directive for the implementation of Pillar 2 in EU member states. Generally, the EC directive mirrors the model rules as set out by the OECD. However, in order to comply with other EU rules, the directive, as drafted, would apply equally to wholly domestic groups as it would to MNEs (as defined in the OECD rules). The draft directive was initially vetoed by Poland, and then vetoed by Hungary (while Poland later withdrew its veto). On 12 December 2022, it was announced that EU member states had finally reached agreement to implement a minimum 15% tax rate on multinational and domestic groups or companies with a combined annual turnover of at least €750 million as the Committee of Permanent Representatives reached the required unanimous support. It was later announced on 14 December 2022 that Poland had vetoed the agreement again, but this veto was quickly withdrawn later that same day.

Following the success of the Common Reporting Standard (“CRS”) developed by the OECD in 2014 (providing for the collection by intermediaries, and exchange, of financial account information), the OECD has been a significant source of model mandatory disclosure rules:

Despite a large proportion of the OECD’s resources being directed toward the progression of the Pillar 1 and Pillar 2 projects (discussed further above), it is notable that the OECD continues (at the urging of the G-20) to expand the scope of its model mandatory reporting rules. Such regimes represent a significant tool in tax authorities’ efforts to minimise tax avoidance, tax evasion, and the so-called resultant “tax gap”. The scope of such rules is therefore expected to expand in the coming years, as tax authorities seek to increase tax revenue. When the UK left the EU, HMRC lost automatic access to the information gathered by Member States under DAC6 and DAC7. However, the UK’s adoption of two of the OECD’s mutual exchange conventions in November 2022 (to which some EU Member States are signatories) indicates that any Brexit-related impact on the information automatically exchanged by, and in favour of, HMRC is likely to be short-lived.