Press Room

31 Jul 2020

Tax News July 2020


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July 2020

For those of our readers that are au fait with the general tax debate here in the UK, one MP stands above all others in their quest for greater powers to punish taxpayers and their advisers for attempting to reduce their tax liability (let alone transgressing the laws of this fine land). The MP is none other than Dame Margaret Hodge (MP for Barking, no less), she who presided over the Public Accounts Committee post 2008 and was largely responsible for bringing US multinationals to task for their, err, perfectly legal tax structures.

No longer the Chair of PAC but still a Barking MP, Mrs Hodge was recently again at the vanguard of tax policy, this time in a paper produced by a cross-party parliamentary group on anti-corruption and responsible tax. According to Hodge current law in the UK “means that it is virtually impossible to prosecute these enablers of failed tax avoidance schemes, even when a criminal offence has been committed.” Astonishingly, the group responsible have suggested that it would be easier to prosecute so-called enablers by removing the requirement for dishonest intent (which is required in all criminal fraud cases), and replacing it with a “double-reasonableness” test, which is used for penalising enablers under the civil law regime.

The problem with this proposal is that it is based upon the assumption that tax avoidance and tax evasion are essentially one and the same and that if a tax avoidance scheme fails then it is in fact tax evasion. Would that life be so binary! With any luck this will be shelved with all the other silly-season stories that have done the rounds over the years. It is worth pointing out, however, that the UK tax code is incredibly complex (and known around the world for being so). This complexity gives rise to loopholes and differences in interpretation but there is nothing “murky” about the distinction between tax avoidance and tax evasion as reported by the Times when covering this story. Advisers who promote tax evasion should feel the full force of the law and rightly so; however, advisers and their clients who exploit loopholes in the law are not committing tax fraud.

If HMRC disagrees with the position adopted by the taxpayer, their recourse is through the tax tribunals; the UK is a common law jurisdiction after all. If a tax scheme or arrangement is found by the courts to have failed, the taxpayer is required to pay tax, penalties and interest, and the law evolves through this process. The paper championed by Hodge seemingly wants to bypass this cornerstone of common law, which could result in defective legislation never being challenged.

Perhaps MPs should look at reinstating the Tax Law Rewrite project and to instruct the Orwellian-sounding Office for Tax Simplification to do what its name suggests. Unfortunately, there is no political will to radically overhaul the tax code, so it is far simpler for MPs to make noises about this every so often, when actually there is not much to see. The reality is that tax avoidance and tax schemes in particular are, on the whole, a thing of the past. Schemes are of course still going through courts and tribunals, but they are dead and buried, thanks to DOTAS and APNs.

After getting that off our chest, let’s move onto this month’s edition. We kick off with a Right to Reply feature. Readers may recall that in June we had a little bit of a rant about a study regarding the possible introduction of a wealth tax published by Warwick/LSE that had been reported in the Financial Times. The authors of the study were good enough to get in touch and ask for a right to reply – to which we said, “Of course, be our guest!”

Andrew Parkes has penned a very interesting article on the assistance in collection of taxes. It really is very interesting, so do take the time to read it!

We then turn our attention to the Apple (and Ireland) state aid case. We take a look at the case, the decision and what we think might happen next in this long running saga.

The Study: A Reply

The previous edition of the newsletter contained a self-described “rant” about some research we produced on the effective average tax rate paid by individuals receiving about £100,000 in income and or gains. Given the natural interest that this group is likely to have in the topic, and the mixed coverage (in terms of accuracy) in some of the newspaper articles, we wanted to set the record straight on what we do, and don’t say. You can also read for yourself the research, and indeed from my website you can find the data for all the charts in case you want to look at them yourselves.

Our first finding was that the average share of income paid in tax in practice is much lower than you’d get if everyone paid the headline rate with no deductions, and actually declining at the top. We wouldn’t expect that result to surprise anyone who gets this newsletter – of course you are all aware of the various deductions and reliefs that exist, and of the lower tax rates on dividends. [Aficionados: check out the long appendix if you want a deep dive into what happens when we take into account corporation tax. Short version is not much in terms of our main story, since you should then probably also include employer national insurance contributions].

So why bother saying it? Because before this research we couldn’t quantify how much money is at stake as a result of access to deductions, reliefs, and lower rates. We show it is about £8bn: the revenue equivalent of moving the basic rate of income tax from 20% to 21.5%. That doesn’t mean these are a problem, but if they were worth £100m I wouldn’t think anyone should waste time doing detailed cost-benefit on this. At £8bn they are worth thinking about.

We then also look at including capital gains. Our earlier work showed much of these are repackaged income. Again, people reading this newsletter ought not to be surprised that there are incentives to repackage. Combining income and gains, average rates paid are much lower, and quantitatively this is large: if people received those gains but paid headline rates there is a further £12bn at stake (see fig).

We say clearly that this is a static estimate, and should not be treated as money that could just be collected, but again highlights that if a government is thinking about reform, there is serious scope here. It is also not especially radical to suggest gains taxation (with suitable rate of return allowance) be aligned with income tax rates: Nigel Lawson did this in 1988, and the IFS called for it a decade ago in the Mirrlees Review.

Chart 1

It is also important to say, as we do in the report, that this isn’t about taxing “the rich”. Too often the public conversation about tax goes straight to the rich should pay more taxes, and then a discussion about how high the top rate of tax should be. But this misses a crucial point: people with high incomes, or high remuneration (incomes plus gains), are very heterogeneous. About a quarter of those with remuneration above £100k currently pay at or close to the headline rate. But the median person doesn’t. And some people pay very low rates (see fig).

Chart 2

Politicians can, and will, make up their own minds about what they deem to be fair. We have no strong opinions, and no special expertise, to pronounce on questions of fairness. But it is important to know that raising top tax rates will be concentrated only on a small subset of those who have high remuneration (picture just for income is in the report), so if they decide they want more revenue and they decide they want it from some definition of “the rich” then the headline rate isn’t the only, or necessarily the best, instrument.

Arun Advani, Assistant Professor of Economics, Warwick
Andy Summers, Assistant Professor of Law, LSE

The UK: The Long and Short Arm of HMRC’s Law

For a long time, many moons ago, a taxpayer that owed money to HMRC could up sticks and leave the UK, and in so doing leave their tax debts behind. This was confirmed in the case of Government of India v Taylor ([1955] A.C. 491), albeit in respect of a foreign tax debt being chased in the UK.

We didn’t move around that much 65 years ago, so relocation for tax planning / dodging purposes was relatively unusual. However, the world has become a much smaller, accessible place in the last 25 years making it easier for people to go abroad thumbing their nose at Revenue Authorities. The principle in Government of India, that one state will not assist in the direct enforcement of a foreign revenue claim, couldn’t last for ever. So, the Authorities decided to do something about it.

The hills have eyes

For the EU, this came in what is now known as the MARD or Mutual Assistance in the Recovery of Debt directive, with the current iteration being the EU Council Directive 2010/24/EU. This allows HMRC to ask their EU colleagues to go after UK tax debts when they believe the money is in another EU Member State. Of course, with Brexit we will have to see if/how MARD applies after the transition period ends.

The hills have eyes II

HMRC doesn’t have to rely on the MARD though, plus of course, it doesn’t apply outside the EU. They have two other options. The first is the Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters or MAC (Mutual Assistance Convention).

The MAC covers more than just assistance in collection of taxes. It also covers exchange of information, service of documents plus simultaneous enquiries and the attendance of officials from one country at meetings held in the other country. It has been around for a while, opening for signatures from 25 January 1988, with the UK signing up on 24 May 2007. It was updated by a protocol from May 2010.

The Convention is not the easiest for a Revenue Authority to use though, as it is necessary to determine which version has been signed and ratified. For instance, the US signed and ratified the original MAC, but although they signed the protocol back in 2010, it has yet to be ratified.

Also, and here is the rub, many countries opt out of the assistance in collection provisions of the MAC, often opting out of everything apart from the basic exchange of information provisions. The UK, being a good global citizen, has only opted out of assistance for local taxes and social security contributions. In fact, the UK has gone above and beyond in this area as they extended the MAC to the Crown Dependencies and most Overseas Territories during 2013 and 2014.

This act of altruism allows other countries to now ask the BVI, Cayman Islands, Jersey etc for assistance under the MAC. However, and the reason I say it is altruistic, is that the UK is not able to use the MAC in respect of these territories since you can’t ask yourself for help, which is what would be happening here. Instead, where the UK needs help in the assistance in the collection of taxes from the Crown Dependencies or Overseas Territories, it has to rely upon the third weapon in their arsenal, the assistance in collection article in double taxation agreements, provided they have one.

The hills have eyes III

Many of the UK’s recent DTAs have an article in them regarding the assistance in collection in taxes, although not all. For instance, the recent amendments to the Israel/UK DTA did not add an assistance in collection article (let’s face it, the changes were so great this is the old treaty in name only).

These articles allow HMRC to ask their counterparts to collect money on their behalf. Crucially, the usual wording of the article does not limit it to either residents of the two contracting states, or to just taxes covered by the DTA. For example, the UK’s Diverted Profit Tax is not covered by the UK’s DTAs (we still struggle with this, if it is not similar to CT then what is?), so if a Ruritanian company is charged to UK DPT and stashes its cash in a Utopian bank, if the UK/Utopia DTA has an assistance in collection article, HMRC could ask its counterparts to collect on the debt even though DPT is not covered by the DTA and there is no tax “connection” to a resident in Utopia.

There are safeguards built in. The debt must still be collectable in the UK – if HMRC is out of time to collect upon the debt but the other country is not, the UK can’t ‘extend’ the UK’s time limits by asking another territory to collect the money. Also, the principle of reciprocity is available if countries want it. For example, if the money is held in a foreign trust which, if it was in the UK HMRC could not collect from but the foreign tax authority can, the foreign tax authority is under no obligation to accept the request from HMRC. However, they can if they wish. Depends how helpful they are feeling at the time!

Another quirk is that once the article is in force, the Authorities can make requests in respect of tax debts no matter when they arise. This is set out in paragraph 14 of the OECD commentary for article 27 (the assistance in collection article in the OCED’s Model DTA) and was confirmed in the UK by the Court of Appeal in Ben Nevis (Holdings) Ltd v. HMRC ([2013] EWCA Civ 578). However, since then HMRC has felt it necessary to make this explicit, as the most recent UK DTA’s (those with the Channel Islands and Colombia for example) make clear in their commencement articles that the assistance in collection article can apply to any tax claims.

The article also says that the two countries will agree how the article is to be applied between them.  This allows them to agree, say, that debts must be over a certain size before they will be submitted for collection. However, these agreements are not routinely published. In the Ben Nevis decision HMRC did say that they could be published following a Freedom of Information request.

Scarier sequels?

With the battering economies have had and are still taking with Covid, collecting as much tax as possible will be a priority for tax authorities, and chasing debts abroad will probably be popular with the public (provided it is not them who are being chased of course). This means that assistance in collection is a growth area for tax authorities. More DTA’s now contain this article and the OECD even has a manual for Tax Authorities who are unused to this route.

International borders are no longer a barrier to tax collection. Now, we’re off to draft Freedom of Information requests…

Andrew Parkes

If you have any queries regarding the interpretation or application of double taxation agreements, please contact Andrew Parkes on +44 7522 229 589 or

Miles Dean



or Miles Dean on +44 7785 770 431


The EU: Apple and The Republic of Ireland

The state aid case against Apple and the Republic of Ireland took its latest step on 15 June when the lower-tier General Court found that Apple did not receive illegal state aid, thus annulling the European Commission’s (EC) decision of 30 August 2016.

The EC claimed that tax rulings obtained by Apple in respect of two Irish incorporated, but not resident, companies amounted to illegal state aid. Pursuant to the rulings almost all the profits of the Irish companies were allocated to a head office outside Ireland leaving only a small margin on which Irish tax was paid.

The General Court confirmed that the EC does have the right to check the compatibility of tax rulings with EU State aid rules (this was the good news for the EC), but went on to dismiss the EC’s three lines of reasoning (Primary, Subsidiary and Alternative) as follows:

Primary Reasoning

Because the foreign head offices had no employees and little substance it was unable to perform the functions and bear the risks related to the key value-generating assets (i.e. the IP). This being the case, the EC argued that the functions and risks should be allocated to the Irish branches.


  • the EC can use the arm’s length principle to check profit allocation reflects market values;
  • it is acceptable to use the OECD approach to assess the split of profits allocable to the head office and to a branch under TP rules;
  • the EC failed to show that the functions and risks related to the value-generating IP were in Ireland; and
  • that the key functions were performed outside of Ireland (i.e. the U.S.)

Subsidiary Reasoning

The allocation of the IP assets and related profits was outside Ireland but the application of the transfer pricing method (transactional net margin method) was defective.


  • the EC incorrectly allocated risks to the Irish branches;
  • the EC failed to demonstrate that Apple’s TP studies were unreliable; and
  • a lack of contemporaneous TP documentation cannot lead to a presumption of State Aid.

Alternative Reasoning

Essentially the discretion of the Irish tax authorities was excessively broad which resulted in a selective advantage being granted to the two Irish companies.


  • The EC failed to show that the Irish tax authorities had exercised a (too) broad discretion in this case.

Next Steps and Our Thoughts 

In our opinion the EC is likely to appeal the judgment to the highest court (the European Court of Justice or ECJ).  Whether this will be successful is anyone’s guess, particularly since the General Court dismissed the factual findings of the EC.

This latter point is pretty damning as far as the EC is concerned, but the fact that the General Court confirmed the EC’s right to investigate national tax measures for compliance with state aid rules and the applicability of the arm’s length principle gives the EC the ammunition it needs to attack tax issues using the stick of state aid.  That said, the EC will have to undertake much more detailed economic analysis of transfer pricing arrangements if it is to successfully use state aid in tax cases.

So, whilst Apple and Ireland have prevailed in this instance, it’s very much a score draw. Businesses will welcome the ruling, but the door hasn’t been closed on the EC use of state aid.  Watch this space.

If you’re interested in the background to the case, please read on!


In 2013, the EC brought a case against the Irish government for providing illegal state aid to Apple. A state aid claim has a window of limitation of 10 years meaning that the EC’s assessment goes back to 2003/4.  On 30 August 2016, the EC concluded that the tax benefits afforded to Apple by Ireland amounted to illegal state aid, on the basis that it (the Republic) allowed Apple to pay substantially less tax than other businesses. As a matter of principle, EU state aid rules require that illegal state aid is recovered in order to remove the distortion of competition created by the aid with the EC assessing that Apple owes Ireland c.EUR13bn.

In 1991, Apple obtained rulings from the Irish government in relation to its transfer pricing strategy (i.e. its strategy to allocate revenue and expenses to its Irish operations on an arm’s length basis) that allowed it to allocate a significant proportion of the profits of two Irish companies, Apple Sales International and Apple Operations Europe, to a head office that was not subject to tax in any country.  As a result of the rulings Apple paid a far lower effective corporate tax rate on its European profits than other businesses. The EC has estimated the effective tax rates as being 1% in 2003, declining to 0.005% in 2014 on the profits of Apple Sales International.

Most countries operate transfer pricing (TP) rules. These dictate that transactions between connected parties (e.g. entities within a multinational group) must be undertaken on the same terms that would have existed had the transaction been between wholly independent parties (i.e. no common ownership/control). The OECD published TP guidelines in 1979, which have been substantially updated over the past 39 years, that establish the methods to be used to identify such arm’s length terms.

At the time the rulings were issued, Ireland did not have TP rules.  Apple nonetheless operated in many countries that did have TP rules and thus had a strategy that was potentially compliant with the TP rules of those countries. The absence of TP rules in Ireland, however, created uncertainty and it was therefore prudent and good business practice to obtain a ruling on the allocation of profits to Ireland, a system that was available to all undertakings, not just Apple.

Most countries that have a TP regime also offer taxpayers the possibility of entering into an Advance Pricing Agreement, arguably not that different to the Irish ruling system. A ruling is merely a method by which a taxpayer can obtain certainty over its tax position.

The basis of the EC’s claim in Apple

The EC asserted that the method used to determine the profit allocation to Ireland is wrong and that instead of using the Transactional Net Margin Method (‘TNMM’), the Comparable Uncontrolled Price Method (‘CUP’) should have been applied.  Now, until 2010 Ireland did not have TP rules within its domestic legislation and in the absence of any domestic TP rules, the state in question, Ireland, was presumably at liberty to select the methodology that best suited it and the taxpayer (Apple).

Issues with the application of state aid to tax matters

EC competition law specialists ordinarily deal with matters of state aid. Their remit also extends to state aid matters pertaining to tax, despite the fact that their primary area of expertise is not taxation.  Consequently, a unique interpretation of the ‘arm’s length principle’ that is inconsistent with the OECD TP Guidelines (and therefore the TP regimes of a significant number of countries both within and without the EU) has been developed (as discussed below).

When will a measure constitute state aid?

For a measure to constitute aid it must have the following hallmarks as prescribed by case law of the Court of Justice (CJEU) and the General Court:

  • it is provided by a member state and financed through state resources (i.e. intervention by the member state that departs from the norm);
  • an economic advantage is provided to an undertaking;
  • it is selective in favour of a particular undertaking, category of undertakings or category of goods; and
  • it distorts or threatens to distort competition and affects trade between member states – this is assumed to be the result where intervention, economic advantage and selection exist).

Application of state aid principles to the Ireland / Apple case

Intervention: Has there been an intervention by the Irish government?

In this case a ruling was granted to give certainty over the taxpayer’s tax position in the absence of specific TP legislation.  The EC has asserted (in its state aid case against Luxembourg in respect of Amazon), that any tax assessment that results in a tax benefit by virtue of the EC’s application and interpretation of the arm’s length price will constitute ‘intervention’.  This, in our opinion, has to be wrong.  Ireland had very limited TP rules at the time it entered into the Apple rulings. It included the concept of the arm’s length principle, but not the methodologies and how to apply them in determining an arm’s length price for the transactions and, as such, there appear very few cases in which the arm’s length principle was applied. Consequently, up until the introduction of its TP regime in 2010, Ireland would have had no real basis to challenge or make an adjustment to Apple’s TP policy, regardless of whether a ruling was granted or not.  In which case, we would argue that there can be no tax benefit conferred upon Apple for most of the period to which the state aid case applies (2003-2010).

However, the EC argue that Ireland did not need domestic TP law, because Article 107 of the Treaty on the Functioning of the European Union (‘TFEU’) provides that where a state provides aid that distorts competition, it will be illegal and incompatible with the Single Market. In respect of tax cases it allows the member state to make an adjustment to a taxpayer’s liability to prevent such illegal state aid.

To suggest that Article 107 allows (or forces) a member state to levy tax in the absence of domestic rules, would create incomprehensible uncertainty for taxpayers and undermines established domestic parliamentary and legislative process (i.e. the rule of law). An attempt to redesign Ireland’s corporate tax system exceeds the EC’s power granted by Article 107 (one of Apple’s appeal arguments), a notion echoed by the Irish Department of Finance in its press release of 30 August 2016: “It is not appropriate that EU state aid competition rules are being used in this new and unprecedented way in the area of taxation, which is a member state competence and a fundamental matter of sovereignty.

Economic advantage: Is there an economic advantage to Apple?

The EC seeks to rely on case law from the Court of Justice of the European Union (‘CJEU’) that establishes an ‘economic advantage’ as an economic benefit that an undertaking would not have obtained under normal market conditions (C-39/94, SFEI).

This disregards the fact that transactions between connected parties do not reflect market conditions.  Instead the arm’s length principle is applied as a mechanism to substitute market conditions. To identify market conditions would not be comparative and it is necessary to apply the OECD transfer pricing guidelines as to how to determine an arm’s length price and thus whether an economic advantage has arisen.

In each of the recent fiscal state aid cases referred to above, the Commission’s preliminary finding has been that the respective tax rulings diverged from the ‘arm’s length principle’ and this provided the selective economic advantage.

The EC held, in an Italian non-tax state aid case, that policy measures do not automatically constitute state aid, and that it is necessary to look at the effect(s) of the measure.  It appears that, as a result of this decision, the EC gives more weight to the effect of a policy or measure than the established conditions for state aid. For instance, whether there has been an economic benefit to the taxpayer is secondary to whether there is a disadvantage to others.  This approach was extended further by the CJEU in World Duty Free Group C-20/15P, where it was broadly held that a measure that is merely discriminatory (i.e. not necessarily causing an advantage to the taxpayer or a disadvantage to other undertakings) against other undertakings will constitute state aid.  It seems the ‘economic advantage condition’ required to be present for state aid to arise has been completely rewritten.

In TP cases, it is likely that there will always be a difference in the treatment of a related party transaction as against transactions between independent parties. Whether this difference means that independent parties are discriminated against and whether this is sufficient for illegal state aid remains to be seen. The risk for MNGs is that any ruling or APA approving an MNG’s pricing policy is now potentially subject to a state aid claim.

Selective: Has Apple benefited from a measure that other businesses can’t benefit from?

The ‘measure’ in question is the granting of a ruling by Ireland to Apple agreeing the profits that would be allocated to Apple’s Irish operations (i.e. a transaction between connected parties).  However, to answer the question of whether the measure was ‘selective’, one would need to consider all undertakings, including those that have no connected party transactions.  In our view, the only way to answer this question would be to consider whether the transactions between Apple’s non-Irish entities and its Irish entity were arm’s length – the price that would have been charged had the entities not been connected.

The EC’s response has been to develop and apply its own version of the arm’s length principle:

“A reduction in the taxable base that results from a tax measure that enables a taxpayer to employ transfer prices in intra-group transactions that do not resemble prices that would be charged in conditions of free competition between independent undertakings negotiating under comparable circumstances at arm’s length considers a selective advantage.  This is because that taxpayer’s tax liability determined under ordinary rules of taxation of corporate profit is reduced as compared to independent undertakings whose taxable profit reflects prices determined on the market negotiated at arm’s length”.

In other words, if a tax authority accepts a taxpayer’s use of a method other than the CUP, this results in the state aid ‘selective’ condition always being met since the EC is suggesting that only market prices actually negotiated between independent parties would be acceptable prices to use.

However, use of the CUP method in accordance with OECD standards is only possible where the taxpayer makes sales or provides services to an unrelated third party in the same ways as it does internally (i.e. there is a direct comparative price for the sales or services provided internally) or where there is market data available showing the price between independent parties for such sales or services. It is noted that such data is almost never available.

The EC’s approach again undermines standard domestic parliamentary or legislative process, since no tax authority applying the arm’s length principle can adjust a taxpayer’s pricing of a related party transaction to the market price had the taxpayer been structured differently, organised itself more or less efficiently etc. A tax authority can only make adjustments where it considers a transaction is not arm’s length. To determine this, the tax authority will apply the arm’s length principle (i.e. the substitution mechanism for market value / price) using methods prescribed by domestic law or those set down in the OECD TP Guidelines.

Zoe Wyatt

If you have any questions or would like to know more,
please contact Zoe Wyatt on +44 7909 786 144


Miles Dean



or Miles Dean on +44 7785 770 431 or

Andersen LLP, 80 Coleman Street, London, EC2R 5BJ

Tel: +44 (0)20 7242 5000  |  Fax: +44 (0)20 7282 4337  |

The content of this newsletter and any subsequent updates we send do not constitute tax or legal advice and should not be acted upon as such. Specific tax and / or legal advice should be taken before acting on any of the topics covered.

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