Contents

1. The US: Biden vs. Trump: How would a change in the Oval Office impact my tax affairs? – Julian Nelberg and Luke Jenkinson

2. The UK (and Belgium): Digital Services Tax – A Stick or a Carat? – Miles Dean

3.  The UK: VAT on UK e-commerce imports post-Brexit – Sarah Shears

4. Treaty Anomalies: Corporate Restructure – South Africa / UAE Double Tax Agreement – Andrew Parkes

1. The US: Biden vs. Trump: How would a change in the Oval Office impact my tax affairs?

As we move into November and continue to adjust to the ‘new normal’, you could be forgiven for forgetting that millions of Americans are currently casting their votes early, for one of the most divisive US elections in recent years. In the early morning of November 4th, we should expect to know whether Donald Trump will be re-elected for his second and final term in office, or if Joe Biden will be inaugurated in January 2021 as the 46th President of the United States.

Whilst the stark differences between the two candidates has been clear to see throughout the entirety of this election campaign, with a light being shone on their personal differences rather than their party’s, here we consider the differences in their tax policy and what reforms a Biden administration may bring.

The state of play

Trump signed into law the Tax Cuts & Jobs Act 2017 (TCJA) following his inauguration, which brought about major changes to how individuals are taxed from 2018 until 2025. We have touched on some of the key changes below.

The TCJA reduced five of the seven rates of income tax for individuals. This includes the top rate which has been reduced from 39.6% to 37% whilst the threshold at which this kicks in has increased from $470,700 to $600,000 (for Married Filing Joint filers). A clear win for high earners.

Personal exemptions have been suspended, but standard deductions for all filers have essentially been doubled. However, if you are a high net worth (HNW) individual, you are more likely to itemize your deductions rather than claim the standard. Under the TCJA, a number of itemized deductions have been capped or suspended, so whilst you are subject to a lower rate of income tax, the total deductions you can claim may now be less. Two of the main changes are the capping of state and local tax deductions for both single and joint filers at $10,000, whilst the amount of loan principal you can deduct mortgage interest against has been reduced from $1 million to $750,000.

Before 2018, under the Pease Limitations, the itemized deductions you could claim were reduced by 3% of the amount by which your adjusted gross income (AGI) exceeded certain thresholds. In 2017 this threshold for single taxpayers was $261,500. The TCJA did away with the Pease Limitations, so itemized deductions are no longer limited based on AGI.

A significant change under the TCJA was the increase in the estate tax exclusion from $5,450,000 to $11,400,000 for each individual, meaning the total exemption for any married couple is now $22,800,000. This is the highest the exclusion has ever been and also means that the majority of Americans are unlikely to pay any estate tax at all. In 2019 for example, only 0.07% of Americans who died will have to pay any estate tax. This increased exclusion runs until 2026, at which point it will revert back to the lower exclusion.

Prior to the TCJA, US corporation tax was at a relatively high level, with companies paying tax at a rate of 25% if their taxable income ranged from $50,001 – $70,000. This eventually reached a maximum rate of 35% for companies with taxable income over $10 million. Personal Service Companies (PSC) always paid a flat rate of 35%, regardless of taxable income levels. However, from 2018 the TCJA established a flat rate of 21% – including PSCs – which represented a significant drop in tax for any company that generated taxable income above $50,000. As a businessman himself, there is no doubt this change appealed to Trump personally (in case he should ever be in a position to pay more tax in the US than China), as well as US businesses.

Biden’s plan to Top Trumps

Joe Biden has clearly set out what tax reforms he intends to make should he be elected into Office, a number of which would directly repeal parts of the TCJA.

Biden is proposing to roll back the income tax reductions introduced in the TCJA for those who earn above $400,000. This could be done by reverting the rates for taxable income above this threshold, back to pre-TCJA levels. He has made it clear that if you earn less than $400,000, you would not be impacted by these changes. What this means is that, if you are taxed at the top rate, you would have an income tax increase of 2.6%.

To further counteract the rules implemented by the TCJA, Biden wants to cap itemized deductions at 28% of their value for those with income over $400,000. Rather than being capped as soon as you reach the threshold, it is likely this limitation will be phased in between a range, for example between $400,000 – $500,000. This change would potentially limit the deductions you can claim by over 70%, which would result in a significant increase in income tax for high earners.

With the estate tax exemption currently as high as it has ever been, it is inevitable that Biden will look to bring this back down to at least the level in 2017. The proposals are not clear on what this figure will be; however, we can be confident that the exclusion will not exceed the previous amount of $5.5 million per individual and could be as low as $3.5 million.

In another proposed change aimed at high earners, Biden would look to tax capital gains and dividends at the same rate as ordinary income if you earn over $1 million in the year. This would mean for capital gains and qualifying dividends, your maximum tax rate would increase from 20% to 39.6% (assuming they revert to the pre-TCJA income tax rates), essentially doubling the tax you pay.

Finally, Biden is proposing the introduction of a flat rate of corporation tax at 28%, a 7% increase on the changes brought in by Trump at the end of 2017. There is also a clear shift to a greener future, with Biden looking to provide tax credits to those working on renewable energy whilst eliminating the preferences offered to companies focused on fossil fuels.

What can I do now?

If Biden is elected, we would expect any reforms to come in no earlier than January 2021. However, given the ongoing pandemic and the unpredictable future ahead of us, these changes could be pushed back as far as 2022 should further tax breaks and reliefs be required to protect jobs and ensure the wellbeing of people in the US. We would still recommend undertaking advanced tax planning to ensure that if any of the above may impact you, you have taken the necessary steps to manage your tax position.

These discussions can cover:

• Estate planning:

Making gifts out of your estate now in order to take advantage of the $11.4 million exemption. Any gifts out of your estate that exceed the exclusion can be subject to tax in the US up to a rate of 40%, so it seems a no brainer to make use of it now, should the exemption potentially be reduced by nearly $8 million.

• Crystalise chargeable gains:

If you know you are going to realise a sizeable gain at some point in the future, it may be worth realising this sooner rather than later, to ensure you only pay tax at 20%, rather than Biden’s proposed rate of 39.6% (plus net investment income tax!).

If you think you would be impacted by these possible changes and would like to discuss, or if you have any questions on the above, please do not hesitate to contact:

Julian Nelberg on +44 (0)7803 502 555 or
julian.nelberg@uk.Andersen.com

or

Luke Jenkinson on +44 (0)7494 157 948 or
luke.jenkinson@uk.Andersen.com

2. The UK (and Belgium): Digital Services Tax – A Stick or a Carat

In 2016, Belgium introduced an alternative tax regime applicable to the diamond sector. Ordinarily, corporate tax is levied on a Belgian company’s profits. However, due to the difficulty of accurately valuing diamonds and the fact that at a wholesale level stones are bought and sold as commodities making it difficult to trace in the accounts of the traders, it was felt that tax revenue was being lost and the sector was not paying its “fair share”.

The “Diamond Regime” or “Carat Tax” was therefore introduced with the aim of ensuring the tax base of diamond traders could be easily calculated without the need to value the diamonds in the traders’ accounts. This is achieved by calculating the trader’s gross profit based on a fixed percentage of turnover, which also results in a fixed calculation of the value of stones purchased and the variation in the inventory during the accounting period (cost of goods sold). Under the regime, a trader’s gross profit margin is fixed at 2.1% of its turnover. After deduction of expenses the net taxable income cannot be lower than 0.55% of turnover.

At a time when the European Commission is fervently pursuing State Aid claims, it’s interesting that the Carat Tax received the greenlight on the basis that it does not selectively favour diamond traders over other businesses (including within the diamond sector itself), which are subject to the normal tax regime in Belgium and that it reduced the complexity faced by the traders. It has been reported that the Carat Tax has resulted in the sector paying significantly more tax than prior to the introduction of the new regime.

Which brings us on to the Digital Services Tax and the problem tax administrations are having at getting tech companies to pay their “fair share”.  Earlier this month it was widely reported that Amazon would not have to pay the DST on the goods it sells directly to customers, but on the service fees that companies such as Amazon and Google charge third parties for using their platforms. Given the difficulty in taxing tech companies, as Amazon is showing by passing the DST costs onto the third parties who use their platform, perhaps the DST isn’t the right stick and a Carat should be used instead? [ED: Even by our exacting standards that joke is a bad one.]  The question of State Aid would have to be addressed, of course, but given that a tax on turnover would undoubtedly increase the tax paid by the likes of Amazon in the UK, and the playing field would be levelled up, perhaps it’s time to think about alternative ways of taxing tech?

If you think you would be impacted by these possible changes and would like to discuss, or if you have any questions on the above, please do not hesitate to contact Miles Dean on +44 (0)7785 770 431 or miles.dean@uk.Andersen.com

3. The UK: VAT on UK e-commerce imports post-Brexit

At the end of the Brexit transition period on 31 December 2020, HMRC will introduce a new model for the VAT treatment of goods arriving into Great Britain from outside the UK. This aims to ensure that UK businesses are not disadvantaged by competition from VAT free imports. It should also improve the effectiveness of VAT collection on imported goods.

Under the UK’s Brexit e-commerce reforms, online marketplaces like eBay and Amazon will become responsible for charging, collecting and accounting for UK VAT on certain transactions.

Similar reforms are proceeding with the EU VAT ecommerce package which comes into effect on 1 July 2021.

These UK B2C ecommerce reforms include the following:

• For imports of goods from outside the UK in consignments not exceeding £135 in value, VAT will be collected at the point of sale rather than the point of importation. This means that UK supply VAT, rather than import VAT, will be due on these consignments. The seller will account for VAT through its UK VAT return. Goods above this value will be subject to VAT and customs duty under the current method.

• The new arrangements will also involve the abolition of Low Value Consignment Relief, which relieves import VAT on consignments of goods valued at £15 or less.

• Where online marketplaces (OMPs) are involved in facilitating the sale below the £135 threshold, they will be responsible for collecting and accounting for the VAT.

These import VAT reforms only cover Great Britain (GB) and do not cover matters specified in the Northern Ireland Protocol.

Goods located outside the UK at the point of sale

These new arrangements will apply to sales of goods to GB customers where the consignment does not exceed £135 in value. This aligns with the threshold for relief from customs duty. This will replace the existing import VAT collection at clearance by customs, or customer import payments to the delivery agent.

For most consignments not exceeding £135 in value, instead of VAT being collected at importation or delivery to the customer, VAT will be accounted for at the point of sale, as follows:

• If an OMP is not involved in facilitating the sale, there will be a supply direct from the seller to the consumer, which will be liable to UK VAT. This will be charged at the point of sale ie, website checkout.

• If an OMP is involved in facilitating the sale, they will be deemed, for VAT purposes, to be making the supply to the UK consumer and again UK VAT will be chargeable.

In both instances the value of the goods for VAT purposes will be based on the price at which they are sold to the consumer rather than any valuation calculated at the point of importation. The seller, or OMP, must provide a VAT invoice (which may be a simplified invoice).

If the customer is a UK VAT registered business, they may provide the seller or OMP with their UK VAT number as evidence for zero-rating. The UK customer then uses the reverse charge mechanism to report the VAT due. Otherwise, sales VAT should be charged.

For goods that are located overseas at the point of sale, the new arrangements will apply irrespective of where the OMP or the business selling the goods is established.

This will lead to UK VAT registration requirements (if not already registered) for:

• any business that operates an OMP that facilitates sales of goods to UK customers; and

• any business that sells goods directly (without OMP involvement) to UK customers where the goods are (i) outside the UK at the point of sale (ii) imported to the UK in consignments not exceeding £135 in value.

The VAT is then paid through a regular UK VAT return by the seller or deemed supplier OMP.

Consignments above that value will remain subject to existing customs rules and processes and from 1 January 2021, UK VAT registered businesses will be able to use postponed VAT accounting to account for import VAT on their VAT return.

Goods located inside the UK at time of B2C sale 

The goods will already have been imported into GB from outside the UK and existing VAT and duty obligations will apply at importation.

Non-UK seller using an OMP

UK VAT will be due at the time the sale of goods takes place as it is now. However, under the new rules, the OMP will be the deemed supplier and therefore will be the party liable to account for VAT on sales facilitated through its marketplace. For VAT purposes, the seller (operating through the OMP), will no longer be seen as making a supply to the UK consumer.

At the point the goods are sold to the customer, the overseas seller will be deemed to make a zero-rated supply of the goods to the OMP. The overseas seller should show the value of its supplies in box 6 of its VAT return, but will not be responsible for declaring VAT on those deemed sales made through the OMP. The OMP will then sell to the consumer at the applicable rate of UK VAT.

B2B transactions are excluded. The UK VAT registered customer would provide a UK VAT number and normal UK VAT will apply.

Sales by non-UK sellers that are not facilitated 

Where sales are made by non-UK sellers not using a facilitating OMP, the existing rules apply. The non-UK seller remains liable to register and account for VAT on all such sales to UK customers.

As there is no VAT registration threshold for businesses not established in the UK, the non-UK seller is liable to register and account for VAT as soon as it starts making sales or holds stock in the UK.

OMP record keeping

Online marketplaces and direct sellers will be required to retain electronic records supporting all transactions for at least six years. For OMPs, this covers both sales they make themselves (directly to consumers) and sales by third party sellers that they facilitate as an OMP, which for the purposes of these new rules will be deemed sales by the OMP.

If you think you would be impacted by these possible changes and would like to discuss, or if you have any questions on the above, please do not hesitate to contact Sarah Shears on +44 (0)7772 544 345 or sarah.shears@uk.Andersen.com

4. Treaty Anomalies: Corporate Restructure – South Africa / UAE Double Tax Agreement

Our client is a Mauritius headquartered telecoms business with operating subsidiaries throughout Africa. As part of a restructuring exercise, the group decided to relocate its headquarters to Dubai. The UAE has a growing DTA network and one with South Africa, a jurisdiction that is central to our client’s business. A key consideration to the proposed reorganisation was how to effect the transfer from Mauritius to Dubai. Typically, a redomiciliation or cross-border merger would be the way to go, but we were not confident that the process in either case would be straightforward. Cross-border mergers are by definition complex transactions (as are redomiciliations) and the UAE is a relatively new jurisdiction where bureaucracy can get in the way of matters that are not “plain vanilla”.

The obvious alternative would be to move central management and control of the Mauritius company to Dubai and subsequently apply for a tax residency certificate. However, the UAE although not defining tax residence in its domestic legislation, appears to use only incorporation as its test for residence and seems to go out of its way to put this into its DTAs.

For example, in the Mauritius/UAE DTA, Article 4(1)(b) defines a resident of the UAE as “…a company which is incorporated in the United Arab Emirates.”

This would appear to have been too simple, so they moved onto this wording for Article 4(1)(a)(ii) of the UAE/UK DTA “any person other than an individual that is incorporated or otherwise recognized under the laws of the United Arab Emirates or any local government or local authority thereof;”.

This has become a real mess in Article 4(1)(b)(ii) of the South Africa/UAE DTA “any company or other legal entity which is incorporated or created under the laws of the United Arab Emirates by reason of its residence, domicile, place of management or any other criterion of a similar nature.”

Apart from copying the general wording from the OECD model tax convention we are not sure why this wording was chosen unless it was to confuse people. But for whatever reason, our client will not be redomiciling to the UAE.

If you think you would be impacted by these possible changes and would like to discuss, or if you have any questions on the above, please do not hesitate to contact Andrew Parkes on +44 (0)7522 229 589
or andrew.parkes@uk.Andersen.com