The U.S.
U.S. Tax Compliance

The introduction by the U.S. of FATCA in 2010, followed more recently in 2014 by the OCED’s Automatic Exchange of Information initiative, known as the Common Reporting Standard (CRS), have had a profound effect on taxpayer behaviour. Government authorities are now exchanging taxpayer data which, not surprisingly, is starting to trigger enquiries into (suspected) undeclared funds.

The U.S. is unique (other than Eritrea!) in that it taxes individuals by reference to their citizenship rather than residence, that is to say that an individual who is a U.S. citizen is liable to U.S. tax and reporting obligations regardless of whether they are resident in the U.S. or not. This rule catches many people out, especially those that have never resided in the U.S. but happen to have been born there or have U.S. parents.

What are the sanctions?

• Individuals who become aware that they have not filed U.S. Income Tax returns (like our own Prime Minister, Boris Johnson) are liable to late filing and late tax (subject to foreign tax credits) payment penalties. Interest may also be applicable.

• An individual that has signatory authority or a financial interest in any non-U.S. bank accounts, where the aggregate balance of all of those bank accounts exceeds $10,000 in a U.S. tax year, will be required to file a Foreign Bank Account Report (FBAR) with the U.S. Department of the Treasury each year. They must take into account the highest balance of a non-U.S. bank account at any time during the tax year in determining its value for FBAR reporting purposes. The penalties for not filing an FBAR when required are $10,000 per year. A person who deliberately fails to report an account, or account identifying information, may be subject to a civil monetary penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation. Wilful violations may also be subject to criminal penalties.

• There are other penalties that the IRS can potentially impose for the failure to disclose foreign income, assets or investments. For example, individuals owning a >10% interest in a foreign (i.e. non-U.S.) company are also required to file Form 5471. A $10,000 penalty can be imposed for each annual accounting period of each foreign corporation where there is a failure to file Form 5471 by the due date, unless the taxpayer can demonstrate that there was reasonable cause for the failure to file and there was not wilful neglect.

There are three mechanisms by which individuals can become compliant with their U.S. tax filing obligations. These are outlined in very broad terms below.  Individuals should seek advice on the most appropriate option for their circumstances, especially where they were aware or should have been aware of their filing obligations.

1. Streamlined Foreign Offshore Procedure

Since September 2012 certain U.S. taxpayers who are deemed to present a ‘low compliance risk’, including dual citizens and US ‘green card’ holders, have been able to become compliant under a ‘streamlined’ compliance procedure.

The main features of the Streamlined Foreign Offshore Procedure are:

• Taxpayers must file delinquent tax returns for the most recent 3 tax years along with any delinquent information returns (e.g. Forms 5471). The full amount of US tax and interest due must be submitted with the filings.
• The taxpayer must also file delinquent FBARs for the most recent 6 tax years.
• A taxpayer who is eligible to use the Streamlined Foreign Offshore Procedure and who complies with all of the instructions will generally not be subject to failure to file penalties, failure to pay penalties, accuracy-related penalties, information return penalties (i.e. Form 5471 penalties) or FBAR penalties.
• Taxpayers submitting streamlined submissions must also make a statement certifying under penalties of perjury that their failure to comply fully with their U.S. tax obligations was not due to fraud or wilful conduct. If a taxpayer previously became aware of their non-compliance and did not act immediately to rectify the position they cannot use this compliance procedure.
• It is important to note that the Streamlined program offers no closing agreement and no protection from criminal prosecution.

2. Quiet Disclosure 

As an alternative to the Streamlined Foreign Offshore Procedure, a delinquent taxpayer could alternatively become U.S. tax compliant by making a “quiet disclosure” to the IRS. In this instance, the individual would file U.S. Income Tax returns, foreign information reporting forms (e.g. Forms 5471) and FBARs. Advice should be taken to determine for how many years historical tax returns needs to be filed.  However, by making a quiet disclosure to the IRS there is a more significant possibility of both an audit, late filing and accuracy related penalties, and in particular the substantial penalties outlined above for the failure to file Form 5471 and an FBAR each year. A statement should accompany the tax filings explaining the facts and circumstances of the delinquency. As with the Streamlined Foreign Offshore Procedure, making a “Quiet Disclosure” does not give the taxpayer protection from criminal prosecution.

3. IRS Voluntary Disclosure

For individuals not applying for reasonable cause (i.e. they are delinquent through wilful neglect) they should consider becoming compliant with their U.S. tax filing obligations through the IRS Voluntary Disclosure Program. The purpose of the program is to provide taxpayers concerned that their conduct is wilful or fraudulent with a means to come into compliance with the law and potentially avoid criminal prosecution. The main features of the IRS Voluntary Disclosure Program are:

• The IRS will screen all voluntary disclosure requests to determine if the taxpayer is eligible. Taxpayers are required to submit a pre-clearance which, if accepted the taxpayer, is then required to submit further information including a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the non-compliance.
• In general, taxpayers in the IRS Voluntary Disclosure Program are required to submit tax returns for the most recent six tax years. However, in some situations the IRS examiner can extend the scope to earlier tax years.
• In addition to the payment of any tax, penalties and interest due, the IRS may also issue a civil fraud penalty for the failure to file Income Tax returns. Generally, the civil fraud penalty will be a 75% penalty of the highest amount of tax due that arose in any year in the six year period of assessment.
• The penalties for the wilful failure to file FBARs will also be asserted. Generally, this means the penalty is $100,000 or 50% of the maximum value of the account, whichever is greater.
• However, under the IRS Voluntary Disclosure Program the IRS will not automatically issue penalties against applicants who have failed to file information reporting returns (e.g. Form 5471).

In addition to appointing a tax accountant to assist with tax filings under the IRS Voluntary Disclosure program, it is strongly recommended that any individual who seeks to become compliant under this disclosure program works with a U.S. attorney.

We can assist with the disclosure process (including written statements and preparation of the Income Tax returns, Forms 5471 and FBAR disclosures, etc).

If you would like further information or to discuss specific requirements please contact Paul Lloyds on +44 20 7242 5000 or paul.lloyds@uk.Andersen.com

or Julian Nelberg on +44 20 7242 5000 or julian.nelberg@uk.Andersen.com

South Africa
The Voluntary Disclosure Programme

• understatement and other administrative penalties; and 
• prosecution.

Transfer Pricing

Transfer pricing cases are like hen’s teeth – very rare. So to have two significant cases within the space of a month is something of a miracle.

Australia – Glencore 

On 3 September 2019, the Federal Court of Australia handed down its decision in Glencore Investment Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432.

In ruling for Glencore the Court set aside amended assessments totalling AUD 243mn plus AUD 20mn interest for the years 2007, 2008 and 2009.

Facts 

CMPL, the Australian subsidiary of Glencore entered into offtake agreements with GIAG, its Swiss parent in 1999. These agreements were renegotiated in 2007 resulting in a different pricing structure that the ATO found not to be at arm’s length (i.e. that a third party in CMPL’s position would not have agreed to the revised pricing). Interestingly, CMPL adduced evidence that the terms were in fact similar to contracts between independent third parties. Notwithstanding this, the ATO argued that an uncontrolled third party would have stuck to the 1999 contract and only agreed to renegotiate certain limited terms (citing the recent Chevron case as authority). Unsurprisingly, CMPL’s position was that the parties had in fact agreed revised terms and that there was no basis to assume they had agreed something other than that.

Issue

The Court considered two related points:

1. whether the ATO could restructure the contract as a market-related contract for the purposes of applying transfer pricing provisions; and
2. whether the pricing under the revised agreements were within an arm’s length range.

Decision

The Court rejected the ATO’s position that Chevron allowed them to recharacterize the terms of the 2007 agreements. In addition, the Court held:

1. that the commercial prudence of a transaction is outwith the transfer pricing rules, the focus being a comparative analysis of the consideration given under the actual agreement with a comparable “real world” arm’s length consideration;
2. that purpose or motive does not form part of the arm’s length principle; and
3. even if the commercial considerations were to be considered, hindsight cannot be used to assume commercial judgement made at the time the transfer pricing methodology was adopted.

Finally, and to add insult to injury, the Court further found that the consideration under the revised agreements was within an arm’s length range based on evidence provided by CMPL.

One might wish that the Supreme Court here in the UK was similarly sensible as the Australian court…

The Netherlands / EC / State Aid / Starbucks

On 24 September 2019, the General Court of the EU (the Court) published its decision with respect to the claim brought by the European Commission (EC) that the Netherlands had granted to Starbucks a tax advantage that amount to state.  The facts of the Starbucks case are well known but worth briefly summarising.

Facts

In 2008, the Netherlands tax authorities agreed an advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (SMBV) which might colloquially be referred to as a “roaster” (because it roasts green coffee beans turning them brown). In addition to roasting, SMBV also distributed the roasted beans within the Starbucks group in the EMEA region.

The EC found that the APA allowed SMBV to artificially reduce its Dutch taxable profits as a result of two payments:

1. highly inflated” price for green coffee beans to a Swiss group entity; and
2. a royalty to a UK group entity for coffee-roasting know-how.

How much know-how is there in roasting and what price should be paid for this service were issues the Court had to consider when asking themselves whether the arrangements amounted to state aid.

Decision

The Court held that the use by the EC of the arm’s length principle was a legitimate exercise of its powers (Art.107 TFEU). However, the EC failed to:

1. prove that the transactional net margin method (TNMM) which was used by the APA to determine the arm’s length price for the service rendered resulted in a lower tax burden:
2. demonstrate that the royalty rate payable should have been zero; and
3. the price paid for the green beans resulted in a tax advantage.

The Court therefore annulled the EC’s decision because it had failed to demonstrate that the APA derogated from the general corporate system and did not provide Starbucks with an economic advantage within the meaning of Art.107.

Whether the Commission appeals the decision remains to be seen. It has a little over two months in which to do so. Our money is on an appeal – at the end of the day it’s only the taxpayer footing the bill.

For more information on State Aid and / or Transfer Pricing please contact Andrew Parkes on +44 20 7242 5000 or andrew.parkes@uk.Andersen.com

Technology
What is your blockchain strategy?

• the ability to validate data entered on the blockchain as correct and complete at the time of creation;
• the data cannot be changed, new blocks of data are added sequentially and chained to the last block – the story the data tells can be added to, but the past not modified;
• multiple parties consent on a majority or pre-defined basis on the validity of additions to the blockchain;
• multiple copies of the data, in encrypted form, are stored on the computer systems of numerous globally disseminated individuals/organisations participating in a particular blockchain network;
• it is possible that a malicious attack on a particular computer may be successful in changing data held on its copy of the blockchain, but the other participants in the blockchain network would be alerted and the true blockchain restored. In this sense, the blockchain is immutable; and
• an accessible audit trail.

• navigating the tax and regulatory environment in respect of cryptocurrencies, initial coin offerings and simple agreements for future tokens;
• structuring investments in blockchain companies;
• structuring ownership of IP and its exploitation across multiple blockchain uses and industries; and
• supporting a company/group to develop its own blockchain strategy.