Tax Round Up - June 2017

by Proskauer Rose LLP

Proskauer Rose LLP

International Tax Developments

BEPS Multilateral Convention signed

On 7 June, officials from more than 60 jurisdictions signed the BEPS Multilateral Convention which will transplant a number of measures in respect of Action 2 (Hybrid Mismatches), Action 6 (Treaty Abuse), Action 7 (Avoidance of Permanent Establishments) and Action 14 (Improving Dispute Resolution) directly into each signatory jurisdiction's existing network of bilateral tax treaties. 

However, it is worth noting that a number of the provisions in the Convention include elements of choice (e.g. in relation to Action 6 (Treaty Abuse) amendments, signatory jurisdictions can choose to include (i) a principal purpose test, (ii) a simplified limitation of benefits provision or (iii) a detailed limitation of benefits provision along with either rules addressing conduit financing structures or a principal purpose test).  It remains to be seen which approach each signatory jurisdiction will take in relation to these provisions although the UK has indicated its preference for the principal purpose test only.

BEPS Actions 8-10: Guidance on hard-to-value intangibles

On 23 May, the OECD published its public discussion draft of the guidance on hard-to-value intangibles as part of the work on BEPS Action 8.  The guidance aims to set out a common position for tax administrations to take when applying the adjustments resulting from the hard-to-value intangibles rules, which should in turn improve consistency and reduce the risk of double taxation.  This guidance takes the form of a set of principles together with a number of examples which detail how the hard-to-value intangibles rules should be applied in specific scenarios.

An important point to note is that when assessing the reasonableness of intragroup pricing of transactions involving hard-to-value intangibles (e.g. the transfer of IP rights in development), tax authorities can use the facts as they turn out after the intragroup transaction as evidence of what would have been a reasonable price (or set of assumptions on value) for the transaction.

EU Council adopts directive implementing additional hybrid mismatch rules

On 29 May, the EU Council formally adopted a directive amending the 2016 EU Anti-Avoidance Directive which is designed to prevent corporate groups from exploiting the disparities between two or more non-EU jurisdictions to reduce their overall tax liability.  The new directive has been adopted as part of the EU Council's implementation of the OECD's recommendations on hybrid mismatches under Action 2 of the BEPS project.  The text of the directive was originally agreed at a meeting on 21 February 2017 and the European Parliament provided its opinion on the directive on 27 April 2017. Significantly, it will extend the EU's anti-hybrid rules to transactions between Member State and non-Member State parties.

EU member states have until 1 January 2020 to transpose the directive into national laws and regulations (although implementation of certain aspects may be delayed until 2022).

EU Council agrees on text for a directive to resolve double taxation disputes within the EU

On 23 May, the EU Council agreed on a proposed directive designed to improve the mechanisms used for resolving disputes between Member States arising out of double tax treaties.  In summary, the draft directive provides for a 'mutual agreement procedure' to be used under which the relevant Member States must reach an agreement on the matter within two years.  If no agreement is reached within the two year time limit, an arbitration procedure will then be used to resolve the dispute within specified timeframes.

The next steps involve the draft directive being reviewed by the European Parliament.  Once the European Parliament gives its opinion on the draft directive, it can then be formally adopted by the EU Council.

UK Case Law

Capital gains tax deductions

In Revenue and Customs Commissioners v Blackwell, the Court of Appeal considered whether an amount paid for the release of a restriction on voting or transferring shares could be deducted when computing the capital gain made on sale of the shares.  The taxpayer in the case entered into a personal agreement with a third party company which restricted the taxpayer's ability to freely exercise their share rights.  Prior to selling the shares, the taxpayer paid £17.5 million to the third party in order to be released from the restrictions.  The taxpayer then sought to deduct the £17.5 million when calculating their capital gains tax liability relating to the sale of the shares.  The Court of Appeal held that such amount was not deductible because the agreement with the third party was a personal undertaking by the shareholder, rather than part of the rights and obligations conferred and imposed by the shares.  As such, the payment to be released from the restrictions did not relate to the "state or nature" of the shares and so was not deductible when calculating the ultimate capital gains tax liability on sale of the shares.  The case once again highlights the distinction between rights and obligations that are embedded in share terms (e.g. in a company's Articles of Association) and those that are agreed personally in addition to the share terms (e.g. in a shareholders' agreement). When parties want to ensure that the rights and obligations are part of the share terms they should be included in the company's Articles and apply to holder of the shares generally.

In O'Donnell v HMRC, the First Tier Tribunal was asked to consider whether a seller's reimbursement of certain of the costs of a purchaser in respect of a residential property transaction were allowable deductions for the seller when the seller came to calculate their capital gains tax liability.  The Tribunal held that, despite the costs being primarily attributable to the purchaser (being their legal fees and the SDLT and the land registry fees), the costs were incurred by the seller wholly and exclusively for the purposes of the transaction and were therefore deductible when calculating the gain realised by the seller.

Conversion of qualifying corporate bonds and non-qualifying corporate bonds

In the long-running saga of Hancock and another v Revenue and Customs Commissioners, the Court of Appeal was asked to consider whether a gain arising in respect of the conversion of a mixed holding of qualifying corporate bonds ("QCBs") (which are exempt from capital gains tax) and non-QCBs (which are not exempt from capital gains tax) could be held over and then crystallise when the new QCBs were redeemed for cash or whether that gain was exempt from capital gains tax entirely.  The taxpayer argued, on the wording of one of the relevant provisions, that the hold over rules could not apply by reference to the redemption of the new QCBs because QCBs were part of the transaction both before and after the conversion into those QCBs.  The Court of Appeal agreed with the Upper Tier Tribunal that the conversion of the QCBs and non-QCBs into a single new QCB were actually two separate transactions, one transaction being a conversion of a QCB into a new QCB (which was an exempt transaction) and the other being the conversion of non-QCBs into a new QCB (which gave rise to a held over gain).  As a result, the Court of Appeal held that the held over gain crystallised when the new QCBs intro which the original non-QCBs were converted were redeemed for cash.  One of the key reasons for this conclusion was stated to be that a contrary interpretation of the rules would "subvert the evident intention of Parliament" and expose a loophole which would allow taxpayers to structure transactions to avoid tax completely. This is yet another example of the higher courts being willing to stray from a very literal interpretation of legislation needed to support tax avoidance schemes to avoid such interpretation allowing for the exploitation of what they consider to be loopholes in the rules.

VAT repayment subject to corporation tax

In Coin-A-Drink Limited v HMRC, the taxpayer lost its appeal against the finding by the First Tier Tribunal that a repayment of overpaid VAT plus interest from HMRC was properly subject to corporation tax.  The taxpayer sought to argue that if corporation tax was charged on the repayment amount, it would undermine the European law requirement for effective remedy because the taxpayer would not have received a full repayment of the overpaid VAT.  The Upper Tier Tribunal held (applying the general principles set out in the recent Supreme Court decision in the case of Shop Direct Group v HMRC) that the taxpayer was incorrect in its assertion that the repayment of the overpaid VAT and the corporation tax charge should be combined when determining if the taxpayer received an effective remedy in respect of the overpaid VAT as the corporation tax was imposed on the profits generated by the receipt of the repayment from HMRC, rather than the repayment itself.  As such, there were no grounds for arguing that the normal tax rules should not apply to restitutitonary payments.

Ingenious scheme defeated again

In a supplementary decision to the main Ingenious Games LLP and others v HMRC case (which related to a tax-motivated film partnership scheme and in which HMRC has already won the principal argument), the First Tier Tribunal has held, albeit reluctantly, that the expenditure incurred by the investors when acquiring the rights in respect of the relevant films was capital in nature and so could not be written off against the income arising to the investors from the scheme. As a result, the investors in the scheme did not only fail to obtain the tax benefits that they expected, but will now be left with taxable income which is not sheltered by the amortisation of the cost of the film rights.

This decision highlights again the potential pitfalls associated with schemes designed to give rise to tax benefits and that the downside of entering into such schemes might be worse than initially considered.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Proskauer Rose LLP | Attorney Advertising

Written by:

Proskauer Rose LLP

Proskauer Rose LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.