The Administrative Tribunal of Lyon issued a decision on 20 November 2007 in a case involving France???„?s implementation of the anti-abuse provision in the EC Parent-Subsidiary Directive (McKechnie). If the anti-abuse rule applies, the exemption from withholding tax on outbound dividends paid to an EU parent company will be denied. Under France???„?s implementation of the EC Parent-Subsidiary Directive (i.e. article 119 ter of the French Tax Code), dividends paid by a French subsidiary to its EU parent company are exempt from withholding tax if certain requirements are met. For example, the exemption will not apply where the French subsidiary is controlled directly or indirectly by companies outside the EU, unless the French taxpayer can demonstrate that the main purpose for interposing EU companies in the shareholding chain is not to obtain the benefits of the exemption.

According to guidance published by the French tax authorities, the taxpayer???„?s burden of proof is satisfied when the total amount of withholding tax in the entire chain of companies is at least equal to the amount of French withholding tax that would have applied to dividends paid to the non-EU company. In addition, the taxpayer will be deemed to meet the burden of proof when the participation chain existed before the Parent-Subsidiary Directive became effective. The McKechnie case involves a French subsidiary that paid dividends to its U.K. parent company, which was indirectly controlled by two companies based in Jersey. The French tax authorities denied the right
to apply the withholding tax exemption on the dividends on the grounds that neither of the circumstances referred to in the guidelines were present. The company???„?s only argument was that at the time the group was acquired by the Jersey companies, the French company was already held by its U.K. parent and the U.K. company continued to
manage and control its French subsidiary under the same conditions.

The Tribunal concluded that the facts presented by the taxpayer were sufficient to show that the chain of shareholdings did not have as its main objective the avoidance of tax. The decision indicates that the taxpayer is not confined to any particular method to demonstrate the absence of abuse for purposes of the application of the withholding tax
exemption. The Tribunal also was of the opinion that the fact that the French company was already a subsidiary of an EU parent company (i.e. the U.K. company) when the group was acquired by the Jersey shareholders was sufficient to overcome a presumption of abuse.

Without specifically addressing the compatibility of France???„?s anti-abuse provision with EC law, the Tribunal ruled that the wording of the antiabuse provision in article 119 ter had no application to the case. In fact, the taxpayer???„?s contention made no reference to the purpose of the reorganisation nor did the Tribunal require any statement from the
taxpayer as to that purpose to demonstrate that the reorganisation was not tax driven. If confirmed, the decision provides a strong guarantee against reassessments based merely on the existence of a non-EU ultimate parent company.

This decision appears to adopt principles enunciated by the European Court of Justice (ECJ), according to which an anti-abuse provision is compatible with EC law only if its scope of application is restricted to artificial schemes (see, for example, the 2006 decision in the Cadbury Schweppes case). The Lyon Tribunal has thus taken one step towards integrating French tax law with principles outlined by the ECJ, and it comes at a time when the European Commission has been challenging the anti-abuse rules of a number of EU Member States.

Findings from a poll, carried out by PricewaterhouseCoopers LLP at its Breakfast Briefing event following the Budget show that UK business leaders are not optimistic about the UK economy and the competitiveness of the tax system.

Only 25% of senior executives say they expect the growth of their business to continue while 24% expect business activity to stagnate. Just over one third (36 per cent) of senior executives believe they will, to some extent, be tightening their companies’ belts in the course of the next year because of the current economic climate.

Despite reassurance from the Chancellor of the Exchequer about the resilience of the economy, overall confidence in the shape of the UK economy has diminished. While 81 per cent of business leaders questioned over the last two years thought that the UK economy was in relatively good shape following Budget announcements, this year only one third (36 per cent) were inclined to agree with this statement.

The tax system

The Budget will be of some relief to UK business because it contained few major surprises. This was particularly important given the amount of change already in-hand. Despite the Red Book and a raft of supporting press releases and documentation, this year’s Budget was more about consolidation, with net reduction in tax payments forecast for 2008/09 of GBP 140m for the measures announced on Wednesday. However, the measures will lead to a net increase in taxation for 2009/10 of GBP 790m and GBP 1.865bn for 2010/11.

However, a lack of progress in some areas could impact the attractiveness of the UK for business from a tax perspective. Two thirds (66%) of senior executives think the UK tax system is less competitive than it was five years ago

Mark Schofield, tax partner, PricewaterhouseCoopers LLP, said:

“It was encouraging to see that there were few surprise changes for large business. However, the challenge of maintaining a competitive tax system in the UK remains.

“Although the Red Book announces that a consultative document on the taxation of foreign profits will be published before summer 2008, businesses remain in the dark as to how this will affect them when the rules are introduced. The proposed new measures for principles based taxation, which are now subject to further consultation, could also give an unfavourable impression of the UK to potential investors.

“Business needs a certain, stable, attractive and coherent tax system to have the confidence to invest in the UK. Therefore the Chancellor must demonstrate clearly how he is going to deliver the government’s commitment to consultation with business to maintain a stable business tax system that remains responsive to business needs and internationally competitive”

As with any Budget, there are winners and losers. The Chancellor’s focus remains on how to retain investment from portable industries in the UK, i.e. the more internationally mobile businesses such as financial services companies, service companies generally and non-capital intensive businesses will benefit from the reduction in mainstream corporation tax from April 2008. On the other hand, industries with more physical capital such as the oil and gas, manufacturing and capital intensive industries could be disadvantaged as a result of the asset depreciation measures.

Survey questions

The PricewaterhouseCoopers Budget Breakfast event took place in London on 13 March 2008. The event was attended by 104 chairman, chief executives, managing directors, chief operating officers, financial directors, chief financial officers and non-executive directors from some of the UK’s largest businesses.

Ernst & Young smoothes out crunch-time bumps for Canadian tax professionals with an updated version of their annual tome on personal tax returns: Ernst & Young’s Guide to Preparing 2007 Personal Tax Returns. This year’s edition is filled with updates on new rules and hot topics, including:

• pension income splitting
• eliminating capital gains on gifts of public company shares to private foundations
• RESP rule changes
• increased capital gain deduction limits for small business shares and farming/fishing property

“This is such a busy time of year,” notes Gena Katz, tax executive director at Ernst & Young. “This guide saves you time by collecting the newest updates and comprehensive guidelines in one easy-to-use resource.” Ernst & Young’s Guide to Preparing 2007 Personal Tax Returns is published by the Canadian Institute of Chartered Accountants each year. The guide is available in both print and online editions. The print edition includes a reference CD that contains a searchable version of the book, along with all referenced source materials. The Internet edition reproduces all materials in the print edition and links to more than 50,000 cross-referenced documents, thousands of CRA rulings and cases, legislative references and Department of Finance explanatory notes.

To order a copy of Ernst & Young’s Guide to Preparing 2007 Personal Tax Returns, go to knotia.ca/store/07t1eypr

Derrick Parkes, Energy Tax Partner at KPMG comments on the oil tax reforms in this year’s Budget:

???UK oil companies will be pleased that the Chancellor resisted the urge to increase tax rates on their profits despite very high oil prices.

???But the Government has stopped the offset of investment management costs against UK oil and gas profits. In doing so the Chancellor expects to raise an additional ??150m per year.

???At the same time, long-life assets will now qualify for 100 per cent ???first year???„? allowances (up from 24 per cent) as will mid-field life decommissioning costs. There are further technical changes including a fairer system for tax deductions for the costs of abandoning North Sea fields and the possible opting out of fields that will not pay Petroleum Revenue Tax.???

“Overall, these reforms increase tax overall whilst bringing some welcome relief”

Professional services firm KPMG is celebrating being named the ‘Best Big Company To Work For’ in the prestigious Sunday Times Best Companies awards. Described as ‘unparalleled’ by the Sunday Times, it is the second time that KPMG has won the award, and the fourth year in a row that it has come in the top three. The Sunday Times Best Companies awards are the biggest survey of workplace opinion in the UK, and this year encompassed 868 organisations in total, capturing the views of over 180,000 employees. KPMG topped the ‘Best Big Company’ category for organisations with more than 5,000 employees.

John Griffith-Jones, chairman of KPMG in the UK, said:

“We are extremely proud to have been named Best Big Company to Work For, especially as it is the first time any company has won the award twice. Our people are our greatest asset, because they are at the heart of all our services to clients. That is why it is so important to us to create an environment where people can flourish and their talents can grow. The firm has been expanding and developing rapidly in recent years and we are delighted that our people have given us this vote of confidence through their feedback in the awards. We recognise that creating a great place to work is a never-completed task, something that needs to continually evolve and develop.”

KPMG was also very proud to win two further awards ‘Most Improved’ and ‘Best For Giving Something Back’. KPMG puts considerable emphasis on supporting communities and local causes. In 2007:

• GBP 5.7m was donated to causes in cash or in kind
• Over a third (35%) of KPMG people gave their time and expertise to projects
• They contributed a total of 38,000 hours
• Over GBP500,000 was raised for KPMG’s staff-selected charity, Help the Hospices
• KPMG began an innovative programme of free energy audits at hospices around the UK, helping them to reduce their energy costs and lower their carbon footprint

Opportunities and innovation

The last year has been a significant one for KPMG due to the launch of KPMG Europe – a joining of the UK, German and Swiss practices which has created exceptional opportunities for KPMG’s people to work internationally, both internally with their colleagues in Europe and externally in client-facing teams. This innovative step was a first in the accountancy profession.

The firm continued to invest considerably in training and development. Over 200,000 staffing hours were invested in training last year, and 550 people managers were given development training.

Colin Cook, chief executive of KPMG in the UK, said:

“It is our people who make KPMG a great place to work. It is their proactivity and energy that actually drives our profitability. Managing people is crucial to the performance of any business – we need to keep on challenging ourselves to improve, and always to look for further innovations in the future.”

An inclusive place to work

KPMG is an inclusive company, and that is one of its strengths. There has been a major focus on retaining talented women over the past 12 months there has been an increase in the percentage of senior women managers, which stands at over 30%. The firm is shortly to expand and enhance its package of support for prospective and new parents and carers. It actively supports flexible working practices, with 98% of requests accepted last year. Thirty percent of the firm’s graduate intake is from ethnic minority and overseas backgrounds. The firm has a training programme specifically on diversity, Daring To Be Different, which enables partners to take a lead on creating an inclusive workplace. Almost 70% of partners have now completed the programme, and a further 650 people management leaders in the firm have also completed diversity training in the last 18 months.

Rachel Campbell, Head of People at KPMG in the UK, said:

“This is a fantastic result for the firm. It is especially pleasing to win the ‘Most Improved’ award, as continuing to develop is a constant challenge for any company. We know that there is still much to do, especially with the expansion of the firm through the merger in Europe. We are determined to keep our people at the heart of all we do, and to provide them with the opportunity to develop rewarding, varied and satisfying careers – whatever their working pattern and work/life balance needs.”

Key KPMG UK statistics:
Staff numbers: 11,872
Male/female ratio: 53:47
Average age: 33
Staff bonus (2006/07): GBP100m
UK offices: 22
Graduate recruits: 914 in 2007 (up 18% from 2006). Targeting 1000 in 2008
Volunteers: 35% of staff, giving over 38,000 hours

Chris Sanger, Ernst & Young’s Head of Tax Policy expects the following to be included in the Budget:

• The new 18% flat rate of capital gains tax will be once again confirmed together with details of the entrepreneur’s relief. The changes for taxpayers who are resident in the UK but not domiciled here will be clarified to reassure those who are considering leaving the UK as a result of the proposals.
• The rate of income tax has been fixed by his predecessor but national insurance contributions are still up for grabs by the new Chancellor.
• The Chancellor is expected to introduce measures, perhaps a change in the rate of relief, to minimise the impact that the reduction in the basic rate of income tax has had on the tax relief received by charities.
• Joint taxation of spouses was abolished in 1990 and, while this is unlikely to ever be reintroduced, are we starting to see signs that the tax system is being used to create a family unit for tax purposes. We only have to look at the tax credits regime which is based on the concept of family income to see the beginnings of a shift of approach.Next, the Government has indicated its intention to act to tackle what it calls income shifting, in other words, the arrangement of affairs so that one spouse’s income is diverted to another in order to gain a tax advantage from their lower tax rate. A consultation finished on 28 February 2008 and further details are expected in the Budget although it remains difficult to see how the proposals will work in practice.Finally, the Chancellor will take another opportunity to outline the details of the transfer between spouses of the inheritance tax exemption. Is this the final step towards taxation of the family unit or can we expect to see more developments on 12 March?
• The changes to the trust rules come into effect from April but a number of uncertainties remain. Most forms of trust are affected by the new rules but many taxpayers are unaware. The changes make planning families’ wealth much more difficult which does not fit with the Chancellor’s simplicity objective and may prompt him to amend some of the key changes.
• Green taxes are sure to be on the agenda with either further measures to encourage householders to implement green strategies or showroom taxes to discourage the purchase of cars with high emissions
• With the credit crunch really starting to bite now, the Chancellor should consider measures to encourage saving like the extension and simplification of ISAs.
• Finally, if the Chancellor really wants to cement his position as the man in control of the Treasury, reforming the antiquated stamp duty land tax regime from a slab to a graduated system would be a great place to start and would bring a fresh approach to the housing market. Chris concludes “It’s going to take something big for the Chancellor to change the first impressions of UK taxpayers but with the current economic climate, this may be difficult. The Chancellor made a good start with his commitment to competitiveness, fairness and simplicity and we now need to see some evidence of this in practice.”

In a closely-argued examination of the interaction between environmental taxes and modern economies, ‘Taxation and the Environment’, a new study from KPMG’s Tax Business School in the UK, quotes figures from the Organisation for Economic Co-operation and Development (OECD) which show that in many economies environmental taxes as a proportion of Gross Domestic Product (GDP) have fallen in recent years.

OECD figures show that between 1996 and 2005 (the last year for which figures are available) the proportion of GDP accounted for by environmental taxes across 29 of the world’s largest economies has fallen by an average of 0.2 percent. (See table attached).

“Given the increase in government rhetoric on green issues in the past ten years, and the enthusiasm among campaigners for new environmental taxes, it is odd to see that the apparent importance of environmental taxes in so many economies has actually fallen,” said KPMG global head of tax, Loughlin Hickey.

Frank Sangster, Head of the Environmental Tax and Incentives Group at KPMG in the UK added: “If green taxes are being used as a tool of environmental protection, we would expect to see them rise as a proportion of GDP. Some might say that GDP growth has been very strong across these countries in the period we have examined, so it’s not surprising that green taxes should seem to decline. But even if we look instead at environmental taxes as a proportion of the total tax income for these countries, we see the same thing; green taxes seem to be falling in importance.”

Is tax an effective tool?

It is not clear why this has happened. Governments may have discovered that tax can be a blunt and possibly ineffective tool if it is used to pursue the single aim of reducing environmental damage. Or it may be so effective in making people change their behaviour that the revenue from these taxes has fallen. It is even possible that governments are not as committed to environmental protection as their rhetoric suggests.

Looking at the effectiveness of tax as a green tool, the study examines the widely accepted idea that governments can and should switch the focus of their tax policy from taxing ‘goods’ like work or savings, to taxing ‘bads’ like pollution.

Supporters of this idea claim that it provides a double dividend, by simultaneously raising revenue and reducing undesirable activity – the ultimate alignment of tax policy with green policy. But the study shows that its effects are more complex.

“Pollution, climate change and the use of scarce natural resources are not the result of attempts to harm the environment in which we live, but the side effects of activities intended to enhance our enjoyment of it.” the study says, “Any attempt to tax these activities has the potential for harmful as well as beneficial effects on human welfare. The challenge is how to tax the pollution while minimising the impact on the activity.”

Changing priorities

It points out that in the case of the UK, the fall in receipts is very largely attributable to a fall in real terms in duties on road fuel. This is separately confirmed by the OECD’s analysis of its own figures, which goes on to show that this is also true for many other large economies, particularly in Europe.

Frank Sangster said that this change may not be due to a lack of government commitment to cutting emissions from road transport, but to a change in priorities for raising revenue. Governments may decide instead to tackle environmental problems through other means such as direct regulation, as the US is proposing to do with legislation on car fuel efficiency, or via market mechanisms like the carbon trading scheme.

He added that a reason for choosing these alternatives may be that taxing environmental problems can have undesirable side effects. These forms of taxation are often regressive, in that by raising prices they have a greater impact on the poor than on the rich. They can also be unreliable sources of revenue, because the more effective they are in persuading people not to pollute, the less revenue they will raise.

UK business increasingly concerned about climate change

UK business is becoming increasingly concerned about climate change: according to a recent KPMG survey of 200 senior UK business executives, 85% think that climate change is a significant business issue and 77% think it will grow in importance.

However, despite acknowledging its rising importance 82% admit they still don’t have a strategy in place to respond to climate change.

Frank Sangster commented: “Business is looking for improved communication and a clear regulatory framework from the Government to provide certainty so that they know where to focus their emission saving efforts. And next week’s budget provides a key opportunity for the Chancellor to give some clarity in this area. Any significant investment in new carbon efficient business practices or energy saving technology is unlikely to go ahead until they fully understand the impact of regulation.”

Case study: the Irish plastic bag tax

One example of a green tax wrestling with these problems is the Irish plastic bag tax. When this was introduced on 4th March 2002 the levy had an immediate effect on consumer behaviour – plastic bag per person usage decreased overnight from an estimated 328 bags to 21.

However, income from the levy increased, and surveys showed that plastic bag usage rose to 31 bags per person during the course of 2006. This prompted the Irish government to increase the levy from 15 Euro cents to 22 Euro cents in July 2007, against a background of calls for a much greater increase.

The explicit aim of the increase was not to raise revenue but to reduce usage to the level achieved in 2002 or lower. “This raises the question of whether people’s underlying behaviour really can be changed by a tax change alone,” said Frank Sangster.

“The plastic bag levy seems to be having the desired effect, but the Irish Government uses the money raised by the levy to support environmental education and waste management programmes, so it may be a combination of education and taxation that is working, rather than just taxation. I do wonder how high the tax would have to be to have the same effect if there were no education schemes as well, and at what level the regressive nature of the tax would start to produce undesirable social effects. The Irish plastic bag levy is is a clear demonstration that green taxes have to be balanced against the other effects that they have before governments can decide whether, and at what level, they should be imposed.”

Frank Sangster added. “KPMG’s Tax Business School study argues that there is no such thing as a pure environmental tax, just taxes with environmental effects. Governments may decide that tackling environmental problems requires a much more sophisticated set of responses than simply devising a new tax. Getting the balance right between taxation and other measures, is a major challenge, perhaps the biggest single challenge, for governments throughout the world.”