Select Committee on Statutory Instruments Contents

Instruments reported

At the Committee’s meeting on 20 April 2016 it scrutinised a number of instruments. It was agreed that the special attention of the House of Commons should be drawn to one of those considered in accordance with Standing Orders. The Instrument and the ground for reporting it is given below. The relevant Departmental memorandum is published as an appendix to this report.

1S.I. 2016/237: Reported for doubt as to whether they are intra vires

Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) Regulations 2016

1.1 The Committee draws the special attention of the House to these Regulations on the ground that there is a doubt as to whether they are intra vires in one respect.

1.2 The Regulations, which impose obligations on entities covered by the Regulations, give effect to the OECD Country-by-Country Reporting guidance set out in “Transfer Pricing Documentation and Country-by-Country Reporting, Action 13: 2015 Final Report” published on 5th October 2015”. The guidance forms part of the wider OECD Base Erosion and Profit Shifting Action Plan adopted by the OECD and G20 countries in respect of the provision of information concerning high-level transfer pricing. The descriptions of information called for by the Final Report are fully set out in it, as are the factors to be taken into account in providing the information.

1.3 Regulation 21, which is entitled “Anti-avoidance” provides that “If …. a person enters into any arrangements; and …. the main purpose, or one of the main purposes, of the person in entering into the arrangements is to avoid any obligation under these Regulations, these Regulations are to have effect as if the arrangements had not been entered into.”

1.4 The Committee asked the Treasury to identify the vires for regulation 21.

1.5 In a memorandum prepared by Her Majesty’s Revenue and Customs on behalf of the Treasury and printed as an Appendix, the Department identifies section 122(3) and (4)(d) of the Finance Act 2015 as providing vires for regulation 21. The Department notes that section 122(1) provides for the Treasury to make regulations implementing the OECD’s guidance on country-by-country reporting, and accepts that the OECD’s guidance, which includes model legislation for country-by-country reporting, does not specifically address anti-avoidance arrangements; but the Department asserts that since section 122(3) expands the reference to implementing the OECD guidance to include implementation “to any extent, subject to such exceptions or other modifications as the Treasury consider appropriate”, the “provision in regulation 21 is a modification of the OECD’s guidance aimed at making country-by-country reporting more effective by capturing any arrangements deliberately designed to avoid reporting obligations. Whilst a modification, it is consistent with what the OECD’s guidance is intended to achieve.” The Department adds that “section 122(4)(d) specifically sets out that regulations may make provision about contravention of, or non-compliance with, the regulations. Arrangements entered into for the purpose of avoiding obligations under the 2016 Regulations would be a form of contravention or non-compliance. Preventing such arrangements from having effect is therefore clearly within the scope of section 122(4)(d).” Based on section 122(3) and 122(4)(d), the Department asserts that it “is of the view that regulation 21 falls squarely within the scope of the broad regulation making powers in section 122”.

1.6 The Committee does not agree that the question of vires is beyond doubt. In particular, the Committee does not accept that either of the two provisions identified is apt to cover regulation 21.

1.7 So far as section 122(3) is concerned, expansion to include matters acknowledged by the Department as being outside the OECD guidance does not fall naturally within the notion of implementation “to any extent” with or without modifications: it is not implementing what the guidance does provide for, but adding matters that it might have provided for but chose not to. The Committee accepts that a power to modify includes power to expand but, according to the Committee’s understanding of case law (see, in particular, STEVENS v THE GENERAL STEAM NAVIGATION COMPANY LTD (C.A. [1903] 1 K.B. 890)), it does not include such a power if the expansion is radical. In the Committee’s view, specific expansions broadening the obligations envisaged by the guidance for the purpose of identifying or preventing avoidance might well fall within the concept of implementation with modifications. But regulation 21, which in effect imposes additional obligations without any specificity or any limitation except for motive, cannot in the Committee’s view be securely regarded as a non-radical departure from the guidance document.

1.8 As to section 122(4)(d), to argue that “arrangements … for the purpose of avoiding obligations … would be a form of contravention or non-compliance” is to presuppose a proposition along the lines of regulation 21 itself: it could equally well be argued that doing things that do not attract a provision of the regulations is not contravening them or failing to comply with them, but simply ordering ones affairs so as not to engage them.

1.9 Even if one or both of those provisions did apply, however, that would not necessarily be sufficient. The provisions are both of a general nature and, in accordance with normal principles, will not routinely be treated as sufficient to permit provision that contradicts basic rules of statutory construction. Regulation 21 does not expressly identify who is to decide whether the “main purpose, or one of the main purposes, of the person in entering into the arrangements is to avoid any obligation under these Regulations”. In practice, what seems likely to happen is that HMRC will assess a penalty against a person under regulation 16 in reliance on regulation 21, and the person will have a right of appeal to the First-tier or Upper Tribunal under regulation 18. So the potential effect of regulation 21 is that people who are satisfied that the terms of the regulations do not apply to them will be at constant risk of HMRC initially concluding that they have attempted to avoid the regulations and that the regulations therefore apply anyway – that being the default position in the absence of an appeal. It is unclear that such a result, which breaches the principle of certainty, would be within the contemplation of enabling powers that do not contain express provision for the type of anti-avoidance provision used. The fact that Parliament has, notably in Part 5 of the Finance Act 2013, enacted anti-avoidance provisions which are similarly imprecise or discretionary is irrelevant to the security of such provisions in subordinate legislation, in the absence of express enabling powers. The Committee accordingly reports regulation 21 for a doubt as to whether it is intra vires.

Instruments not reported

The Committee has considered the instruments set out in the Annex to this Report, none of which were required to be reported.

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Prepared 21 April 2016