HM Treasury (HMT) on 16 March 2016 made a number of announcements related to the OECD’s base erosion and profit shifting (BEPS) project in the 2016 budget, and the UK government’s “business tax roadmap” setting out priorities for major business taxes to 2020 was also released on 16 March 2016. Between these two documents, new measures relating to BEPS Action 2 (hybrid mismatches), Action 4 (interest deductibility), Action 6 (royalty withholding tax) and Actions 8-10 (transfer pricing) were announced. The government also took the opportunity to reaffirm its commitment to the OECD’s BEPS project and set out a summary of the actions taken by the UK to date.
After the Budget day announcements, the government on 24 March 2016 published the draft Finance Bill that includes draft legislation for many of the measures announced in the Budget.
The following provides a discussion of UK steps to implement certain BEPS recommendations.
BEPS Action 2, Hybrid mismatches: The UK has already committed to introducing the OECD’s recommendations from 1 January 2017, with draft legislation published in December 2015. The 2016 Budget:
The revised draft legislation included in the Finance Bill also includes further detail on the assumptions to be made when considering the potential application of the legislation. Read more in commentary prepared by KPMG in the UK: Budget and Finance Bill commentary
BEPS Action 4, Tax deductibility of corporate income tax: In an anticipated move, the Chancellor announced the introduction of a new regime for interest deductibility from 1 April 2017. The new regime is expected to align with the OECD’s proposals, with a fixed rate ratio of 30%, a group ratio rule, a £2 million de minimis threshold, measures to address volatility, and an exemption for certain public infrastructure projects. A period of formal consultation is expected to commence in May 2016, with a view to publishing draft legislation at the end of 2016 for inclusion in Finance Bill 2017.
BEPS Action 5, Harmful tax practices: While not highlighted as a specific “measure,” the Finance Bill—as anticipated—includes legislation to amend the UK’s patent box regime to bring it in line with the OECD’s BEPS Action 5 recommendations. Changes will be effective from 1 July 2016.
BEPS Action 6, Treaty abuse relating to royalty withholding tax: Three measures were announced in relation to royalty withholding tax. The first is an anti-abuse measure with immediate effect, to deny treaty benefits when royalty payments are routed through a connected company in a treaty jurisdiction to gain a tax advantage. Draft legislation has been published, and no amendments are expected to be made before the legislation is passed.
The other two measures extend the scope of the withholding tax regime for royalties, and will apply from “Royal Assent” of the Finance Bill (expected in July 2016). The definition of royalty will be extended to include payments made in respect of intangible assets—such as trademarks and brand names—and the regime will also apply to royalty payments that are connected with the activities of a UK PE of an overseas company (even if the payment does not have a UK source).
While these changes represent a significant change to UK law, they do bring the UK rules more in line with international practices. Draft legislation has been published for the extension to the definition of royalty, and draft legislation for the second change applying the tax to UK PEs is expected in the near future. A short consultation period now runs until 29 April 2016.
BEPS Actions 8-10, Transfer pricing: Legislation will be included in Finance Bill 2016 to update the UK’s transfer pricing rules to keep them in line with the OECD’s Transfer Pricing Guidelines. The new rules will apply to accounting periods beginning on or after 1 April 2016.
BEPS Action 13, Transfer pricing documentation and reporting: In line with expectations, neither the budget nor Finance Bill includes specific measures in relation to BEPS Action 13. However, the “business tax roadmap” includes a commitment from the UK government to press the case for public country-by-country reporting on a multilateral basis. No details of a specific plan or timeframe for this reporting were included.
Arguably, the most critical measure to keep a watchful eye on is the new interest deductibility regime. As described above, a consultation period will commence in the coming weeks, and representations from businesses could be crucial in helping to shape a regime that balances compliance under the OECD’s recommendations with a framework that is acceptable to business and commercially viable.
The commitment by the UK government to press the case for public country-by-country reporting is also noteworthy. This is a matter high on the EU’s agenda, so the related statement in the “business tax roadmap” can be seen as a clear message of support for the initiative by the UK government.
For more information, contact a KPMG tax professional in the UK:
Rob Lant | +44 20 73111853 | Rob.Lant@KPMG.co.uk
Robin Walduck | +44 20 73111816 | Robin.Walduck@KPMG.co.uk
Sarah Beeraje | +44 20 76944705 | Sarah.Beeraje@KPMG.co.uk
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