Commenting on a number of corporate tax changes announced in yesterday’s Budget, Robin Walduck, Tax Partner at KPMG in the UK, said:
“The announcements by the Government in the Budget reinforce their commitment to the OECD’s BEPS process. Some measures, such as the draft rules on hybrid mismatches, have already been released, consulted upon with business and have now been extended, whilst other measures, such as the rules on royalty withholding tax, are new and certain aspects have been introduced without consultation.
“The Government has also signalled its intention to press the case for public disclosure of Country by Country Reporting information on a multilateral basis as it believes there is an opportunity to go beyond the outcomes of BEPS and enhance transparency still further. Views in the business community on public disclosure are highly polarised so this announcement will not be received well by some companies.
“With the introduction of these changes, the UK is clearly signalling it is an early adopter of the OECD’s recommendations. At this stage, it is difficult to estimate the impact on business, but clearly the proposals in relation to interest relief could have an impact on the UK’s tax competitiveness given the importance of the interest deductibility regime in the UK as a key component of the UK tax framework in attracting inbound investment. The confirmation of the intention to introduce a group ratio rule is therefore a welcome announcement.”
The principal changes that have been announced are as follows:
1) The hybrid mismatch rules are being extended to cover hybrid mismatches arising from permanent establishments. Rules will be introduced in Finance Bill 2016, to take effect from 1 January 2017. (This change is linked to OECD BEPS Action 2.)
2) From 1 April 2017, the rules in relation to interest relief will be modified as follows:
a. A fixed ratio rule will be introduced, limiting the net interest expense in the UK to 30% of a group’s UK taxable earnings;
b. A group ratio rule will also be introduced, based on the net interest to earnings ratio for the worldwide group as set out in the OECD’s report;
c. A de minimis group threshold of £2 million of net UK interest expense will be introduced;
d. Rules will be introduced to address volatility in earnings and interest; and
e. Rules will be introduced to ensure that the restriction does not impede the provision of private finance for certain public infrastructure projects in the UK where no BEPS risk is evident. (This change is linked to OECD BEPS Action 4.)
3) Withholding tax on royalty payments has been reviewed by the Government with the following proposed changes designed to tackle avoidance in relation to overseas royalty payments to low or no-tax jurisdictions:
a. A change to the deduction at source regime to ensure that all international royalty payments arising in the UK are brought within the charge to income tax;
b. The Government will extend withholding tax rights to cover all intangible assets such as trademarks and brand names;
c. They will ensure that withholding tax will apply to payments that are attributable to a UK PE, even if the payment of the royalty is not made from the UK;
d. They will apply the tax to all payments connected with the activities of a business liable for tax in the UK;
e. Domestic law will be introduced to prevent tax treaties being abused by royalty payments being routed through third countries to gain a tax advantage; and
f. Rules counteracting payments of royalties made under tax avoidance arrangements exploiting double taxation agreements will be effective from 17 March 2016.(This change is linked to OECD BEPS Action 6.)
4) The UK government has announced that they will be legislating (in this year’s Finance Bill) in relation to the revisions to the OECD Transfer Pricing Guidelines that have been agreed as part of the OECD’s BEPS project. This will be done by updating the link between the UK Transfer Pricing rules and the OECD Transfer Pricing Guidelines, so that any interpretation of the UK rules will need to be done by reference to the OECD Guidelines. We are expecting the Finance Bill to be published next Thursday, 24th March.
(This change is linked to OECD BEPS Actions
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For further information please contact:
Jess Liebmann, KPMG Corporate Communications
T: 0207 311 3245 M: 07551 135 778
KPMG Press office Tel: +44 (0) 207 694 8773
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a revenue of £1.96 billion in the year ended September 2015. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 174,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.