BEPS: Description of BEPS proposals in the UK

BEPS: Description of BEPS proposals in the UK

The United Kingdom (UK) government earlier this week released several proposals to address base erosion and profit shifting (BEPS) concerns.

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The Autumn Statement 2014 [PDF 1.87 MB] proposes a new “diverted profits tax” (DPT) to counter the use of what the UK considers to be aggressive tax planning by multinationals to divert profits otherwise subject to UK taxation.

The DPT would be assessed at a rate of 25% beginning April 1, 2015. A draft of Finance Bill 2015 including the DPT legislation is set to be released next week. 

KPMG observation

Tax professionals have observed that given the few details provided, the DPT is meant to, at least in part, target direct or indirect UK investments using Irish non-resident companies. The UK government commentary* to the Autumn Statement also indicates a troubling broad scope, by noting that mere selling activity within the UK could make a multinational corporation subject to the tax.

HM Treasury, Autumn Statement 2014: 16 things you should know (Stating that “if a company conducts a lot of activity in the UK – sales, for example - but can avoid paying corporation tax by moving profits generated in the UK to other countries through the manipulation of the international tax rules, the UK will now be able to tax those profits at a rate of 25%.”).

Country-by-country reporting

The Autumn Statement also notes that the UK will introduce legislation implementing “country-by-country” (CbyC) reporting along the lines recently proposed by the Organisation for Economic Co-operation and Development (OECD) as part of its BEPS project. The UK’s legislation on CbyC reporting will be included in Finance Bill 2015 and would be effective as of January 1, 2016.

The OECD’s model for CbyC reporting was discussed in its report on Action 13 of the BEPS Action Plan (Action 13 deliverable). Read TaxNewsFlash on the Action 13 deliverable.

The Action 13 deliverable sets forth a model template for reporting by multinational enterprises of the global allocation of their income, taxes, and economic activity—as well as certain organizational information with respect to the members of such groups (e.g., tax resident jurisdiction, jurisdiction of organization, and main business activity).

KPMG observation

Interestingly, the Autumn Statement CbyC reporting proposal appears to not include Master File and Local File reporting as contemplated in the Action 13 deliverable. The stated goal of CbyC reporting is to help tax administrations conduct high-level transfer pricing risk assessment and evaluate other BEPS related risks.

Hybrid mismatch arrangements

Finally, the UK tax authorities released a consultation document [PDF 567 KB] addressing hybrid mismatch arrangements (Hybrids Report).

The proposals set forth in the Hybrids Report closely track the recommendations contained in the OECD’s report on Action 2 of the BEPS Action Plan (Action 2 deliverable). Read TaxNewsFlash on the Action 2 deliverable.

The UK’s domestic legislation with respect to hybrids is intended to be effective from January 1, 2017, and will take into account the OECD’s commentary with respect to the Action 2 deliverable, with the OECD’s commentary expected to be released in September 2015. The Hybrids Report states specifically that no additional transition rules (e.g., no “grandfather” rules) are contemplated.

The Hybrids Report’s description of a hybrid mismatch arrangement generally follows the Action 2 deliverable’s recommendations, and includes so-called “imported” mismatches routed through a third jurisdiction.

The scope of the UK rules would thus be very broad. The UK rules would address both inbound and outbound cross-border, related-party payments involving a UK corporation. In general, the UK would deny an otherwise allowable deduction with respect to affected outbound payments. With regard to inbound payments, the UK would require an income inclusion if the hybrid payment were deductible in the related-party payor’s jurisdiction. The Hybrids Report also indicates that the UK is considering introducing rules targeting reverse hybrids, consistent with the recommendation in the Action 2 deliverable.

The Hybrids Report notes the UK’s conclusion that its current law effectively implements the OECD recommendations: (1) to deny a dividend exemption for deductible payments; (2) to prevent foreign tax credit duplication in the case of withholding taxes; and (3) to implement effective controlled foreign corporation (CFC) rules. The Hybrids Report thus declines to implement those recommendations.

The Hybrids Report addresses two areas in which consensus was not reached in the Action 2 deliverable.

  • With respect to the treatment of a bank’s hybrid regulatory capital, the Hybrids Report notes that the UK is considering rules that would prevent banks from using hybrid instruments for tax-planning, but that the UK wishes to avoid rules that would create uneven competition between UK and non-UK headquartered banks or that would provide incentives for raising capital in a manner that is sub-optimal from a regulatory standpoint.
  • With regard to whether income taxed under a CFC regime is to be considered “included in ordinary income” for purposes of determining whether a hybrid mismatch exists, the UK is still considering the issue and specifically noted concerns with the administrability of a CFC rule.

Comments on the proposals described in the Hybrids Report have been requested. The comment period began on December 3, 2014, and will run for 10 weeks until February 11, 2015.

KPMG observation

The UK’s proposals are viewed by tax professionals as the most comprehensive implementation to date of the Action 2 deliverable and CbyC reporting. The UK’s apparent commitment to adopt the OECD’s hybrids and CbyC reporting recommendations in full may encourage other countries to similarly enact the OECD’s recommendations.

The UK proposals are, however, troubling because they include a “diverted profits tax,” which was not contemplated by the BEPS action items. As a result, the UK’s proposals do not fully adhere to the consensus-based recommendations being produced in the OECD’s BEPS project. The prospect of the “diverted profits tax” may encourage other countries to take unilateral measures to increase their tax base, thereby increasing the likelihood of cross-border tax disputes and double taxation.

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