Debate about the tax planning undertaken by multinational companies has been especially vigorous in the United Kingdom. The government has been very publicly studying possible remedies and, in advance of the OECD BEPS Action Plan being completed, has introduced a new ‘Diverted Profits Tax’ to counter arrangements that are perceived to divert profits from the UK. Representatives from HM Treasury, HM Revenue & Customs and other government departments have been active in discussions on the BEPS Action Plan. With the knowledge that change is coming, many UK companies are assessing the impact on their businesses going forward.
Exchequer Secretary to the Treasury David Gauke has expressed the UK’s support for the OECD BEPS Action Plan: “We’ll continue to work through the G20 and OECD – on the digital economy, on coherence, on substance and on transparency – to make sure that this area is properly reformed.”
With a number of high-profile government officials involved in the OECD BEPS Action Plan, the UK government is sending a clear message that it is taking the OECD’s efforts seriously. Representatives from business, as well as the advisory community, have been actively encouraged by the OECD to get involved in helping to shape the Action Plan in a way that does not disturb ordinary commerce.
Tackling tax avoidance is not a new concept in the UK. In fact, the country has historically been proactive on anti-avoidance. The government has already introduced a new set of CFC provisions, and the regime has been amended to ensure that groups are not able to utilize the rules to generate a UK tax advantage. Most recently, the government introduced a new Diverted Profits Tax, discussed below.
It is understood that the UK tax legislative framework has been studied at the OECD in order to assess what might constitute best practice in designing rules to defeat perceived BEPS activity. An example is the anti-arbitrage rules, which have prevented companies from exploiting asymmetries between different tax regimes by using contrived arrangements. The new CFC provisions are also being reviewed as a potential model for tackling the artificial export of profits from one country to another.
TaxThe new Diverted Profits Tax (DPT), which is different from corporation tax, applies to diverted profits arising on or after 1 April 2015. DPT applies at a normal rate of 25 percent, which is higher than the UK’s current 20 percent corporation tax rate.
DPT applies to both UK and non-UK resident companies:
Groups that are taking action to restructure as a result of DPT are also considering other changes that are expected to come in as a result of the BEPS Action Plan in due course.
A significant component of the OECD BEPS Action Plan relates to transfer pricing, in particular with respect to the extent of documentation needed, hard-to-value intangibles, and risk and capital. Like the tax departments of other multinationals, those of UK companies have historically invested considerable efforts in ensuring that transfer pricing policies are robust. This is a complex area, and companies are keeping a close eye on developments to ensure that business models are disrupted as little as possible.
In light of the OECD proposals in relation to hybrid mismatch arrangements under Action 2 of the BEPS Action Plan, the UK is proposing to change its domestic rules. The UK rules are likely to closely follow the OECD’s recommendations, and they are expected to apply to payments made on or after 1 January 2017.
In March 2014, the Chancellor of the Exchequer released a report by way of an update of the government’s thinking on the OECD BEPS Action Plan. Entitled Tackling Aggressive Tax Planning in the Global Economy: UK Priorities for the OECD Project for Countering Base Erosion and Profit Shifting, the report outlines the government’s priorities heading into 2015. The following are some recommendations of particular interest, together with the latest developments in the UK.
As the OECD nears the end of its consultations, many UK-headquartered companies are gearing up to respond to the upcoming wave of legislative change. With company directors and upper management taking more interest in the business impact of changing rules in the UK and other countries, many tax executives are modeling various scenarios and potential responses, with particular focus on their legal structures, financing arrangements and operating models. UK companies have also started factoring potential BEPS legislation into their future plans, for example, for proposed mergers and acquisitions.
Planning for the future is particularly difficult in the current context. The OECD Action Items are complex and interdependent, and some of the proposals released to date (e.g. interest deductibility, treaty shopping) offer flexibility in their implementation. Until the OECD proposals are finalized and countries transpose them into their domestic law, UK companies will need to weather uncertainty over exactly how their tax positions will be affected. Companies that are taking steps now to review current and proposed structures in light of the BEPS project will be in a good position to act quickly when needed.