United Kingdom - Response to BEPS

United Kingdom - Response to BEPS

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, even in advance of the OECD BEPS Action Plan being completed, introduced a DPT to counter arrangements that are perceived to divert profits from the UK. Representatives from HM Treasury, HM Revenue & Customs and other government departments continue to be active in discussions on the BEPS Action Plan. Now that there is significantly more clarity over how the UK will implement the BEPS recommendations, many UK companies are assessing the impact on their businesses going forward.

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United Kingdom

Former 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 reformed⁸.”

With a number of high-profile government officials involved in finalizing the remaining aspects of 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. As noted, the government introduced a DPT discussed below.

It is understood that the UK tax legislative framework has been studied at the OECD in order to assess what mightconstitute best practice in designing rules to defeat perceived BEPS activity. For example, the OECD has considered the UK’s anti-arbitrage rules, which prevent 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.

In addition to the ongoing implementation of the BEPS initiatives, UK tax policy will now also need to take into account the UK’s exit from the EU widely referred to as ‘Brexit’. This is expected to happen in November 2018 at the earliest, and the application of all existing EU (or EU-influenced) legislation and regulation will continuein the interim. KPMG in the UK does not anticipate thatBrexit will interrupt or change the UK’s commitment to implementing BEPS measures or its overall plan to tackle tax avoidance. However, once the UK has left the EU, it may no longer be obliged to implement EU initiatives related to tax, including tax avoidance.

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 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:

  • For UK resident companies, DPT applies where profits are considered to have been diverted from the UK through arrangements or entities lacking economic substance.
  • For non-UK resident companies, DPT applies where profits are considered to have been diverted from the UK by avoiding a UK PE.

Groups that are taking action to restructure as a result of DPT are considering other changes that are being implemented as a result of the BEPS Action Plan.

In March 2016, the Chancellor of the Exchequer published an updated Business Tax Roadmap setting out the government’s plans for business taxes to 2020. The document summarizes the UK’s progress in implementing the OECD’s recommendations, and its priorities going forward. The following are some recommendations of particular interest, together with the latest developments in the UK.

Unilateral BEPS actions todate

Hybrid mismatch arrangements

In light of the OECD proposals on hybrid mismatch arrangements under Action 2 of the BEPS Action Plan, the UK is proposing to change its domestic rules. Draft legislation has been published, and the UK rules closely follow the OECD’s recommendations. The new rules will apply to payments made on or after 1 January 2017.

Deductibility of corporate interest expense

The UK announced it will introduce a new regime for the taxation of corporate interest expense. The new regime will apply to payments made on or after 1 April 2017. Whilefinal details of the new regime are yet to be published, it is clear that the new regime will broadly follow the OECD’s recommendations. Interest deductions will be restrictedto 30 percent of EBITDA, and a group ratio rule will be put in place. Consultation on these measures is ongoing, and draft legislation is expected to be published by the end of 2016.

Countering harmful tax practices

The UK is introducing a reformed patent box regime, effective 1 July 2016, compliant with OECD recommendations.

Transfer pricing

A significant component of the OECD BEPS Action Plan relates to transfer pricing, particularly regarding the extent ofdocumentation needed, hard-to-value intangibles, and risk and capital. The UK has adopted the revised OECD transfer pricing guidelines as of 1 April 2016. Like the tax departments of other international companies, those of UK companies have historically invested considerable efforts in ensuring their transfer pricing policies are robust. This area is complex, and companies are working to implement the revised OECD guidelines to ensure that business models are disrupted as little as possible.

Transfer pricing documentation and country-by-country reporting

The UK has implemented the BEPS Action 13 proposals on CbyC reporting, although it has remained silent on the Action 13 proposals related to master file and local filetransfer pricing documentation. The UK rules for CbyC reporting are effective 1 January 2016. The UK government has also stated that it is in favor of the introduction of public CbyC⁹, although there is no timetable for (or certainty of) this.

On the horizon

The UK is committed to implement the following actions in line with OECD recommendations, once the OECD work has been completed.

  • Prevent treaty abuse by denying benefits to persons whose main purpose is to gain access to tax benefits through those treaties. However, in it most recent budget, the government announced anti-avoidance measures in relation to royalty arrangements, including the introduction of anti-treaty shopping provisions for payments made on or after 17 March 2016.
  • Prevent the articifical avoidance of PE status by re-examining and updating the rules governing thethreshold at which a company becomes taxable in aforeign country, and working to prevent businesses fromartificially fragmenting their operations to avoid breachingthis threshold (i.e. through measures such as the DPT).
  • Make dispute resolution mechanisms more effective by introducing arbitration where tax authorities cannot come to agreement or tax disputes have exceeded a certain length of time.
  • Develop a multilateral instrument to enable participating jurisdictions to implement BEPS measures and enhance bilateral tax treaties. The UK is one of more than 96 countries that have so far said they will participate in the ad hoc group to develop a multilateral instrument to implement tax treaty measures to tackle BEPS.

For the remaining BEPS Actions, UK tax policy is considered as largely consistent with the OECD’s recommendations. Therefore, no material changes are expected in the following areas of tax policy:

  • Strengthen CFC rules to make it more difficult for multinational enterprises based outside the UK to divertprofits to low-tax countries (to level the playing field between those enterprises and UK domestic businesses).
  • Give attention to transparency and substance going forward. The government is mindful of the need for compatibility with existing international law and for the support of fair competition, as well as the acknowledgement of legitimate commercial decisions with respect to R&D within the framework of globalized markets and operations.
  • Require disclosure of certain tax planning arrangements. This builds on a mandatory disclosure scheme introduced in the UK in 2004 and will therefore be familiar to UK businesses.

Impact on businesses

Now that the OECD has concluded most of the BEPS Actions, many UK-headquartered companies are responding to the legislative change that comes with local implementation of the OECD’s recommendations. 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.

The OECD BEPS Action Plan items are complex and interdependent, and some of the proposals released to date(e.g. interest deductibility, treaty shopping) offer flexibility in their implementation. However, now that the OECD proposals are (largely) finalized, we are starting to gain clarity over how individual countries will transpose them into their domestic law. In many respects, the early adoption and clear statements of intent issued by the UK government have been helpful to UK companies that are determining 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 are in a strong position to adapt to the new corporate tax landscape quickly and effectively.

Footnotes

⁸ https://www.gov.uk/government/speeches/david-guakes-speech-to-the-lord-mayors-taxation-forum

⁹ https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/509249/business_tax_road_map_final2.pdf

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