The new corporate interest restriction (CIR) rules—enacted in Finance (No.2) Act 2017 that received Royal Assent on 16 November 2017—impose an additional potential restriction on UK tax relief for finance costs, after the existing tax rules (including the transfer pricing rules) have been applied.
The CIR rules have an effective date of 1 April 2017.
For purposes of calculating the additional restriction imposed by the CIR rules, any adjustments made under the UK transfer pricing rules will be taken into account in calculating a CIR group’s “tax-interest” and “tax-EBITDA.” However, no equivalent transfer pricing adjustments will be made for the purposes of calculating the group’s “group-interest” and “group-EBITDA.” This may lead to some (favourable or unfavourable) mismatches affecting the quantum of the group’s “interest capacity” under the CIR rules and therefore ultimately the quantum of the restriction imposed by the CIR rules.
The consequences of a disallowance of interest costs under the CIR rules may be different to a disallowance of interest costs under the transfer pricing rules. When the CIR rules effectively result in a group being disallowed UK tax relief for interest costs paid to a related-party lender, the related-party lender will not be able to:
On the other hand, by contrast with interest costs disallowed by the transfer pricing rules, to the extent interest costs are disallowed by CIR, they may be carried forward for potential “reactivation” in future periods.
The definition of “related parties” in the CIR rules (that applies for the purposes of excluding “related party” interest costs when applying the group ratio method) is significantly broader than the equivalent connection tests in the transfer pricing rules. As such, it is possible that some loans might be treated as “related party” loans for CIR purposes (and therefore treated less favourably under the CIR rules) in circumstances when they are not subject to potential adjustment under the transfer pricing rules.
A number of taxpayers have expressed concern whether, in light of the CIR provisions, it is still worth entering into an Advanced Thin Capitalisation Agreement (ATCA) with HM Revenue & Customs in relation to interest deductibility under the thin capitalisation provisions. In many circumstances, the answer will still be “yes.” The thin capitalisation provisions will still apply before the CIR provisions and for some groups the certainty an ATCA provides over the arm’s length debt and interest position will remain valuable. However, how valuable such certainty will be will ultimately depend on the interplay with the CIR rules.
Read a November 2017 report prepared by the KPMG member firm in the UK
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.