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.
In 2014, former Exchequer Secretary to the Treasury David Gauke 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.”7
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 in detail below.
It is understood that the OECD has studied UK tax legislative framework to assess what might constitute best practice in designing rules to defeat perceived BEPS activity. For example, the OECD has considered the UK’s anti-arbitrage rules (now superseded by the anti-hybrid rules), which prevented companies from exploiting asymmetries between different tax regimes by using contrived arrangements. The new UK 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 also needs to take into account theUK’s exit from the EU. ‘Brexit’ is expected to happen in March 2019 at the earliest, and the application of all existing EU (or EU-influenced) legislation and regulation will continue in the interim. KPMG in the UK does not anticipate that Brexit 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.
Diverted Profits Tax
The DPT, which is different from corporation tax, applies to diverted profits arising on or after 1 April 2015. The DPT applies at a rate of 25 percent, which is higher than the UK’s current 19 percent corporation tax rate.
The DPT applies to both UK and non–UK resident companies:
- For UK resident companies, the DPT applies where profits are considered to have been diverted from the UK througharrangements or entities lacking economic substance.
- For non–UK resident companies, the DPT applies where profits are considered to have been diverted from the UK by avoiding a UK PE.
Groups that are restructuring as a result of the 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. Summarized below are some recommendations of special 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 has changed its domestic rules that apply to payments made on or after 1 January 2017. The UK rules closely follow the OECD’s recommendations and replace the UK’s previous anti-arbitrage rules.
Deductibility of corporate interest expense
The UK is introducing a new regime for the taxation of corporate interest expense that is expected to apply to payments made on or after 1 April 2017. Draft legislation and part of the draft guidance notes have been published, although the finalization of the legislation was delayed by the June 2017 UK election. The legislation’s implementation date could change as a result. Based on draft documents published to date and the consultation process, it is clear that the new regime broadly follows the OECD’s recommendations. Interest deductions are restricted to 30 percent of EBITDA, with a group ratio rule and various other exemptions and elections to provide flexibility in the regime’s application.
Countering harmful tax practices
The UK introduced a reformed patent box regime, effective 1 July 2016, compliant with OECD recommendations.
A significant component of the OECD BEPS Action Plan relates to transfer pricing, particularly regarding the extent of documentation needed, hard-to value intangibles, and risk and capital. The UK 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 minimal disruption of their business models.
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 Action13 proposals related to master file and local file transfer pricing documentation. The UK is party to the automatic exchange of CbyC reports, and as of June 2017, has activated 39 exchange relationships. The UK rules for CbyC reporting took effect 1 January 2016. The UK government has also previously stated that it is in favor of the introduction of public CbyC, although there is no timetable for (or certainty of) this.
The UK was among the first signatories to the Multilateral Instrument on 7 June 2017. Regarding the instrument’s four main areas, the UK has indicated it will:
- largely apply the provisions on hybrid mismatches
- apply the minimum standard provisions on treaty abuse, and thus adopt the principal purpose test in full (but not the simplified limitation on benefits provision)
- not adopt the PE recommendations except for the anti-fragmentation rules (or therefore the provisions on dependent agent PEs or the ‘preparatory and auxiliary’ tests)
- apply the arbitration provisions with the “baseball arbitration” option; however the UK has stated that it will also apply arbitration with countries that have opted for “reasoned opinion” arbitration.
On the horizon
As at 30 June 2017, the UK has implemented or committed to implement most BEPS measures. For the remaining BEPS Actions, UK tax policy is considered as largely consistent with the OECD’s recommendations. Therefore, no material changes are expected to:
- strengthen CFC rules to make it more difficult for multinational enterprises based outside the UK to divert profits 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 theneed for compatibility with existing international law and for the support of fair competition, as well as the acknowledgment of legitimate commercial decisions on 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.