OECD BEPS Project - Impact on UK tax law. Munich, 21 April 2016

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1 OECD BEPS Project - Impact on UK tax law Munich, 21 April 2016

2 Slide 3 5 Recent tax developments in the UK 6-8 Action 2 - Hybrid mismatch arrangements 9 10 Action 3 - CFC Rules Action 4 - Interest deductions Action 7 - Definition of Permanent Establishment 15 Actions IP and transfer pricing Action 13 - Transfer pricing documentation and CbCR 2

3 Recent tax developments in the UK (1 of 3) March 2016 Budget Corporation tax rate will be cut to 17% by Corporation tax loss relief rules to be reformed. New rules to apply from 1 April Greater flexibility in the use of carried forward losses but the amount that can be offset will be restricted to 50% of the profit. Consultation on the substantial shareholdings exemption looking at changes to increase simplicity, coherence and international competitiveness. New rules were to be introduced for companies with profits > 20 million to make tax payments on account in the 3 rd, 6 th, 9 th and 12 th month of the accounting period. Rules deferred to accounting starting on or after 1 April Changes relating to the OECD s BEPS project. 3

4 Recent tax developments in the UK (2 of 3) Panama papers Release of Panama papers put tax again on the front page of newspapers in UK. UK media often blind to any distinction between tax evasion, tax avoidance and legitimate tax planning. Increasing public demand in UK for action on perceived exploitation of tax havens. In the eyes of the public/media holding wealth offshore is unacceptable. Revelations led UK Prime Minister (Mr David Cameron) to feel obliged to publish information in his tax returns for last six years. UK Government action against tax evasion New 'taskforce' to deal with information from Panama papers, jointly led by UK tax authority (HM Revenue & Customs) and National Crime Agency. Introducing this year a new offence of failing to prevent the facilitation of tax evasion. All UK companies now required to hold a register of People with Significant Control (PSC), in addition to existing registers. PSC register includes information on individuals who own or control companies including their name, month and year of birth, nationality, and details of their interest in the company. 4

5 Recent tax developments in the UK (3 of 3) UK Government action against tax evasion (continued) Crown dependencies (Isle of Man, Jersey and Guernsey) and overseas territories (including Bermuda, British Virgin Islands, Gibraltar, the Cayman Islands) previously agreed to exchange taxpayer financial account information automatically with UK authorities from this September. Additionally these territories have now agreed to provide UK law enforcement and tax agencies full access to information on beneficial ownership of companies. Continued exposure in UK media of tax issues is causing policies to be regularly reviewed and consulted on, causing uncertainty. Inward investment to UK also dampened by Brexit. (On 23 June 2016, UK voters will decide whether to remain in, or leave, the EU. The outcome is far from certain.) 5

6 Action 2 Hybrid mismatch arrangements (1 of 3) OECD recommendation A series of recommended rules to neutralise effect of hybrid instruments and entities. UK response UK has existing anti-arbitrage provisions. New replacement legislation to tackle hybrid mismatches published in draft. Due to come into effect from 1 January New legislation will apply to a wider range of circumstances. It contains no purpose test. No grandfathering rules and so existing transactions caught from 1 January Applies to transactions between related parties (more than 25% common control) or structured transactions between third parties designed to produce a hybrid mismatch. Arrangements covered include those involving hybrid entities, financial instruments, stock loans and repos, limited liability partnerships (LLPs), dual resident companies and permanent establishments. 6

7 Action 2 Hybrid mismatch arrangements (2 of 3) UK response (continued) Hybrid mismatches defined as cases where: an amount is deductible in one jurisdiction but not taxed in any other (deduction/noninclusion mismatches), or an amount is deductible more than once (double deduction mismatches). Draft legislation counters mismatches through: Deduction/non-inclusion mismatch Primary response of disallowing a deduction where UK is jurisdiction of payer Where UK is payee s jurisdiction, and a primary response not applied in another jurisdiction, UK bring receipt related to deduction into charge. Double deduction mismatch A deduction is disallowed except against dual inclusion income where the UK is the jurisdiction of the investor. Where the UK is hybrid entity s jurisdiction, and a deduction not denied in the investor s jurisdiction, UK will deny deduction to the hybrid except against dual inclusion income. 7

8 Action 2 Hybrid mismatch arrangements (3 of 3) UK response (continued) Exemptions Deductions for imputed interest, for example on interest-free loans, not within rules. Financial services Regulatory capital securities issued by banks and insurers are excluded. Controlled foreign companies Income counted as taxed if received by a controlled foreign company (CFC) (held from UK or another territory) which is subject to CFC inclusion even if CFC itself not subject to tax. Where CFC is party to a hybrid mismatch, new rules define CFC s assumed taxable profits for purpose of determining whether mismatch is caught. 8

9 Action 3 CFC Rules (1 of 2) OECD recommendation Six building blocks for the design of effective CFC rules. Recommendations and not minimum standards; designed to ensure those jurisdictions implementing CFC rules have ones that effectively prevent the shift of income to foreign subsidiaries. UK response UK Government stated it has recently reformed its CFC rules to protect the UK tax base from tax avoidance and aggressive tax planning. Importantly, the new CFC rules reflect the UK s move to a more territorial corporate tax system, an approach adopted by most developed countries which is well adapted to a more open economy and to globalisation. The BEPS project should encourage more countries to adopt and enforce workable CFC rules. (March 2014) Given above comments, no substantive changes expected to be made to UK s existing CFC rules. 9

10 Action 3 CFC Rules (2 of 2) UK response UK CFC rules provide full or 75% exemption of certain non-trading finance profits from qualifying loan relationships. (i.e. such profits could be subject to tax at 4.25% when UK corporate tax rate falls to 17% in 2020.) Initially there was concern above provisions would be contrary to the final OECD report; but acceptance of territorial approach to CFC rules should mean UK can retain these exemptions. Actions 8-10 may have implications for the return financing entities can earn under transfer pricing rules where they do not exercise control over the financial risk. 10

11 Action 4 Interest deductions (1 of 2) OECD recommendation Fixed ratio rule to be applied to tax-adjusted earnings of between 10% and 30%. Optional elements, including: UK response group ratio rule allowing interest up to the level of the net interest:ebitda ratio of worldwide group where it exceeded the fixed ratio. de minimis limit; exclusion for interest on loans used to fund public-benefit projects (e.g. PFI); carry forward (or potentially carry back) of disallowed interest and/or unused capacity; and specific targeted anti-abuse rules. UK Government has announced new rules to limit the corporate tax deductibility of interest expenditure. Apply from 1 April 2017; a detailed consultation to be undertaken this Summer. 11

12 Action 4 Interest deductions (2 of 2) UK response (continued) Key elements of new rules are expected to be: fixed ratio rule limiting deductions of net interest expense to 30% of a group s UK EBITDA; group ratio rule, based on external net interest to EBITDA ratio for the worldwide group (to replace current worldwide debt cap regime); de minimis group threshold of 2 million net UK interest expense; measures to ensure restriction does not impede provision of private finance for certain public infrastructure projects in the UK, and rules addressing volatility in earnings and interest. New rules represent significant shift in the way amount of deductible interest is calculated in UK. Historically, the debt finance a UK entity could claim interest deductions on was based on arm s length standard, which could lead to deductions significantly greater than 30% of EBITDA. UK entities were able to count EBITDA of overseas subsidiaries when assessing arm s length debt capacity. This will no longer be permitted. 12

13 Action 7 Definition of a PE (1 of 2) OECD recommendation Changes to the definition of a PE in Article 5 of the Model Tax Convention to prevent avoidance of the establishment of a PE by: commissionaire arrangements and similar strategies; use of specific preparatory or auxiliary activity exemptions, including artificial fragmentation of business activities. Use of Principal Purpose Test recommended under Action 6 to address splitting contracts between closely related enterprises or requiring automatic aggregation of time spent by closely related enterprises at the same site. UK response Changes to UK double tax treaties to reflect proposed amendments likely to take effect from 2017 through the multilateral instrument. UK Government enacted Diverted Profits Tax (DPT) legislation from 1 April 2015 to address concerns around perceived avoidance of UK PEs by foreign enterprises. 13

14 Action 7 Definition of a PE (2 of 2) UK response (continued) When does DPT apply? DPT addresses counteracts the diversion of profits from the UK by groups that either: use entities or transactions lacking economic substance to create a tax benefit, or seek to avoid a UK taxable presence that would bring a foreign company into the charge to UK corporation tax. Calculation of DPT Taxable diverted profits calculated on same principles as UK corporation tax, including transfer pricing rules, except where law requires arrangements to be re-characterised (in which case calculated on a just and reasonable basis). Charged on taxable diverted profits at a rate of 25%. 14

15 Actions 8-10 IP and transfer pricing (1 of 1) OECD recommendation Existing transfer pricing rules can be misapplied with result that allocation of profits not aligned with the economic activity. Major changes to OECD Transfer Pricing Guidelines to ensure outcomes aligned with value creation. UK response UK will adopt OECD s recommendations in full. UK transfer pricing rules are interpreted in accordance with Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations approved by the OECD on 22 July 2010 [Section 164, Taxation (International and Other Provisions) Act 2010]. Finance Bill 2016 amends this requirement to be the 2010 Guidelines as revised by the report, Aligning Transfer Pricing Outcomes with Value Creation, Actions Final Reports, published by the OECD on 5 October For accounting periods beginning on or after 1 April UK tax authorities more able to challenge artificial arrangements or ones that lack substance. 15

16 Action 13 TP documentation and CbCR (1 of 2) OECD recommendation 3-tiered approach to transfer pricing documentation for MNEs: Master file containing information relevant for all MNE group members. Local file referring to material transactions of local taxpayer. Country-by-country report (CbCR) containing high-level data on global allocation of income, taxes and certain other measures of economic activity where turnover is at least EUR 750 million. Purpose to enhance transparency for tax administrations, providing information to conduct transfer pricing risk assessments and transfer pricing audits. UK response UK Government will adopt recommendations in full. Country-by-country reports to be filed for accounting periods starting on or after 1 January UK tax authorities have confirmed existing powers enable them to request provision of the Master File and the Local File from other jurisdictions. 16

17 Action 13 TP documentation and CbCR (2 of 2) European Commission European Commission proposed a form of public CbCR for qualifying companies in the EU. Yet another initiative by EC supplementing, and exceeding, other international developments relating to tax transparency and CbCR. Latest proposal unique in that it provides public CbCR, where qualifying companies must publicly disclose specific tax-related information. Unlike EU Anti Tax Avoidance directive, which needs unanimous approval by the member states, the above proposal only needs a majority vote. 17

18 Thank you for your attention. 18

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