The Chancellor reaffirmed the Government’s continued support for the OECD’s work on base erosion and profit shifting (BEPS) and modernisation of the international framework for taxing multinational companies.
Measures in relation to three specific areas are announced – a consultation on hybrid mismatches and the introduction of the OECD’s proposals into UK legislation, a commitment to introduce country-by-county reporting of information to tax authorities for UK multinationals and a newly-announced ‘diverted profits tax’ to counter aggressive tax planning techniques.
The Government has confirmed that the UK will introduce new anti-hybrid rules in line with proposals from the OECD. A consultation document asks for comment on the open areas, in particular focussing on areas where the OECD is undertaking further work such as regulatory hybrid capital for banks and insurance companies, and the implications in relation to dual resident companies. It is expected that UK legislation will be drafted in Autumn 2015, once the OECD has issued its final guidance, and will be included in Finance Act 2016. The measures are expected to take effect from 1 January 2017.
The rules are intended to deal with gaps that arise when a hybrid entity (a company or a partnership) or a hybrid instrument (shares or loans) is taxed in different ways in different countries. The OECD says that multinationals have exploited these differences to achieve tax advantages, for example, tax-deductible interest in one country whilst the equivalent income is not taxed elsewhere. The initial proposal from the OECD in September 2014 called for countries to enact law to remove these advantages. This would be done by countries denying tax relief for payments unless the corresponding income was taxed by the recipient’s country. Should some countries delay or fail to introduce the rule, there would be a secondary approach so that the recipient country would tax otherwise tax-exempt income. However, effective legislation in this area is complex and the OECD is still consulting on some aspects, as well as drafting a detailed Commentary to aid countries with common implementation of the rules.
The Government has reconfirmed its commitment to the OECD’s work on country-by-country reporting of information to tax authorities, and provides for legislation to be introduced in the UK. This will require UK multinationals to provide high level information to HMRC on their global allocation of profits and taxes paid, as well as indicators of economic activity in a country. This will include revenues, profits, taxes paid, employees, capital and tangible assets. The Government expects that this will be introduced with effect from 1 January 2016, for reporting in 2017.
The OECD proposals are intended to give tax authorities better information to help assess whether a group presents a risk that its transfer pricing or other tax matters might be open to challenge, and form part of a wider package involving additional transfer pricing documentation.
Diverted profits tax
The Chancellor announced that a new UK tax will be introduced to counter the use of aggressive tax planning techniques by multinational enterprises to divert profits from the UK. This is aimed at complex business arrangements, particularly in relation to technology businesses. The new tax will apply from 1 April 2015 at a rate of 25%. It appears that this will apply where a company conducts a lot of activity in the UK – such as sales. The Government is not waiting for the OECD to complete its work in relation to modernisation of the international tax framework in respect of digital businesses before introducing changes related to what is perceived as aggressive tax planning by multinationals.
The G20/OECD work on other aspects of BEPS will continue throughout 2015, with final outcomes reported in September and December 2015