Budget 2016: Business tax road map tackles multinational tax avoidance

The government has published a policy paper setting out its plans for the Business tax road map announced by the Chancellor at Budget 2016, which indicates a new approach to business tax for the parliament, which will tackle avoidance issues relating to multinational corporations, including interest deductibility, hybrid mismatches, withholding tax on royalty payments and treatment of losses, bringing £7,920bn into the Treasury's coffers

The government said in its policy paper that the new approach will give businesses the ‘clarity they need to invest with confidence’.

Announcing the plans, Chancellor George Osborne said: ‘They will deliver a low tax regime that will ‘attract the multinational businesses we want to see in Britain, but ensure that they pay taxes here too. And it will level the playing field, which has been tilted against our small firms.’

The new approach has been led by best practice set out by the OECD and concludes key areas of tax policy that have been under review, including business rates, business energy efficiency taxation, as well as the UK’s response to the outputs of international work on base erosion and profit shifting.

The paper sets out significant reforms, which include measures to reduce tax rates to drive growth, including supporting small business; build on progress from the last parliament to tackle avoidance and aggressive tax planning and ensure a level playing field and to simplify and modernise the tax regime.

Interest deductibility bring £3,9bn 

As of 1 April 2017, the Treasury is to limit the level of corporation tax deductions for interest expense that can be offset against profits to 30% of a group’s EBITDA. Alongside this, a group ration rule based on the net interest to EBITDA ratio for the worldwide group will also be introduced. The new rules will also include a £2m de minimis threshold, exclusion for public benefit projects, carry-forward/back rules to deal with volatility in interest expense and EBITDA, and changes to simplify and integrate the worldwide debt cap into the new interest restriction rules.

Hybrid mismatch rules raise £950m 

Hybrid mismatch rules are also in scope with a new measure, effective from 1 January 2017, to eliminate the tax advantage arising from multinationals’ use of arrangements involving permanent establishments. The measure extends the scope of the hybrid mismatch measures announced at Autumn Statement 2014 and includes mismatches from hybrid financial instruments and hybrid entities, hybrid transfers, dual resident companies.

Royalties witholding tax to bring in £730m

Rules governing the deduction of income tax at source from payments of royalties will also be extended, and will effectively deny the benefit of a tax treaty as it applies to royalty payments between connected parties where arrangements have been put in place, one of whose main purposes is to secure a benefit that is not in accordance with the object and purpose of the treaty. This part of the measure will apply to payments made on or after 17 March 2016.

Offshore property developers to bring £2,2bn

Offshore property developers have been netted by the Treasury’s new measures to ensure that trading profits from developing UK land are always subject to UK tax. New rules, effective from the Report Stage of Finance Bill 2016, will ensure that the full profits of such activities will be taxed.

Commenting on the paper, Michelle Quest, head of tax at KPMG said that the Chancellor's announcements reinforced the message that the UK wants international business to come to the country, but to ensure that it pays an appropriate amount of tax.

'Key changes announced include the further reduction of the headline corporation tax to reach 17% by April 2020, measures to tackle tax avoidance and evasion, changes to interest rate relief, as well as a Business Tax Roadmap.

'Under review are measures such as withholding tax on royalty payments in order to tackle avoidance in relation to overseas royalty payments, as well as the Double Taxation Treaty Passport. Additionally, the Substantial Shareholdings Exemption regime will be reviewed to make sure it is delivering on its original policy objectives whilst ensuring that the regime is simple, coherent and operating in a manner that keeps the UK internationally competitive.

'The treatment of corporate tax losses will also be modernised, so that they can be used more flexibly, but that losses can only be used against 50% of the profits generated each year; in banking, the 50% loss restrictions already in force will be further reduced to 25%.

'These latest announcements reinforce the commitments the UK Government has made as an early adopter of the OECD’s BEPS proposals, whilst encouraging further investment in the UK by overseas businesses. This is a delicate balancing act, but the announcement of a Business Tax Roadmap will help to give businesses the visibility and predictability in relation to the tax system that they are demanding,' she said.

Business rates cut

From April 2020, taxes for all rate paying businesses will be cut through a switch in the annual indexation of business rates from RPI to be consistent with the main measure of inflation, currently CPI, in line with the government’s previous commitment to consider moving the indexation of indirect taxes from RPI once fiscal consolidation is complete. This represents a business rates cut every year from 2020. In 2020-21 alone it is worth £370 million to businesses and the benefit will grow significantly thereafter.

Administration of business rates through digital tax accounts

In addition to revaluing properties more frequently to ensure it is easier for businesses to pay taxes due, the government will transform business rates billing and collection.

By 2022, local authority business rate systems will be linked to HMRC digital tax accounts so that businesses can manage their rates bills in one place alongside other taxes. As a first step, the government will work with local authorities across England to standardise business rate bills and ensure ratepayers have the option to receive and pay bills online by April 2017.

The Treasury announced it would build on previous measures to tackle avoidance and aggressive tax planning and ensure a level playing field by:

  • Limiting the level of deductions for interest expense that can be offset against profits to 30% of a group’s earnings; targeting the measure by introducing a group ratio rule, an exemption for public benefit infrastructure and a £2m de minimis threshold;
  • Eliminating the tax advantage arising from multinationals’ use of hybrid mismatch arrangements involving permanent establishments;
  • Extending the UK’s withholding tax rights over royalties; and
  • Ensuring non-resident property developers pay tax in the UK on profits they make in the UK

Implementing OECD's BEPS measures

Following endorsement of the BEPS outputs by G20 leaders in November 2015, the government is taking forward this work as set out below.

Action 1 (Digital economy): work to update the threshold at which a company becomes taxable in a foreign country and updates to the transfer pricing guidelines to take into account technological advances will address many of the tax challenges with the digital economy. However, in the context of the rapid development of new digital technologies and business models, the government will continue to work with international partners to determine whether any supplementary rules to tackle specific tax challenges are necessary and participate in future work at the OECD.

Action 2 (Addressing hybrid mismatches):

The government has taken swift action to introduce the OECD agreed rules to address hybrid mismatch arrangements in Finance Bill 2016 from 1 January 2017. The new rules will prevent multinational enterprises avoiding tax through the use of certain cross-border business structures or finance transactions that exploit differences between countries’ tax rules.

Action 3 (Controlled Foreign Companies (CFC) rules):

The UK modernised its CFC rules in 2012 after an extended period of consultation to ensure that they are fit for the global economy and effective at preventing the artificial diversion of UK taxable profits to low-tax subsidiaries. The UK CFC rules, which reflect a more territorial approach to taxation, synthesise elements from a number of the approaches covered by the BEPS report, and no amendments are being considered as a result of the BEPS project.

Action 4 (Interest deductibility):

Restriction on the tax deductibility of corporate interest expense consistent with the OECD recommendations from 1 April 2017.

Action 5 (Intellectual property):

New rules to reform the Patent Box in Finance Bill 2016, so that this is consistent with the nexus approach agreed through the OECD BEPS project, which links benefits to the level of R&D investment undertaken.

This will ensure the Patent Box continues to provide an incentive for the development and commercialisation of IP in the UK. The effectiveness of this relief will continue to be reviewed in light of wider changes. Specifically, the government will keep under review the case for reducing the current 10% tax rate available under the Patent Box, alongside the currently scheduled reductions in the main rate of corporation tax.

Actions 8-10 (Transfer pricing guidelines):

The government has swiftly legislated in Finance Bill 2016 to update the current link in the UK’s transfer pricing rules to these guidelines, to incorporate the revisions which were agreed as part of this action.

This maintains the link between the UK rules and the most current internationally agreed consensus on the practical application of transfer pricing principles. The UK continues to participate in the ongoing work at the OECD in this area to further develop these guidelines and continues to call for targeted measures to be introduced to protect them from abuse.

Action 11 (Analysis of BEPS):

This will improve access to new and existing data to allow countries better to analyse risks. Data will be presented in an internationally consistent way, while still maintaining taxpayer confidentiality.

Simplifying tax regime

The government will also simplify and modernise the tax regime by:

  • Simplifying the business energy tax regime: abolishing the CRC energy efficiency scheme, and offsetting the costs through an increase in the Climate Change Levy
  • Modernising the corporation tax rules on losses, making the system more flexible for business, while ensuring that companies pay tax when they make profits in excess of £5m
  • Reforming Stamp Duty Land Tax (SDLT) on non-residential property transactions to reduce distortions, cutting the tax for many businesses purchasing property
  • Allowing businesses, the self-employed and landlords to adopt pay-as-you-go tax payments, enabling them to choose payment patterns that suit them and better manage their cashflow
  • Improving HMRC’s customer service including introducing a dedicated phone service for businesses filing and paying their taxes for the first time, offering a 7-day a week service on tax credit phone lines and new investment to cut call waiting times

Policy paper details

To read the policy paper on the Business Tax Road Map in full, go here

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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