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.
Hybrid mismatches
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.
Country-by-country information
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
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.