International tax reform - are we there yet?

12 May 2016

The debate over multinationals’ tax avoidance has been running for several years now, but with so many statements by the OECD, EU and UK Government, it is hard to tell what is a change in the law and what is political posturing about being tough on tax avoidance. Where actually are we?

OECD action plan

In October 2015 the OECD issued an action plan aimed at addressing the problems in the international tax system. The outcome of this so-called BEPS (Base Erosion and Profit Shifting) project represents the most significant change in the international tax environment in decades, and it cannot be stressed enough that it is not just the world’s largest businesses that are affected. The UK Government has been a vehement supporter of the project from the outset, so the UK tax system is already being changed to be consistent with BEPS.

UK response

The Government’s March 2016 Budget confirmed a number of BEPS-related measures would be implemented:

  • Transfer pricing documentation - the UK has had such requirements for many years, although these are not prescriptive. The OECD approach, which is to require a master file for the group and a local file for each specific country, should be considered best practice. To put this beyond doubt, the Government will legislate to update the link between the UK rules and the OECD guidance.
  • Country by country reporting - requirements have been brought in for the very largest groups (over €750m turnover) with effect for accounting periods beginning on or after 1 January 2016. Tax authorities in each country where a group does business will share key facts and figures about the tax paid around the world. The EU announced last month that it will go a step further, with recommendations that elements are put into the public domain.

  • Interest deductibility – the UK rules generally allow financing costs to reduce taxable profit, although there are some restrictions. The OECD’s new approach is to limit tax deductibility based on a percentage of a group’s earnings before interest, taxation, depreciation and amortisation (EBITDA). This is subject to consultation and new rules are expected to apply from 1 April 2017.

  • Patent box – the UK’s regime that can achieve a tax rate as low as 10 per cent on profits from patents is considered harmful and open to abuse, and so is being redesigned. Many companies will still benefit, although the new rules are significantly more challenging to apply. There are also detailed transitional rules, with the new regime applying with effect from 1 July 2016.

  • Hybrid mismatch arrangements – this is a complex area but essentially involves the elimination of tax advantages caused by legal entities or instruments being categorised differently by different tax jurisdictions. New rules to address these will come in from 1 January 2017.

Recent public debate has focused on secrecy and the role of tax havens, so there will be more to come on this. Also, it is important to consider all aspects of the BEPS proposals, not just those already legislated, as they represent the prevailing direction of travel for tax globally.

For further information, please contact Rebecca Reading, or your usual RSM contact.

Base Erosion Profit Shifting - BEPS

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