In addition to the changes to the taxation of royalties the Chancellor mentioned in his Budget speech today, there were a number of other tax measures set out in the many documents that were published once he sat down that are of particular interest to multinational companies.
Royalties
With effect from April 2019, withholding tax obligations will be extended to royalty payments, and payments for certain other rights, made to some low or no tax jurisdictions in connection with sales to UK customers. Under current rules, the UK only taxes royalties if they are paid by a company with a UK presence, but the new rules will apply regardless of where the payer is located.
Double tax relief
From today (22 November 2017), a restriction will be introduced to the relief for foreign tax incurred by an overseas branch of a company, where the company has already received relief overseas for the losses of the branch against profits other than those of the branch. This ensures the company does not get tax relief twice for the same loss. The Double Taxation Relief targeted anti-avoidance rule (TAAR) will also be amended to remove the requirement for HMRC to issue a counteraction notice, and extend the scope to ensure it is effective.
Hybrid changes
A number of detailed changes have been announced to the Hybrid and other Mismatches rules. Those in relation to taxes charged at a nil rate and the change in relation to multinational companies, will have effect from 1 January 2018. The remaining changes will have effect from 1 January 2017, which was the original commencement date of the regime.
Revisions have been proposed to:
- make it clear that withholding taxes are to be ignored for the purposes of the regime;
- disregard taxes charged at a nil rate;
- ensure that capital taxes can be taken into account in relation to hybrid instruments, hybrid transfers and CFCs;
- clarify the treatment of entities which are seen as hybrids by some investors but as transparent by others, making it clear that in such cases, any counteraction applied by the regime will be proportional - this should give certainty to those taxpayers (particularly those owned by private equity funds) that have been grappling with this issue;
- clarify the scope of the legislation in relation to multinational companies - we will need to see the draft legislation expected on 1 December to understand what is intended here;
- ensure certain transactions, which do not generate a tax deduction for the payer but give rise to a taxable receipt for the payee, can be taken into account when quantifying certain mismatches;
- confirm that in certain circumstances, income taxable in 2 jurisdictions (dual inclusion income) can be taken into account when applying the imported mismatch rules, aligning the imported mismatch rules with other parts of the hybrid rules
- take into account certain accounting adjustments which effectively reverse, or partially reverse, hybrid mismatches in earlier periods which have been counteracted by the hybrid rules.
Corporate interest restriction
A number of amendments will be made to these rules, some with effect from 1 April 2017 (when the rules commenced) and others from 1 January 2018. Many are technical amendments to correct anomalies in the current legislation, but the first three represent policy changes (all broadly favourable to taxpayers):
- the infrastructure rules, so that the time limit for making an election to be a qualifying infrastructure company is changed to the last day of the accounting period where the election first applies;
- the infrastructure rules, so that a third party which acquires an asset from a qualifying infrastructure company (QIC) is not automatically treated as making an election to be a QIC;
- the definition of a group, to align it with accounting standards and to ensure that asset managers do not cause otherwise unrelated businesses to be grouped together;
- the rules about relevant derivative contract debits and credits to ensure that derivatives hedging a financial trade that is not a banking business are not inappropriately excluded from the rules;
- the calculation of group-EBITDA, to align the treatment of R&D Expenditure Credits with the approach taken in the calculation of tax-EBITDA;
- the infrastructure rules, to ensure that insignificant amounts of non-taxable income do not affect their operation;
- the infrastructure rules, so that the limitation on relief for related party interest cannot be avoided by using a conduit company to provide the finance;
- the administrative rules, so that when an interest restriction return is submitted, companies will be required to amend their company tax returns if their tax position is changed.
Corporate tax & the digital economy
The Government has issued both a position paper and brief on this topic and has clearly announced its intention to take action (both unilaterally and working with like-minded international partners) to ensure that all businesses – both digital and bricks and mortar – operate on a level playing field within the corporate tax system.
Giving effect to the BEPS Multilateral Instrument (MLI) in domestic law
The powers by which double taxation arrangements with other territories are given effect in the UK will be amended to ensure they are sufficient to give full effect to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument or MLI), which the UK was signed in June 2017. The changes will have effect on and after Royal Assent of Finance Bill 2017-18.
Other anti-avoidance measures
- Requirement to notify HMRC of offshore structures – The government will publish a consultation response on the proposed requirement for designers of certain offshore structures, that could be misused to evade taxes, to notify HMRC of these structures and the clients using them. This work will be taken forward in conjunction with the OECD and EU.
- Extending offshore time limits – Assessment time limits for non-deliberate offshore tax non-compliance will be extended so that HMRC can always assess at least 12 years of back taxes without needing to establish deliberate non-compliance, following a consultation in spring 2018.
For further information contact Robin Palmer or Sara-Jane Tovey.
