THE GOVERNMENT’S latest wide-ranging plan to prevent tax leakage from multinational corporations will be difficult to police, judging by the contents of the rather hefty draft 2015 Finance Bill, which runs to 552 pages of draft clauses and 226 of explanatory notes.
A holiday read it is not.
The two-pronged measure focuses on transactions where the main purpose is to drive down tax liabilities, but many are concerned over its impact on commercially-based planning and the unilateral nature of the move, which comes outside of the OECD’s plan to deal with base erosion and profit-shifting (BEPS).
The first test targets multinationals using a “conduit structure” through jurisdictions which have double-tax treaties with low-tax nations. These enable the companies to potentially escape UK corporation tax altogether on almost all their profits.
The second targets those with arrangements with so-called tax havens to avoid tax which can then be repatriated by the multinational to its tax base. If either of those criteria is satisfied, then the UK will apply a 25% levy to profits generated in the UK by the multinational.
“The regulations are wide-ranging and the focus is on multinational groups and transactions where the main purpose (or one of the main purposes) is to avoid a charge to corporation tax,” Duff & Phelps transfer pricing managing director Shiv Mahalingham told Accountancy Age.
“While this should ensure commercially-based planning is not impacted, businesses are going to need allocate resource to examining this new area of legislation to ensure that there is no duty to notify HMRC if they are potentially within the scope of the tax. It will be necessary to demonstrate that any UK entity has sufficient economic substance and there is an exemption for businesses with UK sales less than £10m.”
CBI director-general John Cridland criticised the move “which will be complex to apply”.
“If other countries follow suit businesses will have a patchwork of uncoordinated unilateral rules to navigate, which risks undermining the whole OECD approach,” he said.
“International tax rules are in urgent need of updating but there is already an OECD process underway to do this. It is unfortunate that the UK has decided to go it alone with a Diverted Profits Tax, outside this process, which will be a real concern for global businesses.”
Both politically and practically troublesome, then.
Thankfully, there is a few months’ grace period during which plenty of advisers will make representations to aid the functionality of £350m levy.
The political damage at international level, though, is less easy to gauge.
It’s safe to say the consensus is such a unilateral move will not play well with the OECD with around a year left to run on the BEPS project. Businesses value stability and simplicity, and running a dual, patchwork system is far from conducive to that.
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