The Chancellor today announced three key measures to help the UK tackle Base Erosion and Profit Shifting (“BEPS”). The measures signal the first concrete BEPS related measures intended to be adopted into domestic legislation. The measures are part of the UK Government’s efforts to strengthen anti-avoidance measures and in the process promote fairness in tax matters. The measures are summarised below with more to follow as details become available.
(i) ‘Tech Tax’
Arguably the most controversial measure, and the one most likely to attract the most public attention, is a new tax called the Diverted Profits Tax (“DPT”) which is intended to counter the use of aggressive tax planning techniques by multinational enterprises to divert profits from the UK. Today’s announcement is that the DPT will be applied using a rate of 25% from 1 April 2015 at a time when the mainstream corporate tax rate will be 20%. The tax (already being dubbed as the ‘Google’ tax in the press) is seen as a measure aimed at curbing aggressive tax avoidance by technology companies. It will be interesting to see how this tax will be implemented in practice as details are not yet available. It presumably seeks to tackle avoidance not already caught by the CFC and transfer pricing regimes. One option could be for the UK to extend the reach of the Permanent Establishment rules (“PEs”) and to tax any resulting attribution at the DPT rate of 25%. Whatever the mechanism, it is clear that technology companies with UK revenue streams may have to re-consider how they are structured in light of this development.
(ii) Country-by-Country Reporting
The Chancellor also announced that legislation will be introduced that gives the UK the power to implement the OECD model for country-bycountry reporting. This will require multinational enterprises 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. The most interesting aspect of this change is that it will effectively introduce prescriptive transfer pricing documentation in the UK and this will be a major cultural change for multinational enterprises caught by the new documentation requirements. Multinational enterprises are advised to start reviewing their documentation in light of this impending change to ensure consistency and transparency in their global tax reporting.
(iii) Hybrid Mismatches
The third BEPS related measure announced today pertains to proposals to address hybrid mismatch and dual resident company arrangements to prevent multinational enterprises avoiding tax through the use of certain cross border business structures or finance transaction. Please see Matthew Wentworth-May’s forthcoming blog on hybrid mismatches for more details.
For more details on BEPS please see visit our dedicated BEPS blog.