Sources: HMRC Consultation Document, 12 May 2106, KPMG response dated 13 May 2016
Following the first consultation the UK government announced at Budget 2016 that new rules for addressing BEPS through interest expenses will be introduced from 1 April 2017 in line with the OECD recommendations.
This is a demonstration of the UK’s commitment to aligning the location of taxable profits with the location of economic activity, and is in line with the UK’s more territorial approach to corporate taxation.
Due to the importance of this issue, it was decided to carry out a second consultation on detailed policy design and implementation, to inform the drafting of Finance Bill 2017. A link to the second consultation document is provided below.
The new rules will limit the tax relief that large multinational enterprises can claim for their interest expenses and the key points following the first consultation are:
- A ’Fixed Ratio Rule’ will limit a group’s UK tax deductions for net tax interest expense to 30% of its taxable EBITDA. However, the group may apply the ‘Group Ratio Rule’, which will be calculated with reference to accounting EBITDA but then applied to a tax EBITDA.
- To ensure the rules are targeted where the greatest risk lies, there will be a de-minimis allowance of £2 million per annum, so groups with net tax interest expense below this will not be affected by the rules. Groups that are not excluded by the de-minimis rule will also be able to deduct net tax interest expense of at least £2 million per annum.
- There will be a modified ‘debt cap’ rule which will cap the interest expense deduction at the global net adjusted interest expense of the group. This will replace an element of the World Wide Debt Cap legislation, which will be repealed.
- The rules will apply to net tax interest expense after the application of all other UK legislation that may restrict interest relief (e.g. transfer pricing (the arm’s length provision) & unallowable purpose).
- There will be provisions to allow the carry forward of excess tax interest (indefinitely) and excess capacity (for three years).
As noted above, due to the importance of this issue it was decided to carry out a second consultation exercise to seek views from all stakeholders on the detailed design of the new rules, to inform the drafting of the legislation for Finance Bill 2017.
The 92 page consultation document sets out the proposed design of the new rules and asks 46 specific questions on which stakeholders’ responses are sought.
All stakeholders are encouraged to respond. The deadline for responses is 4 August 2014 and they should be sent by email to: BEPSinterestconsultation@hmtreasury.gsi.gov.uk.