How will the new BEPS Action 4 interest restriction rules affect UK ATCAs?

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Advance Thin Capitalisation Agreements (ATCAs) are provided in the UK under the Advance Pricing Agreement legislation, to determine in advance the transfer pricing of financial transactions within Part 4 of TIOPA 2010.

The legal basis for ATCAs is provided by the legislation at TIOPA 2010, sections 218 to 230, which provides for Advance Pricing Agreements (APAs) in relation to transfer pricing more broadly.

The ATCA process is initiated by the business, in accordance with TIOPA 2010, section 223, as an application for clarification by agreement of the effect of applying the arm’s length principle to the financial provisions between the business and lenders.

The UK government announced at Budget 2016 that new rules for addressing tax avoidance through interest expenses will be introduced from 1 April 2017 in line with the OECD recommendations under BEPS Action 4.

These new rules will limit the tax relief that large multinational enterprises can claim for their interest expenses (more detail here).

So, how will these new rules affect ‘certainty’ under the ATCA process?

UK ATCAs agreed in the recent years should include a clause warning that new legislation may be enacted which could have an effect on interest deductions, irrespective of the certainty offered by the ATCA. Such new rules will become a reality from 1st April 2017.

However, they do not replace TIOPA 2010, they apply after the application of all other UK legislation that may restrict interest relief, like transfer pricing.

This means that the parties to a current ATCA will still be subject to its terms and conditions, and any interest restriction imposed by the ATCA must be applied before restriction under the new rules.

If a group with a ‘live’ ATCA chooses to restructure its UK debt to minimise the impact of the new rules then there may be grounds for terminating the ATCA, given that the circumstances of the group have changed.

However, the introduction of the new rules is not, by itself, sufficient reason for terminating an ATCA.

Transfer pricing covers more than the amount of interest and it remains to be seen how the arm’s length position interacts with the new rules, but in the meantime and in the absence of significant changes in a group’s circumstances, existing ATCAs remain in force and the ATCA process is still there to give some certainty, although perhaps just not as much certainty as before.

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