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This analysis is part of the Lexis®PSL Tax team’s summary of the Autumn Budget 2017. Some of the links require a LexisPSL subscription. If you are not a subscriber, you can take a free trial here.
UK implementation of the BEPS Multilateral Instrument
FB 2018 will amend TIOPA 2010, s 2 (which gives effect to double tax treaties in UK law) with the intention of making it wide enough to encompass the UK’s implementation of the BEPS Multilateral Instrument (MLI). The MLI is an instrument developed as part of the OECD’s BEPS project to enable countries to implement the BEPS measures that require changes to double tax treaties, without having to renegotiate each treaty individually. The UK is a signatory to the MLI but the MLI will not take effect here unless the UK ratifies it under its own legislative procedures.
It is still unclear how, precisely, the UK will implement the MLI under domestic law (given that the MLI amends treaties that take effect in UK law under multiple statutory instruments). One possibility is a ‘super’ statutory instrument to amend all the others, but it is not obvious that TIOPA 2010 currently provides the necessary authority to do this. TIOPA 2010, ss 2 and 6 gives effect to arrangements (which normally means double tax treaties) that provide relief from certain specific taxes. The MLI does not fall comfortably within this description, particularly the MLI provisions dealing with dispute resolution.
The changes to TIOPA 2010, s 2 (and equivalent inheritance tax provisions) announced at Autumn Budget 2017 are intended to widen this provision so that it does provide the necessary authority to implement the MLI. The amendments will provide that the section extends to giving effect to arrangements that operate primarily to restrict relief provided for in existing arrangements and delegate specific functions to competent authorities.
The legislation will take effect from Royal Assent to FB 2018, which under the new Budget timetable is expected to be before the new tax year begins in April 2018. This indicates that the UK does not intend to implement the MLI before that date, at the earliest.
For information on the MLI, see Practice Note: The BEPS Multilateral Instrument — The UK’s position on the MLI.
See: Autumn Budget 2017 (para 3.77), OOTLAR (para 1.46) and TIIN: Double taxation - Powers to implement Multilateral Instrument.
Double taxation relief and permanent establishment losses
The government is introducing a new anti-avoidance provision with immediate effect to prevent UK resident companies from obtaining relief for foreign tax where a foreign permanent establishment (PE) has losses that are relieved against non-PE profits in the foreign jurisdiction.
FB 2018 will introduce new sections 71A and 71B in TIOPA 2010. The effect of the measure is to reduce the amount of ‘foreign tax paid’ (but not below nil) when a company is determining the amount of credit relief or deduction a UK company is entitled to in calculating its corporation tax liability. The reduction applies in circumstances where:
The amount of the reduction is the sum of:
These new provisions are not intended to apply where the hybrid and other mismatches rules counteracts a deduction or allowance that would otherwise be within these new double tax relief rules.
The provisions come into effect for accounting periods beginning on or after 22 November 2017, with straddle periods being divided into two notional accounting periods.
See: Autumn Budget 2017 (para 3.76), OOTLAR (para 1.21) and TIIN, draft legislation and explanatory note: Corporation Tax: double taxation relief and permanent establishment losses.
Double taxation relief: changes to targeted anti avoidance rule
FB 2018 will modify the double tax relief anti avoidance rules in TIOPA 2010, ss 81–95 (referred to by the government as the DTR targeted anti avoidance rule, or TAAR). These rules restrict credit for foreign taxes where a person has entered into a scheme or arrangement that falls within certain statutory definitions and that has as its main purpose, or one of its main purposes, to enable the person to claim more than a minimal amount of foreign tax credits. Where these rules apply, HMRC is entitled to serve a counteraction notice on the person which requires them to amend their tax return for the relevant period.
FB 2018 will make two changes to these rules:
See: OOTLAR (para 1.43) and TIIN, draft clause and draft explanatory notes: Double taxation relief: changes to targeted anti-avoidance rule.
Withholding tax on royalties
FB 2019 will include legislation requiring the deduction of income tax at source in respect of royalty payments made to low or no tax jurisdictions in connection with sales to UK customers. The rules, which will also apply to payments for certain other rights, will apply regardless of where the payer is located.
The government will publish a consultation on 1 December 2017 and the changes will have effect from April 2019.
See: Autumn Budget 2017 (para 3.34), OOTLAR (para 2.7).
Position paper: corporate tax and the digital economy
The government has published a position paper on corporate tax and the digital economy. The paper explores how the international tax framework currently works (reflected in the OECD model tax convention), the challenges to the current framework (including the continued risk of base erosion and profit sharing) and whether the framework is flexible enough to deal with how digital businesses operate and generate value.
The government believes that a multinational group’s profits should be taxed in the countries in which it generates value. It recognizes that many digital businesses that operate in markets through an online platform rely on their users (who may or may not be the business’s consumers) to generate revenue and create value for the business through their active participation in the platform. Examples given include users of a free social media platform that generates revenue from advertising directed at UK users and online marketplaces that generate revenue from matching suppliers and purchasers. This ‘user generated value’ is not captured under the existing international tax framework and the paper suggests that it should be given more weight when allocating profits between countries for tax purposes.
The government intends to push for reforms to the international tax framework and pending such reform, explore interim options to raise revenue from digital businesses that generate value from UK users. It believes that the interim report of the OECD task force on the digital economy (due to be presented next year) should consider these points and outline a multilateral process to resolve them. In the meantime, it suggests exploring a tax on revenues that businesses generate from the provision of digital services to the UK market.
The government is inviting comments on its suggested approach by 31 January 2018.
In order to prevent under taxation the government will also extend UK withholding tax to cover royalties paid, in connection with sales to UK customers, to no or low tax jurisdictions (see: Withholding tax on royalties) and has announced further action to stop online VAT fraud (see: Online VAT fraud).
See: Autumn Budget 2017 (para 3.38), OOTLAR (para 2.64) and Corporate tax and the digital economy: position paper.
Corporate capital gains and foreign branch incorporations
FB 2018 will include a relieving provision, taking effect for disposals of shares or securities on or after Budget Day (22 November 2017), to remove an ‘unintended’ corporation tax charge that can arise following a foreign branch incorporation. The potential charge is a result of the complex interaction between the rules on share exchanges and reconstructions, the substantial shareholdings exemption (SSE), and the rules postponing a tax charge on a foreign branch incorporation (TCGA 1992, s 140).
When a UK company transfers the assets of a foreign branch to a non-UK resident company in exchange for shares in that company, and the assets are standing at a gain, the UK company can make a claim under TCGA 1992, s 140 to postpone the corporation tax that would otherwise arise on that gain. There are a number of subsequent corporate actions which can cause the postponed tax to come into charge, including where the UK company disposes of its shares in the non-UK company. If this disposal takes place as part of a share exchange or reconstruction, this should not be treated as a disposal for these purposes (through the operation of TCGA 1992, ss 127, 135 and 136). However, if the disposal qualifies for the SSE, the SSE rules switch off the ‘no disposal’ treatment, so that potentially the postponed tax comes into charge.
The government describes this outcome as an anomaly and will rectify it by amending the legislation so that ‘no disposal’ treatment applies in these circumstances, irrespective of the SSE rules.
The measure has been introduced following representations from affected businesses. The government has stated that the existing rules are a particular problem for finance businesses that have traditionally operated through a network of foreign branches, and which need to restructure, for example to meet changing regulatory requirements in the territories where they conduct their business.
For background information on the interaction between the SSE and the rules on share exchanges and reconstructions, see Practice Note: Substantial shareholdings exemption—Share exchanges and reconstructions.
See: Autumn Budget 2017 (para 3.35), OOTLAR (para 1.32) and TIIN: Corporation Tax - capital gains assets transferred to non-resident company - reorganisations of share capital.
Offshore trusts: anti-avoidance rules
The government will legislate in FB 2018 to introduce new anti-avoidance rules that relate to the taxation of income and gains accruing to offshore trusts. This measure, originally announced in December 2016, ensures that payments from an offshore trust intended for a UK resident individual do not escape tax when they are made via an overseas beneficiary or a remittance basis user.
The government published a TIIN and draft legislation on 13 September 2017. Although revised legislation has not been published with the Autumn Budget 2017, the OOTLAR states that minor changes have been made to the legislation, including to ensure that the onward gift rules can apply if the close family member rule applies, to clarify the position in the year of the settlor’s death and in relation to onward gifts to multiple recipients. The changes will take effect from 6 April 2018.
See: OOTLAR (para 1.4) and TIIN, draft legislation and explanatory note: Offshore trusts: anti-avoidance (13 September 2017).
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