International corporate taxes
Click on the headlines below to navigate our international corporate tax analysis from the Autumn Budget:
Digital Services Tax
Diverted Profits Tax
EU Disclosure of Tax Avoidance Schemes
Further to the consultation document issued earlier this year, the Government has announced an intention to move forward unilaterally with a Digital Services Tax (DST). The Government’s view is that while coordinated global action to the reform of the taxation of largely digital businesses is preferred, progress at a multi-lateral level has been too slow.
The measure introduces a 2% tax from 1 April 2020 on revenues derived from certain business activities. The in-scope business activities are search engines, social media platforms and online marketplaces, where those activities are linked to the participation of UK users. There will be a £25m allowance, and the tax will only apply to businesses who generate revenues from in-scope activities of more than £500m per annum. The proposed measures include a safe harbour to protect loss-making businesses or businesses with very low profit margins, from the scope of the tax. The tax is very likely to be outside the scope of existing tax treaties.
The Government will consult on the detailed design of the measure and legislate in the Finance Bill 2019-20. The Government has stated that it will monitor progress of the debate on the taxation of digital enterprises at the global level, and will only apply the DST until a global solution is identified.
Reform of the UK Intangible Fixed Assets provisions
Earlier this year, the Government issued a consultation document on the potential reform of the UK’s regime for the taxation of intangible assets in order to make the regime more competitive and easier to administer. There are two notable changes arising from that consultation in this year’s Budget that will be welcomed.
Reform of the amortisation rules for goodwill
A restriction on the ability to amortise goodwill for UK corporation tax purposes on the acquisition of a business was introduced with effect from July 2015. The Government proposes that tax relief will be available for the amortisation of goodwill on the acquisition of businesses with eligible intellectual property with effect from 1 April 2019.
Reform of the de-grouping rules
In common with the chargeable gains regime, the intangible fixed asset regime provides for a de-grouping charge if a company leaves a group holding an asset that was transferred to it on a tax neutral basis in the prior six-year period. However, the intangibles fixed asset regime had not been reformed at the same time as the chargeable gains regime. This was to enable the exemption of this de-grouping charge from tax where the company that holds the asset at the time of the de-grouping qualifies for the substantial shareholding exemption. The rules will now be aligned, which should enable a more flexible approach to transact the carve-out, sale and purchase of businesses.
Taxation of offshore receipts in respect of intangible property
At Autumn Budget 2017, the Government had announced an intention to tax income derived from intangible property held in low-tax jurisdictions to the extent that it related to UK sales. The announcement confirms that these provisions will take effect from 1 April 2019. However, collection of the tax will be by direct assessment on the owner of the intangible property, rather than via a withholding tax on payments made to the intangible property-owning company by other persons.
Also, the scope will be broadened to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties. De minimis thresholds and exemptions will be introduced, including a de minimis threshold for UK sales of £10m, an exemption for income that is taxed at what is deemed to be an acceptable rate and an exemption where the intangible property owner is considered to have sufficient local substance. In common with other similar provisions introduced in recent years, there will be anti-avoidance provisions targeted at arrangements that seek to circumvent the application of these rules.
The EU Anti-Tax Avoidance Directive (ATAD) sets out minimum standards across a range of anti-avoidance measures that Member States are obliged to implement.
Legislation will be included in the Finance Bill 2018-19 to make clear that diverted profits will be taxed under either Diverted Profits Tax (DPT) or corporation tax provisions, but not both. The changes will also stop a planning opportunity from amendments being made to a company’s corporation tax return after the review period has ended and the DPT time limit has expired.
In addition, changes will also be made to:
- Extend the “review period”, the period where HMRC and the taxpayer work together to determine the extent of diverted profits, from 12 months to 15 months;
- Extend a company’s right to amend their corporation tax return to include diverted profits to the first 12 months of the review period
- Make clear that diverted profits liable to DPT can be reduced by amendment to the company’s corporation tax return during the first twelve months of the review period.
Change to the UK definition of permanent establishment
The Organisation for Economic Development and G20 Base Erosion and Profit Shifting project, published the Action 7 Report “Preventing the Artificial Avoidance of Permanent Establishment Status” in October 2015. The report recommended changes to Article 5 of the Model Tax Convention (MTC) that are included in the 2017 version of the MTC.
One of the changes is an anti-fragmentation rule, which the Government has now confirmed the UK will adopt in its tax treaties through the Multi-Lateral Instrument signed in June 2017.
The purpose of the anti-fragmentation rule is to prevent a foreign business from fragmenting complementary functions, otherwise forming part of a cohesive business operation, between locations or among related companies. This was previously used by companies to claim that each of the fragmented operations were preparatory or auxiliary and did not create a permanent establishment in the UK. The new rule requires the activities to be considered together to determine whether a permanent establishment exists.
The Finance Bill 2018-19 will include minor changes to the existing UK rules for hybrid mismatches.
The changes include:
- Specific provisions requiring the UK to counteract arrangements relating to permanent establishments of a company recognised by the jurisdiction where it is resident but not by the jurisdiction where the permanent establishment is situated.
- The current exemption for regulatory capital will be amended to enable regulations to be made which can provide for a revised definition of regulatory capital. The current exemption for regulatory capital will remain in place until the new regulations come into force.
The changes will be effective from 1 January 2020.
Controlled Foreign Company rules
As originally announced on 6 July 2018, in the Finance Bill 2018-19, the Government will now legislate to make two changes to the Controlled Foreign Company (CFC) rules. These changes relate to the definition of control and the treatment of certain profits generated by UK activity, and will ensure that the UK CFC rules comply with Council Directive (EU) 2016/1164, also referred to as the EU Anti-Tax Avoidance Directive (ATAD). The changes will take effect from 1 January 2019.
Corporate Tax Exit Charges
There have been no further changes to the announcement made on 6 July 2018.
The impact of BREXIT on all these provisions will need to be monitored. The outcome of ongoing negotiations will determine what arrangements apply in relation to EU legislation once the UK has left the EU.
If you have further questions on any of our analysis, please contact us.
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