The last few years have
seen an unprecedented public interest in the fairness of the tax system. HMRC welcomes that interest, and the opportunity it has given us to set out just what we are doing to deliver a level playing field for all taxpayers, irrespective of their size or structure.
Base erosion and profit shifting (BEPS) gives multinational companies an unfair advantage over their smaller competitors, deprives countries of revenue and undermines public confidence in the tax system. That’s why the UK has played a leading role in the OECD’s project to tackle it.
Aimed at ensuring that profits are taxed where economic activities are carried out and value is added, the BEPS project has brought together all G20 and OECD countries to review international corporate tax rules. Currently, tax laws vary from country to country, allowing multinational companies to pursue aggressive corporation tax mitigation strategies; and the BEPS project aims to address that.
From a UK perspective, we welcome any opportunities to make it harder for multinationals to exploit mismatches in international and domestic tax rules. The UK has moved to historically low corporation tax rates. The rate has fallen from 28% in 2010 to 20% now, and it will reach 18% in 2020; but, as the chancellor has made clear, the taxes that arise have to be paid in full. Accordingly, we’ve been heavily involved in the BEPS project from the outset, and at a UK level the government has introduced anti-avoidance measures like the diverted profits tax (DPT).
From the beginning of the project, HMRC and HM Treasury (HMT) colleagues have committed considerable resources and expertise to make it a success. Senior tax professionals have contributed to the development of the project’s recommendations, taking on board the concerns and views expressed by UK stakeholders, including businesses and NGOs.
Furthermore, we are supporting the work of developing countries to tackle BEPS by providing HMRC experts to work with their revenue authorities. Our Capacity Building Unit has created a team of tax experts to provide expertise to a number of developing countries on international tax priority areas, including BEPS.
In October, the OECD published final reports on the BEPS Action Plan, consolidating the work done on the project so far. The UK has already begun to implement the recommendations from these reports. For example, the government has already announced the introduction of country by country (CBC) reporting and has recently published draft regulations for consultation.
A good flow of global intelligence is vital to HMRC and other tax authorities, as they assess risks to their tax systems from aggressive tax planning. The CbC model is designed to help authorities gather data on the global activities of multinational companies, while minimising administrative costs for businesses.
We work closely with other tax administrations to exchange information through our network of tax treaties in order to address aggressive tax planning and avoidance across borders. HMRC is already part of the expanding Joint International Tax Shelter Information Collaboration (JITSIC) network – a group of more than 30 tax administrations that share data on complex avoidance schemes and structures, involving multinational enterprises and high net worth individuals.
Another example of this international cooperation, complementing the work on BEPS, is the ‘E6’ project. Under this project, HMRC is collaborating with five other tax administrations to share information and intelligence on multinationals operating in the digital economy, and strategies for tackling tax avoidance by the sector.
UK-based multinationals with revenues of £586m or more will have to file an annual CBC report with HMRC in the OECD approved format. The OECD threshold for reporting was set at a level intended to cover multinational enterprises controlling around 90% of corporate revenues, focusing reporting requirements on the areas where the greatest risk lies, while minimising the compliance burdens on businesses generally.
UK multinationals will be obliged to submit CBC data for accounting periods starting on or after 1 January 2016. This data will be a valuable addition to the intelligence and information we already use to assess whether enterprises present transfer pricing or other BEPS-related risks.
In addition to acting on the OECD model for CBC reporting, the UK will introduce the OECD recommended rules to neutralise hybrid mismatches and we have completed a public consultation on their implementation. The rules aim to tackle companies that exploit the differences between countries’ tax rules to avoid paying tax in either country, or to obtain more than one deduction against profits for a single expense.
Moreover, the government has recently published a consultation paper on the tax deductibility of corporate interest expense and has also announced that patent box rules will be adapted to ensure they conform to the new OECD approved approach. In areas such as controlled foreign company (CFC) rules, meanwhile, the UK is already in line with the OECD recommendations.
For HMRC and HMT officials, the BEPS project has required a substantial investment in terms of time and commitment. The UK has, of course, shared many of the aims of the other 60 nations involved in the BEPS project. However, in an area as complex and wide ranging as international tax, it would have been surprising if there hadn’t also been some challenging discussions. The consensus reached over the 15 items set out in the original Action Plan is a considerable achievement and we are encouraged by the positive outcomes captured by the final reports.
There is still work to do at both a domestic and an international level to implement the project’s recommendations and the UK supports further reform in certain areas of international tax.
The transfer pricing guidelines, for example, represent real progress, but we believe there is still some way to go in delivering a fully comprehensive global approach to tackling transfer pricing abuses. The OECD has acknowledged this by planning additional work in this area, something the UK welcomes.
For some of the actions, including limiting base erosion via interest deductions, work is ongoing within OECD working parties to finalise aspects of the reports. Further guidance is expected on how the recommendations would apply to the insurance and banking sectors. Another area in which work will continue well into 2016 is the development of a multilateral instrument to implement the BEPS treaty related measures.
HMRC will be monitoring the implementation and effectiveness of the BEPS project outcomes. This will include the collection of data and maintaining our voice in the OECD’s decision making process. Tax administrations will share information about avoidance by multinationals through the OECD’s Aggressive Tax Planning Directory and this will help HMRC to deliver on our commitment to monitor the effectiveness of the BEPS measures.
Meanwhile, HMRC’s JITSIC team will continue to play a strategic role in ensuring the information gained as a result of measures within the BEPS project is exchanged effectively and that the additional data shared is put to good use.
Taken together, these developments present a powerful and comprehensive range of measures that should go a long way toward delivering greater assurances about the fairness of the tax system.
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