The OECD’s current review of the international corporate tax system will include consideration of the tax treatment of cross-border interest payments, the government said in a House of Lords written answer published yesterday. Lord Myners had asked the government whether it had any plans to ‘to review or limit the deductibility for corporation tax purposes of interest paid by UK companies to offshore owners and affiliates’.
Lord Deighton, commercial secretary to the Treasury, said: ‘The UK tax system gives deductions for interest as a business expense. This is in accordance with international accounting standards and in line with most countries affiliated with the OECD. The government keep all taxes under review.’
He added: ‘The OECD work on base erosion and profit shifting will include consideration of rules on the treatment of cross-border interest payments.’
The OECD will report to G20 finance ministers next month. Writing in Tax Journal last November, Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration said: ‘It appears that corporate tax policy, and in particular its international aspects, may need a new approach.
‘Some rules and their underlying policy were built on the assumption that one country would forgo taxation as the other would then be able to exercise it. That is not always the case and the profits may end up in a third, low or no tax, country.’
Earlier this month a Financial Times editorial, noting that David Cameron had signalled an intention to use the UK’s G8 presidency to seek multilateral co-operation on making corporate taxation ‘more effective’, suggested that there were things countries could do unilaterally ‘to make this tax less optional’.
It said: ‘For instance, a hard limit on the deductibility of payments to foreign affiliates, including the interest paid on intra-group debt, would make it harder for multinationals to shift profits to low-tax jurisdictions.’
Catherine McKinnell, Labour’s shadow exchequer secretary, has asked the government what assessment it has made of ‘the level of tax avoided by multinational corporations trading in the UK via the use of inter-company loans’.
In a Commons written answer published last week, exchequer secretary David Gauke said: ‘In line with international accounting standards and like most OECD countries’ tax systems, UK tax rules recognise the distinction between debt and equity and give deductions for interest as a business expense.’
There was ‘potential’ for some businesses to seek to exploit the UK's rules for avoidance purposes, he said, but there were no statistics to measure the impact of ‘attempted avoidance by reference to the use of inter-company loans’.
Gauke then listed ‘a variety of defences’ available to HMRC to protect against excessive deductions for interest:
‘The worldwide debt cap, which limits the total tax deductions for interest that the UK part of a worldwide group can claim; transfer pricing rules which disallow interest deductions in excess of what would be paid to an independent lender and on borrowing in excess of what the company would or could borrow; anti-arbitrage rules which tackle artificial asymmetric arrangements for intra-group payments and receipts; disguised interest rules for arrangements giving a return economically equivalent to interest; unallowable purpose rules which prevent a deduction for interest on a loan that does not have a commercial purpose; and withholding tax on interest (where not ceded or reduced under a double tax agreement).’
The disclosure of tax avoidance scheme (DOTAS) provisions for marketed tax avoidance schemes cover schemes that seek to exploit the UK rules in respect of inter-company loans, he added.
The OECD’s current review of the international corporate tax system will include consideration of the tax treatment of cross-border interest payments, the government said in a House of Lords written answer published yesterday. Lord Myners had asked the government whether it had any plans to ‘to review or limit the deductibility for corporation tax purposes of interest paid by UK companies to offshore owners and affiliates’.
Lord Deighton, commercial secretary to the Treasury, said: ‘The UK tax system gives deductions for interest as a business expense. This is in accordance with international accounting standards and in line with most countries affiliated with the OECD. The government keep all taxes under review.’
He added: ‘The OECD work on base erosion and profit shifting will include consideration of rules on the treatment of cross-border interest payments.’
The OECD will report to G20 finance ministers next month. Writing in Tax Journal last November, Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration said: ‘It appears that corporate tax policy, and in particular its international aspects, may need a new approach.
‘Some rules and their underlying policy were built on the assumption that one country would forgo taxation as the other would then be able to exercise it. That is not always the case and the profits may end up in a third, low or no tax, country.’
Earlier this month a Financial Times editorial, noting that David Cameron had signalled an intention to use the UK’s G8 presidency to seek multilateral co-operation on making corporate taxation ‘more effective’, suggested that there were things countries could do unilaterally ‘to make this tax less optional’.
It said: ‘For instance, a hard limit on the deductibility of payments to foreign affiliates, including the interest paid on intra-group debt, would make it harder for multinationals to shift profits to low-tax jurisdictions.’
Catherine McKinnell, Labour’s shadow exchequer secretary, has asked the government what assessment it has made of ‘the level of tax avoided by multinational corporations trading in the UK via the use of inter-company loans’.
In a Commons written answer published last week, exchequer secretary David Gauke said: ‘In line with international accounting standards and like most OECD countries’ tax systems, UK tax rules recognise the distinction between debt and equity and give deductions for interest as a business expense.’
There was ‘potential’ for some businesses to seek to exploit the UK's rules for avoidance purposes, he said, but there were no statistics to measure the impact of ‘attempted avoidance by reference to the use of inter-company loans’.
Gauke then listed ‘a variety of defences’ available to HMRC to protect against excessive deductions for interest:
‘The worldwide debt cap, which limits the total tax deductions for interest that the UK part of a worldwide group can claim; transfer pricing rules which disallow interest deductions in excess of what would be paid to an independent lender and on borrowing in excess of what the company would or could borrow; anti-arbitrage rules which tackle artificial asymmetric arrangements for intra-group payments and receipts; disguised interest rules for arrangements giving a return economically equivalent to interest; unallowable purpose rules which prevent a deduction for interest on a loan that does not have a commercial purpose; and withholding tax on interest (where not ceded or reduced under a double tax agreement).’
The disclosure of tax avoidance scheme (DOTAS) provisions for marketed tax avoidance schemes cover schemes that seek to exploit the UK rules in respect of inter-company loans, he added.
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