On January 16, 2018, the U.K. House of Commons Public Bill Committee debated and approved various provisions in Finance Bill 2018, which contains BEPS Action 1, 2, 4, and 15 measures.
Editor’s Note: The legislation is being referred to in the U.K. Parliament as the Finance (No. 2) Bill 2017-19, and HM Treasury is calling it Finance Bill 2017-18.
This concluded the Public Bill Committee stage of the legislation, which will now move to the Commons Report stage. A revised version of the legislation (as amended in the Public Bill Committee) was published on January 16th.
Each BEPS-related measure of the legislation is addressed below.
On December 1, 2017, the U.K. published the first version of Finance Bill 2018, together with explanatory notes.
On December 18 and 19, 2017, the U.K. House of Commons Committee of the Whole House held its readings of Finance Bill 2018.
BEPS Action 1 – Combatting Online VAT Fraud
Clause 38 of Finance Bill 2018 contains measures to counter VAT fraud by online marketplaces proposed in the November 22, 2017 HMRC policy paper. The measures would extend the scope of existing joint and several liability rules to hold an online marketplace jointly and severally liable for:
- Any future VAT that a U.K. business selling goods via the online marketplace fails to account for after HMRC has issued a notice to the online marketplace, ensuring that all sellers are in scope.
- Any VAT that a non-U.K. business selling goods via the online marketplace fails to account for, where the business was not registered for VAT in the U.K., and the online marketplace knew or should have known that the business should be registered for VAT in the U.K.
Additionally, further measures would require online marketplaces to ensure that VAT numbers displayed for third-party sellers on their websites are valid and to display a valid VAT number when they are provided with one by a third-party seller operating on their platform. These requirements will be supported by a regulatory penalty.
The above measures were included in Clause 38 of Finance Bill 2018, and would have effect as of Royal Assent, expected in spring 2018.
BEPS Action 2 – Hybrid Mismatch Rules
Clause 23 and Schedule 7 of Finance Bill 2018 contains amendments to the U.K. hybrid mismatch rules included in the November 22, 2017 HMRC policy paper, which says that most of the hybrid mismatch proposed changes are effective from January 1, 2017 (exceptions are specified below). The proposed amendments intend to do the following, among others:
- Ensure that capital taxes are taken into account in relation to hybrid instruments, hybrid transfers, and controlled foreign companies (CFCs).
- Clarify the treatment of entities viewed as hybrids by some investors, but as transparent by others. In such cases, clarify that any counteraction applied by the regime will be “proportional.”
- Clarify the scope of the rules relating to multinational companies. It is not yet clear exactly what this entails.
- Account for certain transactions that do not generate a tax deduction for the payer but give rise to a taxable receipt for the payee. This amendment will ensure that such transactions are taken into account when quantifying certain mismatches.
- Confirm that, in certain circumstances, income taxable in two jurisdictions (dual inclusion income) will be taken into account. This will ensure that those rules are aligned with the other provisions of the hybrid mismatch regime.
- Account for certain accounting adjustments that effectively reverse, or partially reverse, hybrid mismatches in earlier periods that have been counteracted by the application of the hybrid mismatch rules.
On November 16, 2017, Finance (No. 2) Act 2017 received Royal Assent, and was published on November 20, 2017. Section 24 of the legislation introduced hybrid mismatch rules, which amended the hybrid and other mismatch regime contained in Part 6A of the Taxation (International and Other Provisions) Act 2010 (TIOPA).
These amendments include the following minor changes: (1) The first change clarifies that the regime is intended to apply by reference to the relevant national, as opposed to local, tax by providing that local taxes are not treated as foreign taxes for purposes of the regime (with effect from July 13, 2017); (2) the second change removes the need for a formal claim in relation to permitted taxable periods for certain mismatches involving hybrid financial instruments (with effect from January 1, 2017); (3) the third change disregards deductions for amortization in relation to the hybrid mismatch regime (with effect from January 1, 2017).
BEPS Action 4 – Interest Restriction Rules
Clause 24 and Schedule 8 of Finance Bill 2018 contains measures to amend U.K. rules restricting corporate interest deductions.
Presently, the U.K. restriction rules define a “non-consolidated subsidiary” as a subsidiary (within the meaning of international accounting standards (IAS)) of another entity that, if this entity were required to measure its investment in the subsidiary, would be required to do so using fair value. Finance Bill 2018 is to extend this from January 1, 2018 (with straddling periods split for these purposes) to include a subsidiary of another entity that, if this entity were required to measure its investment in the subsidiary, would be required to do so on the basis that it were an asset “held for sale” within the meaning of IAS.
On January 9, 2018, HM Treasury issued amendments to the provisions in Clause 24 and Schedule 8 to Finance Bill 2018.
Section 20 and Schedule 5 of Finance (No. 2) Act 2017 introduced interest expense limitation rules, in a new Part 10 in the TIOPA. The measures introduced a restriction on the amount of interest and other financing amounts that a U.K. company can deduct in computing its profits for corporation tax purposes.
The measures entered into force retroactively from April 1, 2017, and implemented the BEPS Action 4 recommendations as follows, among others:
- Worldwide group basis for each period of account of the group’s ultimate parent. Applies to the net interest expense within the charge to U.K. Corporation Tax, including other similar financing costs. Groups with less than £2 million of net interest expense within the scope of Corporation Tax per year will not need to apply the rules. All groups will continue to be able to deduct current period net interest expenses and similar financing costs up to that amount.
- Fixed ratio method will limit the amount of net interest expense that a worldwide group can deduct against its taxable profits to 30% of its taxable earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Group ratio method will allow a “group ratio” to be substituted for the 30% figure. The group ratio will be based on the net interest expense to EBITDA ratio for the worldwide group based on its consolidated accounts. Interest payable to shareholders and other related parties, and interest on instruments with equity-like features, is not reflected in the group ratio.
- Address timing differences between interest expense and EBITDA. Amounts of restricted interest can be carried forward indefinitely. They can be deducted in a later period to the extent there is sufficient interest allowance. Unused interest allowance can be carried forward for up to five years.
- Special rules with respect derivatives, double taxation relief, and the U.K. patent box.
BEPS Action 15 – BEPS MLI
The measures, which would amend Section 2 of the TIOPA and Section 158 of the Inheritance Tax Act 1984, would allow the U.K. to complete the necessary domestic procedures to bring the BEPS MLI into force. The provisions would have effect from Royal Assent to the Finance Bill 2018.
On January 16, 2018, the U.K. House of Commons Public Bill Committee debated and approved various provisions in Finance Bill 2018, including the measures in Clause 32. According to the U.K. Financial Secretary to the Treasury, Mel Stride, Clause 32 of the legislation merely clarifies the existing power for giving effect to U.K. international tax agreements, which ensures that Parliament can implement the BEPS MLI, if it so chooses.
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