Crackdown on international tax avoidance

16 March 2016

In the wake of the OECD’s release of final Base Erosion Profit Shifting (BEPS) Package last October, the chancellor was quick to demonstrate his commitment to tackling tax avoidance by multinationals.

The government has acted to clamp down on two methods used by multinationals to move profits around the world and erode the UK tax base. These relate to hybrid arrangements and royalty payments.

Hybrid arrangements exploit differences between the rules of different countries to effect a tax benefit such as increased relief for interest. Royalty payments can be used to enable the movement of profits from one country to another.

If all this sounds complicated that is because it generally is – it is unlikely that corporate groups would stumble into these arrangements without realising. Hybrids have been a staple tool of the tax planner for many years particularly in relation to inbound investment from the US due to the peculiarities of the US tax system.

The new hybrid rules come as no surprise and follow consultation on the issue in the wake of action by the G20 and the OECD to tackle international tax avoidance. They will be introduced from 1 January 2017.

The key part of the royalty rule change is that withholding tax will now need to be withheld in relation to intangible property such as brand names and trademarks subject to relief under tax treaties or directives.

Whilst businesses should generally know if they have transactions that fall within the scope of the new rules some, such as subsidiaries of overseas parents of those with valuable intangibles overseas should review their arrangements carefully as historical transactions or structures may be caught.

If you would like to discuss how these announcements might affect you please contact Ken Almand or your usual RSM contact.