Multinational avoidance gamble

The Government has reiterated its plans to introduce a new tax on profits diverted from the UK by large companies. This tax, along with other measures on tax transparency and use of losses, is likely to be popular with the electorate but could it deter investment into the UK?

The Chancellor has pursued a policy of reducing the UK corporate tax rate and boasts of it being amongst the lowest of any advanced economy, yet this incentive to investment has had to be balanced by anti-avoidance measures driven by a media and public outcry.

The Diverted Profits Tax (DPT) – dubbed the 'Google Tax' by the media – has been widely criticised; too wide in scope, incompatible with existing tax treaties and generally creating the kind of uncertainty multinational businesses dislike. The Government is pushing ahead however, is this because the measure is a sure fire vote winner? It seems that the Government has listened during the recent consultation process as the rules appear less onerous than originally drafted. Large businesses with international transactions need to urgently review whether the rules will apply to them as the legislation is introduced from 1 April 2015 and features an onerous self reporting obligation and upfront payment mechanism.

Other ‘punches’ the Chancellor threw at multinationals

The Chancellor did not stop at the DPT announcement. He also confirmed that the UK will be legislating to introduce country by country (CbC ) reporting of tax and financial information by large corporates from 2016 and also anti avoidance rules regarding use of losses. The CbC rules will provide tax authorities with far greater transparency over corporate tax affairs and this is a wakeup call that they need to review their transfer pricing strategies and documentation without delay. The loss refresh measures seek to prevent the contrived use of carried forward reliefs and whilst the policy may be aimed at relatively narrow arrangements the scope of the legislation and a purpose test will mean that groups with losses may need to consider whether the measure impacts them.

The three measures support the government’s policy to crackdown on corporate tax avoidance – the question is whether in pleasing the voters they have gone too far and risk reducing inward investment?

If you need any advice on how these announcements might affect you please get in touch.