Global minimum corporate tax rate: A direct hit on the UK’s creative industries?
05 October 2022
The UK’s creative industries are booming, but could a new global minimum corporation tax rate threaten them? It shouldn’t, but the sector needs certainty.
A record £5.6bn was spent on film and TV production in the UK in 2021, according to the British Film Institute. Studio space is at a premium, and industry behemoths such as Netflix, Disney, NBC Universal and Amazon continue to expand their UK footprints.
Similarly, the UK video games development sector is experiencing record levels of investment and employment. Research by TIGA (a trade association representing the UK video games industry) estimates the game development sector’s annual contribution to UK GDP at almost £3bn.
The tax reliefs available to businesses in the creative sector make a key contribution to this success story, enabling up to 20% of qualifying film, TV or video game production costs to be reclaimed. In the year to 31 March 2022, over £1bn of government support was paid out under these tax reliefs, supporting the industry’s rapid growth. Could this growth be jeopardised by proposals on a global minimum corporate tax rate?
The proposals for a global minimum corporation tax rate, also known as “pillar two”, are a set of rules designed by the Organisation for Economic Cooperation and Development (OECD) to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on the income gained in each jurisdiction they operate in. The rules would impose a 15% global minimum tax rate on MNEs with worldwide turnover in excess of €750m, which could result in a “top-up tax” being levied where an MNE’s effective tax rate in a jurisdiction falls below this. The government has published draft legislation that would, if it becomes law, have these proposals take effect for accounting periods beginning on or after 31 December 2023.
The draft rules are lengthy and highly complex, and are based on the model rules drawn up by the OECD. Implementing the rules successfully will be challenging, as to be effective they require a degree of consistency and co-operation between different countries.
The key uncertainty is whether film, TV and gaming companies claiming creative industry tax reliefs in the UK could find the resulting benefits clawed back by top-up taxes that arise as a consequence of pillar two. This could partially negate the benefit of these UK reliefs and negatively impact the attractiveness of the UK as a location for such activities. That would mean fewer films, TV programmes and games being produced here.
The good news is that such unintended consequences have been considered in the draft rules, which exclude “qualified refundable tax credits” from the effective tax rate calculations. This means that where tax reliefs fall within this defined term, the top-up taxes will not increase and so the reliefs should still operate as intended.
The OECD’s definition of a refundable tax credit is, broadly, a tax credit that is not limited by the tax liability of the company. To be “qualifying” it must be receivable in cash, cash equivalents or through a reduction in a tax liability within four years. The key question is whether the UK’s various creative industries’ tax reliefs would meet this definition. The extent to which they will is currently unclear, particularly given that there remains considerable uncertainty as to how each jurisdiction will apply the rules. The impact could be significant if these reliefs are not regarded as qualifying refundable tax credits.
It is important that the government ensures that the global minimum tax rate proposals do not jeopardise the success of our creative industries. It should seek to ensure that the status of the creative sector reliefs as qualifying refundable tax credits is clarified as soon as possible, to allow large MNEs that operate in the creative sector to plan accordingly.
If you would like to discuss these changes further, please speak to your usual RSM contact, or Graham Steele.
A record £5.6bn was spent on film and TV production in the UK in 2021, according to the British Film Institute. Studio space is at a premium, and industry behemoths such as Netflix, Disney, NBC Universal and Amazon continue to expand their UK footprints.
Similarly, the UK video games development sector is experiencing record levels of investment and employment. Research by TIGA (a trade association representing the UK video games industry) estimates the game development sector’s annual contribution to UK GDP at almost £3bn.
The tax reliefs available to businesses in the creative sector make a key contribution to this success story, enabling up to 20% of qualifying film, TV or video game production costs to be reclaimed. In the year to 31 March 2022, over £1bn of government support was paid out under these tax reliefs, supporting the industry’s rapid growth. Could this growth be jeopardised by proposals on a global minimum corporate tax rate?
The proposals for a global minimum corporation tax rate, also known as “pillar two”, are a set of rules designed by the Organisation for Economic Cooperation and Development (OECD) to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on the income gained in each jurisdiction they operate in. The rules would impose a 15% global minimum tax rate on MNEs with worldwide turnover in excess of €750m, which could result in a “top-up tax” being levied where an MNE’s effective tax rate in a jurisdiction falls below this. The government has published draft legislation that would, if it becomes law, have these proposals take effect for accounting periods beginning on or after 31 December 2023.
The draft rules are lengthy and highly complex, and are based on the model rules drawn up by the OECD. Implementing the rules successfully will be challenging, as to be effective they require a degree of consistency and co-operation between different countries.
The key uncertainty is whether film, TV and gaming companies claiming creative industry tax reliefs in the UK could find the resulting benefits clawed back by top-up taxes that arise as a consequence of pillar two. This could partially negate the benefit of these UK reliefs and negatively impact the attractiveness of the UK as a location for such activities. That would mean fewer films, TV programmes and games being produced here.
The good news is that such unintended consequences have been considered in the draft rules, which exclude “qualified refundable tax credits” from the effective tax rate calculations. This means that where tax reliefs fall within this defined term, the top-up taxes will not increase and so the reliefs should still operate as intended.
The OECD’s definition of a refundable tax credit is, broadly, a tax credit that is not limited by the tax liability of the company. To be “qualifying” it must be receivable in cash, cash equivalents or through a reduction in a tax liability within four years. The key question is whether the UK’s various creative industries’ tax reliefs would meet this definition. The extent to which they will is currently unclear, particularly given that there remains considerable uncertainty as to how each jurisdiction will apply the rules. The impact could be significant if these reliefs are not regarded as qualifying refundable tax credits.
It is important that the government ensures that the global minimum tax rate proposals do not jeopardise the success of our creative industries. It should seek to ensure that the status of the creative sector reliefs as qualifying refundable tax credits is clarified as soon as possible, to allow large MNEs that operate in the creative sector to plan accordingly.
If you would like to discuss these changes further, please speak to your usual RSM contact, or Graham Steele.
