What does Corporate Tax Roadmap mean for international businesses?

The first Autumn Budget of the new government was short on major announcements affecting corporation tax, and the Corporate Tax Roadmap it has published reads, superficially, like a long list of promises not to change a thing. This may be positive news for businesses looking for the ability to plan for the longer term. Multinational businesses that have investment holding companies in the UK will welcome, in particular, the commitment to stick with the current broad-based exemptions for dividend income and gains made on the sale of substantial shareholdings (SSE).

The roadmap does, however, provide some intriguing details of likely future developments in the UK’s application of the transfer pricing rules and its implementation of the OECD Inclusive Framework (IF) pillar two global minimum tax rate.

Transfer pricing reforms

The government has stated that it will consult further on reforms to the transfer pricing rules in spring 2025 (following on from the previous government’s initial consultation on certain technical changes during 2023). Potential reforms include removing transactions between UK entities from the scope of the rules.

This would be a welcome administrative simplification. However, for some, it may be overshadowed by a requirement to report more information on related party cross-border transactions, also included in the measures under consideration. This will be an onerous task if lots of detailed information is demanded, especially for businesses with a large volume of related party transactions. Some taxpayers may face operational issues in producing accurate transactional data, particularly where they operate a transfer pricing policy involving year-end “true-ups”.

There is no indication in the roadmap that the government intends to make in-scope businesses maintain a summary audit trail of their transfer pricing records. This concept was considered when the formal requirement to maintain records in the OECD-approved format was introduced in 2023. Many will hope that its omission is a sign that the government does not intend to proceed with a policy that could add significantly to the compliance burden.

Amendments to lower the threshold for mandatory application of the transfer pricing rules will also be consulted on. These would force medium-sized businesses, as well as large ones, to apply the rules to all of their related party transactions. This was not mentioned in the previous consultation but could affect a significant number of businesses (typically those with between 50 and 250 employees, though some with fewer than 50 employees that meet or exceed both turnover and balance sheet thresholds may also be caught), increasing their UK compliance requirements. HMRC and the government will doubtless argue that this simply provides greater alignment between the UK and other territories that do not apply such an exemption (such as the United States).

The roadmap also states that, later in the current parliament, the government will undertake a specific review of the transfer pricing treatment of cost contribution arrangements. The intention will be to provide businesses with greater certainty and make sure that the rules do not deter investment into the UK. Cost contribution arrangements involve sharing the costs and benefits of intellectual property development amongst related parties, and their transfer pricing treatment is complex. It is not yet clear how the government intends for greater certainty to be provided.

Pillar two rules for multinational businesses

The pillar two rules seek to implement a globally consistent minimum tax rate for large multinational enterprises, across all the jurisdictions in which they operate. The rules are already in force in the UK and continue to receive support from the new government. Importantly, the roadmap contains a commitment to ensure that the UK legislation is updated to reflect any internationally agreed updates to the IF’s model rules.

The government has also noted that it will continue to consider opportunities for simplifying or rationalising any rules for taxing cross-border activities that are rendered unnecessary or disproportionate now that the global minimum tax rate rules are in place. Businesses struggling to comply with the administrative aspects of pillar two will welcome any possible simplification. Some will wonder whether the government will seek to leverage its membership of the IF, which designed the regime, to encourage simplification of the underlying pillar two model rules.

In this regard, many affected businesses will find it helpful if the UK advocates for making the transitional country-by-country reporting safe harbour provisions, which apply for the first three years of the pillar two regime, permanent. These provisions allow for reduced compliance obligations for qualifying entities in low-risk territories, and such a change would ideally allow taxpayers and tax authorities to better focus their time and resources on higher-risk territories over the longer term.

Adapting to evolving international tax changes

Despite the lack of fanfare and headline-grabbing announcements in the Autumn Budget, it is clear that businesses are still adjusting to significant changes in the international tax landscape, and it seems likely that more change is on the way.

For more information, please get in touch with Paul Minness, Kaila Engelsman or your usual RSM contact.