On 4 August 2017 HMRC issued for public consultation updated draft guidance in relation to the corporate interest restriction rules to be included in the Finance Bill (No 2) 2017. The latest draft guidance amends and updates the initial draft guidance that was issued on 31 March 2017 and takes into account technical changes made and included in amended clauses published on 13 July 2017. Comments on the updated draft guidance are invited by 31 October 2017.
The corporate interest restriction generally follows the recommendations of the report on action 4 of the OECD project on base erosion and profit shifting (BEPS). The rules aim to restrict tax deductions made by a group in relation to interest expense and other financing costs. The deductible amount will be restricted to an amount commensurate with the group’s taxable activities in the UK. To arrive at that amount the rules take into account the amount the group borrows from third parties. The rules are to apply for periods beginning on or after 1 April 2017.
The rules apply to all groups within the charge to UK corporation tax but the restriction will not apply to groups with less than GBP 2 million of net interest expense and other financing costs per annum. Those groups will not be subject to any reporting requirements but should perform appropriate calculations to ensure the restriction does not apply to them.
For all other groups tax deductions for interest expense will be restricted to the group’s net third party interest expense, or the part of that expense that is proportionate to the taxable earnings before interest, tax, depreciation and amortisation (tax-EBITDA) in the UK. The rules will be applied after transfer pricing adjustments and adjustments for anti-hybrid rules but before the loss restriction rules are applied.
The default method for calculating the restriction is the fixed-ratio method. This applies two main limits on the interest deduction for tax purposes. The first restriction is by reference to a fixed ratio of 30% of the tax-EBITDA of companies within the group that are within the charge to UK corporation tax. The tax-EBITDA and the interest would be computed by reference to the amounts taken into account for UK corporation tax.
The second restriction is a debt cap that limits the net interest deduction to a measure of the worldwide group’s net external interest or economically similar expenses.
An alternative method for calculating the interest restriction called the group ratio method may be applied. Under this method the net tax deduction for interest is restricted by applying the group ratio to the tax-EBITDA. The group ratio is effectively the ratio of group interest to group EBITDA, measured on the basis of the consolidated accounts of the group. Under this method there is also a debt cap applicable based on the measure of the group interest expense used in calculating the group ratio.
Interest that exceeds the limit and is therefore disallowed in a particular year can be carried forward indefinitely. This interest can be used in a subsequent period if there is sufficient interest allowance available. Unused interest allowance may be carried forward for up to five years.
Optional alternative rules apply to the application of the restriction to public infrastructure assets. There are also some special provisions in relation to certain types of company and types of transaction.
The Bill amending the Income Tax Code, Procedural Tax Code and VAT Code on electronic payments and voluntary disclosure of undeclared income has been gazetted in the Official Government Gazette on 22nd December 2016. This draft bill regarding electric payments has been adopted by the parliament on 21st December 2016.
The draft bill regarding electric payments has been adopted by the parliament on 21st December 2016 and it was presented to the parliament for approval on 12th December 2016. On the basis of the adopted text, companies that receive transactions by electronic means must inform their customers accordingly; otherwise, they will get a penalty of EUR 1,000. This obligation starts from 1st February 2017. Also, taxpayers will be obliged to use part of their income via electronic payments (in Greece or in the EU/EEA) for maintaining the applicable tax reduction. More precisely, 10% minimum expenditure percentage will be applicable for income up to EUR 10,000,; for income from EUR 10,000 to EUR 30,000, the minimum expenditure percentage will be 15%; and for income above EUR 30,000, the minimum expenditure percentage will be 20%, capped at EUR 30,000. Taxpayers who are more than 70 years old or disabled taxpayers or taxpayers under guardianship or taxpayers who are tax resident in the EU/EEA (under the conditions of article 20 of the Income Tax Code) and taxpayers who file a tax return in Greece with respect to their employment income/pension in Greece are exempt from the obligation to use electronic means of payment for their transactions. All the exemptions and above-mentioned percentages can apply from 2017 financial years and the following years. An addition to the draft is that the Evros prefecture is included in the provision regarding the 30% reduction of VAT rates. The bill applies upon publication in the Official Government Gazette.
A draft bill regarding electronic payments has been presented to the parliament on 12th December 2016. The term “electronic payments” states to payments via debit, credit or prepaid cards but also to other means of payment, e.g. digital wallets. All enterprises as well as freelancers will be progressively obliged to use a card and accepting device for their transactions with customers (B2C transactions). The threshold for electronic payments of B2C transactions will be dropped from EUR 1,500 to EUR 500 and note that cash payments will not be permitted for B2C transactions exceeding EUR 500. Only taxpayers (i.e. employees and pensioners) making electronic payments will be suitable for tax reduction. Therefore, such taxpayers will be obliged to spend part of their income through electronic payments in order to be granted the applicable tax reduction. Some incentives are granted to taxpayers doing their transactions electronically. If adopted, these provisions will be applicable from 1st January 2017.
On 22 August 2016 the OECD released a discussion draft on branch mismatch structures under Action 2 of the OECD report on base erosion and profit shifting (BEPS). Comments are invited from interested parties by 19 September 2016.
The discussion draft applies the principles outlined in the report on Action 2 to the basic types of branch mismatch arrangement and outlines preliminary recommendations for domestic tax rules to neutralize the mismatch in tax outcomes.
Branch mismatches arise when the ordinary tax accounting rules for allocating income and expenditure between branch and head office result in a situation where the net income of the taxpayer falls out of the charge to taxation in both the branch and the head office jurisdiction.
Branch Payee Structures
The discussion draft looks at two branch payee structures. In these structures the branch is the recipient of the payment but the income received is not subject to tax.
In the case of disregarded branch structures the payee has an insufficient presence in the branch jurisdiction to be taxable on the payment. In the case of diverted branch payments the branch jurisdiction exempts or excludes the payment from taxation on the grounds that the payment was made to the head office.
The paper notes that the simplest way to prevent a deduction non-inclusion (D/NI) outcome for the branch payee structure is for the residence jurisdiction to restrict the scope of the branch exemption so it does not cover payments that have not been brought into account for tax purposes by the branch. The residence jurisdiction could consider making improvements in the operation of the branch exemption so that payments disregarded, excluded or exempt in the branch jurisdiction are treated as received directly by the head office (and are therefore outside the exemption).
Given the similarity between reverse hybrid and branch payee structures the draft recommends that the jurisdiction of the payer should adopt a branch payee mismatch rule, in line with Chapter 4 of the BEPS Action 4 report. This would deny a deduction for a diverted branch payment of a disregarded branch if the branch structure gives rise to a mismatch in tax outcomes.
The branch payee mismatch rule should only apply to payments made under a structured arrangement or between members of the same group. The rule would only apply where there is a mismatch under the ordinary rules for allocating branch income.
Deemed branch payments
It is possible to generate an internal mismatch between the branch and the head office by exploiting rules that permit the taxpayer to recognize a deemed payment between the branch and head office and where there is no corresponding adjustment to the net income in the payee jurisdiction to recognize the effect of this deemed payment.
Given the similarity between disregarded hybrid and deemed branch payments the draft recommends that countries introduce rules neutralizing the effect of the arrangements consistent with Chapter 3 of the BEPS report on hybrid mismatches. The deemed branch payment rule would apply to a notional or deemed payment between the branch and the head office that was deductible under the laws of one jurisdiction (the payer jurisdiction) but not included in ordinary income under the laws of the other jurisdiction; and where the resulting deduction was eligible to be offset against non-dual inclusion income.
Double deduction (DD) branch payments
A double deduction outcome arises where the same item of expenditure is treated as deductible under the laws of more than one jurisdiction. These mismatches give rise to tax policy concerns where the laws of both jurisdictions permit the deduction to be offset against income that is not taxable under the laws of the other jurisdiction (i.e. against non-dual inclusive income).
The BEPS report on hybrid mismatches considered that the recommendations of chapter 6 could apply to DD outcomes using branch structures. The current consultation paper considers the application of that recommendation to branch structures.
Imported branch mismatches
This situation arises when a person with a deduction under a branch mismatch arrangement offsets that deduction against a taxpayer payment received from a third party. An imported mismatch rule is needed to deny the deduction for any payment that is directly or indirectly set off against any type of branch mismatch payment.
On 20 July 2016 the UK published updated statistics on claims for creative industry tax relief. The statistics include data for the film tax relief, high end television tax relief, animation tax relief and video games tax relief for periods up to 2015/16. In the case of video games tax relief this is the first time that statistics have been published.
The statistics are compiled by HMRC’s specialist films unit and from certification data supplied for the Department for Culture, Media and Sport by the British Film Institute. It should be noted that as claims can be made during production, on the basis that the production has secured at least an interim certificate, a production may make two or more claims for tax relief, including one or more interim claims and a final claim on completion of the work.
Film tax relief
This relief amounts to 25% of qualifying production expenditure and is available in the case of British qualifying films that have either passed a cultural test or are qualifying co-productions. The films are required to have a minimum UK core spend of 10% and the tax relief is based on the lower of 80% of the core expenditure or on the actual UK core expenditure. There is also a provision for loss-making companies to surrender the tax relief for a payable tax credit. This relief was introduced in its current form in 2007.
The provisional statistics for 2015/16 show that 210 films made in the UK claimed film tax relief with UK expenditure of more than GBP 1.0 billion. GBP 340 million was paid in response to 530 claims. Since the relief was introduced in January 2007 2,430 claims for film tax relief have been made. More than GBP 1.8 billion has been paid in film tax relief of which GBP 1.3 billion related to large budget films and GBP 540 million to limited budget films.
High end television tax relief
The high-end television (HETV) tax relief was first introduced on 1 April 2013 making available a tax deduction for qualifying companies. A claim for the relief can be made if the program passes a cultural test; is intended for broadcast; and is a drama, comedy or documentary. At least 10% of the production costs (25% before April 2015) must be related to activities in the UK; the average qualifying production costs per hour of production must be at least GBP 1 million per hour; and the slot length of the program must be more than thirty minutes. The television company responsible for the program must be within the UK corporation tax net. This relief also has a provision for loss making companies to surrender the relief for a payable tax credit.
The tax relief cannot be claimed for a program if it is an advertisement; news, current affairs or discussion program; quiz, panel or game show; competition or contest; live event broadcast (including theater) or training production.
In 2015/16 50 television programs made in the UK were the subject of claims for HETV tax relief with UK expenditure on the programs amounting to GBP 300 million. In 2015/16 GBP 96 million was paid out in response to 115 claims. The statistics show that GBP 203 million has been paid out in tax relief since this measure was introduced.
Animation tax relief
This relief was also introduced on 1 April 2013 and supports the production of culturally relevant animations in the UK. The measure allows for a tax deduction or a repayable tax credit for qualifying companies. A company qualifies for the relief if the animation passes the cultural test; is intended for broadcast; at least 51% of the core expenditure is on animation; and at least 10% of the production costs (25% before April 2015) relate to activities in the UK. Certain types of animations including advertisements or training productions are excluded from tax relief.
In 2015/16 there were 20 animations with a financial year of completion of 2015/16 and these had UK expenditure of GBP 38 million. The statistics show that 65 claims have been made for animation tax relief since the measure was introduced with UK expenditure of GBP 110 million. A total of almost GBP 19 million has been paid in response to claims for animation tax relief since the measure was introduced.
Video Games Tax Relief
Statistics on the video games tax relief have been released for the first time since the legislation was introduced. Under this measure a 25% tax relief is granted on a maximum of 80% of the production budget of a qualifying video game for expenditure in relation to goods or services used or consumed in the UK.
In 2015/16 GBP 45 million was paid in VGTR in response to 130 claims for tax relief. Since video games tax relief was introduced in April 2014 a total of 135 claims have been made, with UK expenditure of GBP 147 million.
Peer to peer (P2P) lending permits individuals and businesses to lend to each other through the intermediary of an internet platform. A traditional financial middleman such as a bank is not required as the platform acts as a conduit to arrange loans directly between the lender and the borrower. Tax relief now being introduced is intended to create a level playing field between different types of lending.
The UK has issued final guidance on the application of income tax relief for irrecoverable loans made by P2P investments. The tax relief is to be introduced by legislation included in the Finance Bill 2016. The relief allows tax relief for irrecoverable P2P loans by offsetting the amount against interest received from other P2P loans.