FTI Consulting’s response to HM Treasury’s second consultation on tax deductibility of corporate interest expense.
On Thursday 4 August 2016, the response period closed on the Government’s second consultation on tax deductions for corporate interest expense. The consultation sought input into the detailed design of the new rules, which reflect the recommendations in Action 4 of the Base Erosion and Profit Shifting (“BEPS”) project. FTI provided comments to HM Treasury on both the consultation questions and also the wider proposals. A summary of the key points and a link to our formal response are set out below.
The Government stated objective is to reduce tax avoidance by large multinational enterprises, ensuring profits are taxed in line with activities in the UK. However, in our view the application of the proposals will be much wider. Rather than introducing targeted measures to deal with the issues, the proposals will introduce far reaching changes which will cause much business uncertainty and complexity.
Our key specific concerns are:
Timing of implementation – The proposed April 2017 starting date is over ambitious. This was highlighted in our response to the previous consultation, but is even more so due to factors noted below.
- The significant economic, political and legislative uncertainty the UK is currently facing as a result of the Brexit vote;
- The need to maintain the UK’s competitive advantage and attract global capital, and introduce measures that are in line with those adopted by European nations;
- Complexity of working through all of the aspects of the proposals and translating them into workable legislation that does not adversely impact genuine commercial arrangements;
- Interaction with other consultations that are currently ongoing, from HM Treasury on loss relief and from the OECD on the operation of the Group Ratio Rule within BEPS Action 4; and
- The timetable for review, feedback and refinement of the draft legislation.
We recommend that the implementation date should be no earlier than 1 April 2018, which would still result in the UK being at the fore in implementing the measures.
Grandfathering – In the current climate it is crucial that the UK maintains its reputation for having a stable, transparent and certain tax regime. Applying these proposals to existing external debt arrangements will unfairly penalise businesses who have made long term finance commitments and who have assumed full deductibility for their interest payments. We therefore recommended that existing external finance arrangements are exempted from the regime.
Real estate – We have highlighted a number of key concerns and recommendations for real estate (and other capital intensive industries), which include appropriate treatment for third party debt, non-resident landlords, REITs and PAIFs, and joint ventures. We have also stressed the need to ensure the Group Ratio Rule is fit for purpose, and suggested an alternative approach for international real estate groups.
We would be pleased to discuss with you our thoughts on the implications of the proposed changes for your business. Please do not hesitate to contact me or a member of my team to this end.
Head of European Tax Advisory
+44 (0)20 3727 1450
Senior Managing Director, European Tax Advisory
+44 (0) 20 3727 1271
Managing Director, European Tax Advisory – Transfer Pricing
+44 (0) 20 3727 1711
August 23, 2016