Tax deductibility of corporate interest expense - the ICAS response
Susan Cattell outlines the ICAS response to the government consultation on changes to the tax deductibility of interest.
The UK Government has been a strong supporter of the OECD Base Erosion and Profit Shifting project to tackle the issue of some multinational companies exploiting international tax rules to pay little or no tax.
Following the final reports produced by the BEPS project the government has started consulting on changes to UK rules in line with the BEPS recommendations. The ICAS Tax Committee has already responded to the consultation on changes to the UK Patent Box and has now submitted a response to the consultation on the tax deductibility of corporate interest expense.
The UK has historically had a generous tax regime for the deduction of interest payments by companies and this has been a major plank of the government’s strategy for delivering its stated aim of having the most competitive corporate tax system in the G20. The introduction of a general restriction on interest deductibility is therefore a major change for the UK and ICAS welcomed the opportunity to comment on the proposals.
A key concern highlighted in the ICAS response is the proposed pace of change. The consultation document suggests an implementation date of 1 April, 2017 but this is too soon to allow companies to review and adjust long term financing arrangements. It is also too soon to permit adequate consideration to be given to the approach adopted by other jurisdictions and to ensuring that UK companies are not left at a competitive disadvantage. The OECD is also continuing to work on some aspects of its interest recommendations in 2016. It would make sense to wait for their conclusions before finalising the UK legislation.
ICAS has suggested 1 April, 2018 as the earliest feasible date for implementation but our preferred option would be a start date no earlier than accounting periods beginning on or after 1 January, 2019. Linking the start date to the beginning of company accounting periods would have the added advantage of ensuring that companies do not have to deal with a split year in considering any new rules.
Fixed ratio rule
One of the main proposals is for a general rule to restrict the amount of relief for interest to a fixed percentage of a corporate group’s taxable earnings before interest, depreciation and amortisation. The OECD recommends that the percentage should be set in a corridor of 10 per cent to 30 per cent.
The ICAS response favours setting the UK fixed ratio percentage at 30 per cent and identifies a number of factors in support of this, including: the existing UK targeted anti-avoidance rules on interest deductibility which reduce the possibility of BEPS; and minimising disallowance of third party debt costs which could distort capital markets and consistency with competitor jurisdictions.
Group ratio rule
The OECD recommendations permit an additional group ratio rule in addition to the fixed ratio. This would allow some groups with higher external gearing to obtain a larger deduction than the fixed ratio rule. Whilst this would add complexity we believe that it would be useful to have the option for groups which choose to use it.
De minimis threshold
ICAS supports the proposal in the consultation for a de minimis threshold set at a level which will remove most domestic groups from the scope of the new rules. There is no BEPS risk from these companies. We suggest that consideration should be given to allowing periodic reviews of the threshold, or some form of indexed increase, to take account of changes in interest rates and erosion of the threshold over time.
Dealing with volatility
The consultation considers the OECD options for carry back and carry forward of disallowed interest expense and carry forward of unused capacity to deal with volatility. We believe these are essential and that the rules should be in line with the existing rules in the UK for the carry forward of losses.
Public benefit project exclusion (PBP)
Large scale, highly geared projects which are privately owned but result in the provision of a public benefit present little risk of BEPS. The OECD therefore recognises that countries may wish to exclude them from the general restriction on interest deduction. We are concerned that the proposals for a PBP in the consultation are currently too narrow and suggest that consideration should be given to extending them so that more public interest projects, located entirely in the UK, could use them