In a new feature, this article sets out four areas of tax which should be on the agenda for consideration over the next month. This month, corporate tax matters have particular relevance to those with a year-end on 31 December. The new branch exemption and CFC changes require attention from all in-house teams, as will managing the unintended consequences of the worldwide debt cap. Finally, there are some recent important changes to iXBRL filing mentioned in his recent online article.
Branch exemptionIn FA 2011 the government introduced an exemption regime for foreign branches of UK companies.
Key aspects of the new regime: Each UK resident company with one or more foreign branches should decide whether to elect into the regime.
If made, the election will apply to the aggregated profits and losses of all the company’s foreign branches.
Groups with more than one UK company with foreign branches will be free to choose which, if any, of the companies should make the election.
► On my agenda: Ian Brimicombe writes |
The election is irrevocable (unless reversed before taking effect) and will apply to all future accounting periods commencing after the election has been made.
The location of assets, functions and risks could become more significant if the profits attributable to a foreign branch are exempt from UK corporation tax.
Losses: The decision to elect into the regime may not be straightforward given the electing company will lose UK corporation tax relief for any future losses that are realised by its foreign branches.
In addition, where a UK company has received tax relief for losses of foreign branches in the last six years (or longer where the losses exceed £50m) a ‘loss recapture’ mechanism will mean that the exemption will not apply until those losses are matched by taxable branch profits.
Where losses have been incurred in some territories but not others, the company may make a further election to ‘stream’ those losses and allow the remaining branches to benefit from the exemption.
The streaming election must be made at the same time as the exemption election.
Chargeable gains: The exemption will include chargeable gains or losses of a foreign branch; however a company will be prevented from applying the exemption to assets that have been transferred to the branch deliberately to benefit from the exemption.
Chargeable gains realised by a foreign branch of a ‘close’ company, however, are excluded from the regime.
Anti-avoidance: For foreign branches located in low-tax jurisdictions that pay local tax of less than 75% of the tax they would pay if within the charge to UK corporation tax, an ‘anti-diversion’ test must be passed in order for the exemption to be available.
What should I do now? Since the election will take effect at the start of a company’s next accounting period, tax directors need to start thinking beforehand about whether to elect, and for which companies.
The election should be beneficial where consistently profitable branches are located in low tax jurisdictions.
Conversely, the election will be disadvantageous where a branch makes a loss, and may be of little effect where branches are operating in high tax territories.
Groups with a number of branches will therefore need to consider whether to reorganise their branch holding structures to gain the required flexibility.
Multinational groups often use an offshore finance company to debt-finance their operating companies.
These arrangements can help manage the group’s global tax charge as the operating company’s interest expense will reduce local taxable profits, whilst the interest income of the group finance company may be taxable at a low rate.
Under the proposed CFC rules there will be a relaxation in the UK tax regime for offshore group finance companies.
With proper structuring this will result in a future UK corporation tax rate of 5.75% on the profits of these companies.
The problem: Until now, where a UK parented group has established a non-UK group finance company the UK CFC regime has applied to charge UK tax on the profits of the group finance company.
This has generally negated the tax benefits of using such companies except for groups prepared to enter complex planning arrangements.
What should I do now? It is important that international groups consider how the changes could benefit them, and whether it is appropriate to implement structural changes or adjust current group funding arrangements to maximise the benefit.
As always, it is important to consider the proposals in the wider context of the group’s commercial operations and funding requirements.
An integrated approach: For groups wishing to establish an offshore finance company, key questions will include where to locate the company, the substance it requires and how to transition to the new structure.
EU territories with a low domestic rate and good treaty network are likely to prove popular.
Issues to address from the perspective of the operating companies to be financed or refinanced will include minimising withholding taxes, thin capitalisation rules and other anti-avoidance provisions which could otherwise deny interest expense deductions.
Tax directors will need to consider the possibilities for introducing a (new) offshore financing company as part of standard planning for future refinancing, acquisitions, disposals or other reorganisations.
The ongoing consultation on the worldwide debt cap recognises that the existing legislation is defective in a number of respects.
The problem: However, these debt cap defects will continue to adversely impact many groups of companies until at least 2012 and it appears unlikely that they will be fixed retroactively.
Affected groups should mitigate the resulting tax leakage at the earliest opportunity.
De minimis defect: While the debt cap is mainly targeted at multinational groups it will inadvertently catch many largely domestic groups if they have the ‘wrong’ debt profile.
A key unresolved issue is the way that the legislative operation of de minimis thresholds can result in overall financing disallowances, even though these limits were intended to assist groups grappling with the complexities of the debt cap.
Tax directors facing debt cap tax leakage are advised to mitigate corporation tax liabilities by considering a reorganisation of group financing structures as soon as they can.
In the Figure, a wholly domestic group will suffer an unintended net financing disallowance of £0.8m and tax leakage of around £0.2m.
In the illustration the UK parent is debt capped, with the consequence that tax relief for its £2m interest expense is restricted to the £1.2m cost of its external financing.
Ordinarily, the £0.8m disallowed financing expense amount could be used to exempt the corresponding £0.8m interest income in its subsidiaries’ hands, so that overall the group does not suffer a net financing disallowance.
However, as each subsidiary has interest income of £0.4m these amounts fall within the £0.5m per company de minimis threshold and are disregarded for debt cap purposes, with the result that their financing income is ineligible for exemption.
What should I do now? Tax directors need to identify and optimise their debt cap position, considering issues such as:
Recent announcements from HMRC and Companies House may have undermined the approach taken by many businesses to comply with the introduction of compulsory filing of tax returns and accounts with HMRC in iXBRL.
Key issues: Until recently, HMRC’s transitional phase, requiring a fraction of the full list of iXBRL tags to be applied, was expected to finish on 31 March 2013.
Companies House were expected to mandate iXBRL filing at the same time. Companies House has now deferred mandatory iXBRL filing until at least 2015.
HMRC have released a consultation document, Digital by Default, which proposes to accelerate the move to deliver its services online for all the main business taxes.
Within the consultation document is an acknowledgement that ‘there may be a case for extending the life of minimum tagging lists for accounts information beyond 2013’.
What should I do now? Quite rightly, many businesses remain reluctant to redesign longstanding internal accounts production processes until iXBRL has been mandated by Companies House and HMRC’s transitional arrangements have ended, after this time the tagging requirements are unlikely to undergo further significant changes.
They are choosing to outsource the tagging of their financial statements to iXBRL specialist to mitigate the risks, particularly through 1 April 2013 when HMRC tagging against full taxonomies is expected to be mandated.
Following the announcement by Companies House, outsourcing programmes are more likely to continue until at least 2015.
The outsourcing market is still evolving, but the emerging best practice is to use a professional services firm that provides reassurance on quality such that minimal additional checking is required by in house teams.
All outsourcers should be prepared to share their failure rate with clients.
Best practice is to interrogate tagged accounts with HMRC’s validation checks as a final step to ensure a 100% success rate.
Those who have chosen to tag in-house may now want to reconsider whether this is a sustainable option for the next four years.
Those who have experienced poor quality tagging from those competing purely on price should consider change for year two.
Tony Spillett, Tax Partner, BDO
On my agendaIan Brimicombe, Head of Group Tax, AstraZeneca
It didn’t seem to me that August offered much of a break from the usual agenda of compliance, consultations and business support, however, even assuming there was a lull it’s soon forgotten when attention turns to the work load facing tax directors in the Autumn.
First and foremost there are the consultations on patent box and CFC, open for comment on by 2 and 22 September respectively.
Business input is a critical ingredient to these pro-growth initiatives, which need to be pitched just right and to ensure the UK meets its objective to create the most competitive tax system in the G20.
In the meantime businesses continue to battle against a tough economic backdrop and are being challenged to increase productivity, find new markets, improve cash flow and increase returns to shareholders.
The in-house tax team must support these immediate challenges through accurate and timely advice especially in accessing new markets.
No doubt the global tax community will be looking carefully at the Vodafone India case currently being heard in the India Supreme court.
The tax implications for M&A activity in emerging markets are fundamental and will guide protective tax positions in deals going forward.
For calendar year companies, it is also time for tax teams to offer a robust budget for the 2012 effective tax rate and tax cash outflow.
Proactive management of these metrics is the least expected of tax directors these days.
Ian Brimicombe, Head of Group Tax, AstraZeneca
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