Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, has published revised guidance on the Mutual Agreement Procedure (MAP) in its International Manual (INTM). DLA Piper’s detailed publication is referenced herein.
The revised guidance, together with the supplementary Statement of Practice, provides detailed information on the following:
- Eligibility for MAP
- Access to MAP
- Submitting a MAP request
- Time limits
- Protective MAP requests
- MAP and domestic relief
- Mutual agreement
- Methods of relief and
Multinationals ought to consider more proactive use of the improved MAP, taken together with similar developments in other countries around the BEPS minimum standards, as a viable compliance risk management tool. Although double taxation is often a precondition in transfer pricing cases that end up in MAP, it is important to note that all issues concerning taxation not in accordance with tax treaties are eligible for MAP.
The UK government has updated its October 2015 interest expense consultation paper as of 12 May 2016, and is seeking comments by 4 August, 2016. The paper outlines the intent of OECD’s BEPS interest guidelines and provides questions for further consideration of limitations re: interest expense going forward.
The UK previously legislated hybrid mismatch arrangements that will be effective 1/1/2017, and the new rules are not expected to be effective until April 2017. In the interim, taxpayers will not have certainty re: current arrangements and new rules going forward.
Although following the footsteps of the OECD, UK is not afraid to take an aggressive stance as evidenced by its Diverted Profits Tax legislation, intention to adopt BEPS Actions 8-10 re: transfer pricing at an early stage and inserting risk rules in its Manual with a UK tax strategy governance. This paper is intended to be a future roadmap for UK tax, thus it should be read by all interested parties.
A reference to the paper is provided for reference, and a summary of the questions.
- What are your views on when a general interest restriction should be introduced in the UK?
- Should an interest restriction only apply to multinational groups or should it also be applied to domestic groups and stand-alone companies?
- Are there any other amounts which should be included or excluded in the definition of interest?
- How could the rules identify the foreign exchange gains and losses to be included?
- If the rules operate at the UK sub-group level, how should any restriction be allocated to individual companies?
- Are there items which should be excluded from both the definition of interest and from “tax EBITDA”, as referred to in the section on a fixed ratio rule?
- What do you consider would be an appropriate percentage for a fixed ratio rule within the proposed corridor of 10% to 30% bearing in mind the recommended linkages to some of the optional rules described below?
- What are your views on including in any new rules an option for businesses to use a group ratio rule in addition to a fixed ratio rule?
- What form of de minimis threshold would be most effective at minimising the compliance burden without introducing discrimination or undermining the effectiveness of any rules?
- What level should the de minimis threshold be set at, balancing fairness, BEPS risks and compliance burdens?
- Should SMEs as defined by the EU criteria be exempted from the rules, in addition or as an alternative to a de minimis threshold?
- What is the best way of ensuring that the rules remain effective and proportionate even when earnings are volatile?
- In what situations would businesses choose to use the PBP exclusion? How would this differ if no group ratio rule was implemented?
- Do you have any suggestions regarding the design of a PBP exclusion, taking account of the OECD recommendations?
- Do you have any views on the specific risks that might sensibly be dealt with through targeted rules?
- Do you have any suggestions as to how to address BEPS issues involving interest raised by the banking and insurance sectors?
- What are the types of arrangement for which transitional rules would be particularly necessary to prevent any rules having unfair or unintended consequences, and what scope would these rules need to be effective?
- To what extent do you believe that the new general interest restriction rule should replace existing rules?
The UK tax authority, HM Revenue & Customs (HMRC), will refer to the OECD base erosion and profit shifting (BEPS) report on BEPS Actions 8-10 in transfer pricing audits. Maura Parsons, HMRC deputy director and head of transfer pricing, has stated that HMRC will look to the 2015 BEPS reports in addition to the current OECD guidelines (although British law explicitly refers to the 2010 version on the transfer pricing guidelines).
Additionally, Sweden has taken a similar position and adopted the final OECD report in audits.
This line of reasoning is primarily based upon the premise / supposition that the new OECD guidelines are merely a clarification of existing rules, not requiring new legislation.
In addition to the inherent uncertainty of the new rules, UK, Sweden and other countries that will adopt this position introduce additional challenges into understanding the current law, requirements and grounds upon which appeals / court cases will be based. This is a new trend that promises to expand quickly into other countries, undermining the intent of transparency and consistency worldwide.