2021 Autumn Budget: International
October 27, 2021
The International tax agenda is currently dominated by the OECD initiatives under Pillar One and Pillar Two. There was no coverage of these measures in the Autumn Budget 2021, but it did include proposals for a new re-domiciliation regime to encourage overseas companies to move their domicile to the UK. Other changes around the diverted profits tax, hybrid mismatches and cross border group relief were largely corrective measures.
OECD Pillar One and Pillar Two
Whilst not included in the Autumn Budget 2021 announcements, on 8 October 2021 the UK joined 135 other members of the OECD/G20 Inclusive Framework in reaching political agreement on the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.
Subsequently, on 21 October 2021, the UK made a joint statement with Austria, France, Italy, Spain and the US on a political compromise reached for the withdrawal of the UK’s Digital Services Tax (“DST”) (and other similar measures) once Pillar One has been implemented. In addition, to the extent that an MNE group suffers greater DST in the period of 1 January 2022 to the implementation of Pillar One (or 31 December 2023 if earlier) than they suffer in their first year under Pillar One (after appropriate scaling for period length), then they will be allowed credit for the excess against their Pillar One liabilities. Additionally, as part of this agreement, the US have agreed to terminate current trade actions and not impose further trade actions against the UK, Austria, France, Italy and Spain.
The UK’s support for Pillar One and Pillar Two is not unexpected given their key role in the G7 discussions and vocal support subsequently. We look forward to further government announcements and / or consultation on the design of the UK’s provisions.
The joint statement is welcome and should resolve lingering concern regarding US challenge to the UK’s DST and any potential trade sanctions against the UK.
Re-domiciliation of Companies to the UK
As part of the strategy to attract jobs, investment and innovation to the UK, the Government has published a Consultation containing proposals for enabling the re-domiciliation of a company’s corporate seat to the UK.
With regards to tax, the Government is currently considering whether specific provisions need to be included for where a company re-domiciles to the UK, including whether the company should be automatically tax resident and if there should be a step up in tax basis of chargeable gains / intangible fixed assets (similar to where there are EU exit charges). The consultation document indicates the Government is also considering offering outward re-domiciliation to align with most peer jurisdictions. It is considered that by offering outward re-domiciliation, the decision to re-domicile into the UK would present a lower barrier and be less final, and as such could help attract more companies into the UK.
The Consultation and any associated legislative change are welcome as the lack of ability to re-domicile a company’s corporate seat to the UK can be seen as a constraint to moving activities to the UK (particularly when compared to European counterparts). If the changes make the process reversible (i.e. outward re-domiciliation) then this could ease the decision to move to the UK. We look forward to being involved in the Consultation process and any legislative developments.
Diverted Profits Tax
The Government will introduce legislation to allow relief from Diverted Profits Tax (“DPT”) where the taxpayer has successfully sought relief under the Mutual Agreement Procedure (“MAP”) of the relevant double tax treaty where they consider taxation not to be in accordance with the treaty. These provisions will apply to any MAP decisions reached after 27 October 2021.
In addition, the Government will amend the DPT legislation to prevent the possibility of a closure notice being issued in respect of a corporation tax enquiry where there is an ongoing review period for DPT purposes. This amendment appears to be in direct response to the judgement in the recent case of Vitol Aviation Ltd v HMRC and applies to all DPT review periods open at 27 October 2021 (unless an application to the Tribunal for a closure notice was made prior to 27 September 2021). Alongside these changes, the Government will amend the DPT legislation to allow an amendment to be made to a corporation tax return at any point during the review period (except for the last 30 days) unlike the current position of only being allowed in the first 12 months.
The amendment for relief under MAP is a welcome change as HMRC previously maintained the position that DPT was outside the scope of MAP and may provide an additional mechanism for taxpayers to resolve DPT enquiries. Whilst the changes to prevent a closure notice are unwelcome, given recent case law they are not unexpected and should only be applicable to protracted DPT cases.
Hybrid Mismatch Provisions
Following on from the announcement at the Spring Budget 2021, the Government have confirmed that the final change arising out of the Consultation in 2020 will be made in Finance Bill 2021-22. This change seeks to ensure that the rules apply proportionately to entities that are transparent in their jurisdiction of formation but treated as taxable persons in other jurisdictions (e.g., US LLCs or S-Corps). The change will be retrospective to 1 January 2017.
This is a welcome but long overdue change having initially been included in the draft Finance Bill 2021 but removed due to concerns regarding the drafting. Based on the draft legislation released in July 2021, these changes are expected to achieve the intended policy intent.
The implementation of this change should remove a number of perverse outcomes in the legislation as well as provide certainty to taxpayers on historic positions, although taxpayers should consider whether historic returns should be amended to reflect the impact of this change.
Abolition of Cross Border Group Relief
The Government have announced that the group relief rules for EEA resident companies will be brought in line with those for other non-UK resident companies as the rules are currently more favourable towards EEA resident companies. These changes will apply from 27 October 2021.
As such, the ability for EEA resident companies to surrender losses to UK resident companies in certain circumstances will be removed. In addition, the rules for the surrender of losses by non-UK resident companies trading in the UK through a permanent establishment will be simplified so that a single rule applies to EEA and non-EEA companies such that relief will only be available if it is not possible for those losses to be deducted from non-UK profits of any person for any period.
Given the UK’s exit from the EU and the repeal of the Interest and Royalties Directive in the Spring Budget 2021, these changes are not unexpected. The provisions being removed / amended should only apply to a small number of taxpayers such that the impact of these amendments is likely to be negligible.
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