Evidence of NFIP Flood Insurance and Documenting Grandfathering
BEPS Action 4 in the UK - assets.kpmg€¦ · — WWDC to be repealed and replaced with Modified...
Transcript of BEPS Action 4 in the UK - assets.kpmg€¦ · — WWDC to be repealed and replaced with Modified...
BEPS Action 4 in the UK
Webinar—
13 December 2016
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With you todayDaniel Head UK Head of Transfer Pricing Partner, LondonTel: +44 (0)161 246 [email protected]
John Monds Global Transfer Pricing ServicesDirector, Manchester,
Tel: +44 (0)161 246 [email protected]
Kashif JavedInternational TaxPartner, London Tel: +44 (0)20 7311 [email protected]
Naz KlendjianInfrastructure M&A TaxPartner, London Tel: +44 (0)20 7311 [email protected]
Paul FreemanFS TaxSenior Manager, LondonTel: +44 (0)20 7694 [email protected]
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
BEPS action 4: AgendaOverview of the UK proposals1
The draft legislation2
Sector specific considerations3
Administration and next steps4
Overview of the UK proposals
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Where are we now? – Indicative dates
You are here Certainty?
Mid-May 2016 Detailed policy consultation: released 12 May
August 2016Detailed policy consultation: industry responses due by 4 August
Aug-Nov 2016Legislationdrafting instructions to Parliamentary Counsel
5 Dec 2016Draft legislation published
1 Feb 2017Draft legislation consultation: industry responses due (on clauses published on5 Dec 2016)
1 April 2017New interest regime starts (Final legislation to be included in FB 2017 which will then follow the usual timeline to Royal Assent)
Jan 2017Further draft legislation to be published
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Document Classification: KPMG Public
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A recap on the UK proposalsWhat do we know? — Commencement date – 1 April 2017— £2 million de minimis threshold— Fixed Ratio Rule (‘FRR’) limits amount of deductible interest to 30%
UK Tax EBITDA— Group Ratio Rule (‘GRR’) – Based on Accounting EBITDA, but now with some
optional elections— WWDC to be repealed and replaced with Modified Debt Cap Rule (‘MDCR’)— No general grandfathering — Carry forward of disallowed interest expense (indefinitely) and/or unused interest
capacity (five years)— PBIE – Public Benefit Infrastructure Exemption (draft legislation to be published
Jan 2017)— No carve out or special regime for FS sector
The draft legislation
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Document Classification: KPMG Public
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The draft legislation: A summaryKey points of note:— Confirmed some areas that have changed following consultation responses— Included the first details on the administrative and compliance process— Not yet complete, expect a further update by end of January which will cover
remaining key aspects such as:- Definitions needed for GRR- Public Benefit Infrastructure Exemption (‘PBIE’)- Definitions of related parties and acting together- Interaction with tax incentive reliefs (Patent Box and R&D)- Specific sector application (Banking and Insurance, REITS, Oil and
Gas, Securitisations)
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Document Classification: KPMG Public
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The draft legislation: What has changed?— Alignment of the commencement date for the FRR, GRR and MDCR rules to
1 April 2017. Previously the MDCR only applied to accounting periods beginning ‘on or after’ 1 April 2017
— Excess capacity will be available to carry forward for five years (original proposal was three years only)
— Confirmation that the amount of interest that can be deductible under the GRR is capped at 100% of UK Tax EBITDA
— A number of changes to proposed definitions in order to better align Tax and Accounting measures
— A widening of the PBIE to cover a broader range of qualifying companies and to incorporate a limited application grandfathering period for related party debt entered into by qualifying companies pre 12 May 2016. These changes are particularly welcome
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Timing example – December year end
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2017
1 April 2017
Arm’s length principle only Apply FRR (compulsory) and GRR (if required)
2018
For a December year end, 2017 would have to be treated as a split period with the current rules applying until 31 March 2017 and the new rules applying from 1 April 2017
Apply WWDC
Arm’s length principle
Arm’s length principle
The MDCR applies from periods beginning on or after 1 April 2017, so would apply to a December year end from 1 January 2018. The FRR and GRR will also apply for the whole of 2018
Apply FRR (compulsory) and GRR (if required)
Apply MDCR
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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Timing example – December year end (cont.)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2017
1 April 2017
Arm’s length principle only Apply FRR (compulsory) and GRR (if required)
For a December year end, 2017 will have to be treated as a split period with the current rules applying until31 March 2017 and the new rules (including MDCR) applying from 1 April 2017
Arm’s length principle
Apply WWDC Apply MDCR
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The draft legislation: What has changed?— Alignment of the commencement date for the FRR, GRR and MDCR rules to 1 April 2017. Previously
the MDCR only applied to accounting periods beginning ‘on or after’ 1 April 2017
— Excess capacity will be available to carry forward for five years (original proposal was three years only)
— Confirmation that the amount of interest that can be deductible under the GRR is capped at 100% of UK Tax EBITDA
— A number of changes to proposed definitions in order to better align Tax and Accounting measures. These include but are not restricted to:
- Optional election to exclude fair value (‘FV’) movements on derivatives from the definition of Tax EBITDA (to operate in a similar way to the disregard regulations)
- Optional election to apply various adjustments to Group EBITDA to more closely align this with Tax EBITDA for the purposes of the GRR
- Changes to the definition of Group Interest for the purposes of the GRR
— A widening of the PBIE to cover a broader range of qualifying companies and to incorporate a limited application grandfathering period for related party debt entered into by qualifying companies pre12 May 2016. These changes are particularly welcome
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The draft legislation: Definitions
— Loan relationship debits including losses from related transactions but excluding FX on principal and impairment losses
— Finance cost under certain leases — Finance income on debt factoring or
similar transaction— Guarantee fees paid— Finance cost under structured finance
arrangements within chapter 2 part 16 CTA 2010
— Debits on interest, currency and debt contract derivatives in respect of financing expense amounts excluding FX on notional principal
— Exclude transitional adjustments from changes in accounting or tax rules that occurred prior to 1 April 2017
— Loan relationship credits including profits from related transactions but excluding FX on principal
— Finance income under certain leases— Finance income on debt factoring or
similar transaction— Guarantee fees received— Finance income under a service concession
arrangement accounted for as a financial asset
— Credits on interest, currency and debt contract derivative in respect of financing income amounts excluding FX on notional principal
— Exclude transitional adjustments from changes in accounting or tax rules that occurred prior to 1 April 2017
Tax-interest expense Tax interest income
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Document Classification: KPMG Public
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The draft legislation: Definitions (cont.)
Tax EBITDA = Profits chargeable to corporation tax (a) including net chargeable gains (b) excluding tax-interest and (c) excluding the following:
Tax-depreciation i.e. capital allowances including bal. allowances less bal. charges
Tax-amortisation i.e. amounts deductible/taxable under part 7 CTA (IFAs)
Losses brought forward or carried back (position to be kept under review)
Group relief (incl. consortium relief) within the same group
Follow the tax treatment for derivatives e.g. apply the Disregard Regs.
Specific tax rules for various types of leases
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Aligning tax and accountingTax interest and tax-EBITDA— HMG has indicated that groups will be able to make an election to exclude fair
value gains/losses on derivatives (to work in a similar manner to the Disregard Regulations)
Group interest— HMG has indicated that groups will be able to make an election in respect of the
calculation of group interest. The election would cover:- Exclusion of fair value gains/losses on derivatives- Capitalised interest on development property and trading stock- Amounts arising from changes in accounting policy
Qualifying group interest— HMG has indicated that amounts on some convertible loans and other compound
instruments will be included— But, no change on related party loans, perpetual loans or profit participating loans
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Aligning tax and accounting (cont.)Group EBITDA— HMG has indicated that groups will be able to make an election in respect of the
calculation of group EBITDA. The election would cover:- Exclusion of fair value gains/losses on derivatives- Exclusion of fair value gains/losses on capital assets- Recognition of pension costs on a paid basis- Recognition of the cost of employee share options on exercise- Recognition of amounts from changes in accounting policy- Adjustment to the calculation of gains on asset disposal in line with the
tax basis
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Interaction with corporation tax lossrelief rules
— Deductions for group relief (including the proposed carried forward group relief) and consortium relief from companies within the ‘worldwide group' are excluded for the purposes of calculating ‘tax-EBITDA’
— Deductions for brought forward and carried back losses (with the exception of capital losses) are also excluded for the purposes of calculating ‘tax-EBITDA’
— Interaction with the new rules relating to utilisation of brought forward losses need to be considered
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
CFCs and joint venturesInteraction with UK CFC rules — Interest income brought into account under CFC rules not included in the
calculation of ‘tax-interest income’— HMG has indicated that the ‘matched interest’ rules for the finance company
exemption will continue to apply (draft legislation not available yet) Joint ventures — HMG has indicated it will be possible for joint ventures to elect to use a ‘blended
group ratio’ based on average group ratio of corporate investors (draft legislation not available yet) – To mitigate restrictions if funds raised by investor and on-lent to the joint venture
— HMG has indicated it will be possible for investors in partnerships to elect to treat the partnership as if it were included under equity accounting for calculating the group ratio – To mitigate restrictions if the partnership were fully consolidated
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Anti-avoidance rule — Targeted anti-avoidance rule to be introduced targeted at ‘relevant
avoidance arrangements’ — ‘Relevant avoidance arrangements’ exist if conditions A and B are met:
- Condition A is that the main purpose (or one of the main purposes) of the arrangements is to obtain a tax advantage
- Condition B is that the tax advantage is attributable to one or more specific aspects relating to the leaving out of account or bringing into account tax-interest expense amounts
— If the rule applies adjustments are made on a just and reasonable basis
Sector specific considerations
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The application to the FS sector
No special provisions— Banking and insurance groups will be subject to the FRR in the same way as
other industry groups— The Government has acknowledged the role of regulation in the banking and
insurance sectors but does not think a full exclusion from the rules is justified— Where banking and insurance groups have net interest income, this may mean
an implicit exclusion— A number of groups are however likely to be in a net interest expense position
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© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The application to the FS sector (cont.)
The definition of tax-interestIncluded in legislation— Exclusion of loan relationship and derivative impairment losses To be amended at a later date— Inclusion of an option of making an election to exclude the fair value movements
arising on derivativesClarity needed?— Treatment of fair value movements on debt securities
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The application to the FS sector (cont.)
Option to exclude fair value movements on derivatives— Expected to be along the lines of the Disregard Regulations — Banks and insurers will need to assess whether to make the electionExample:GBP fixed interest for EUR floating interest rate derivative:— Fair value movement due to changes in interest rates — Foreign exchange movement due to changes in FX rates
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The application to the FS sector (cont.)
Further changes in scope?— There is continued concern over ‘mixed’ groups that combine non-financial
services businesses with a regulated bank or insurer— The Government intends to monitor whether there is a need to amend the rules
to deal with possible risks associated with such groups
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Public benefit infrastructure exemption
Public benefit infrastructure exemption – PBIE— Draft legislation to be published Jan 2017— Consultation response document provided an outline of revised proposals:
- Scope broadened to a wider range of sectors- Third party debt- BUT concession for certain related party debt- AND limited scope grandfathering on related party debt
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Document Classification: KPMG Public
© 2016 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Public benefit infrastructure exemption (cont.)
Definition of “public benefit”— “Qualifying activities”, being the provision, upgrade, or maintenance of ‘public
benefit infrastructure’ and the undertaking of ‘public benefit services’ or ‘integral services’ using that infrastructure
— Expected to cover sectors where there is some:- underlying legislation governing the sector (e.g. delegated statutory authority,
control, licence or restriction etc.); and/or - a body established by statute regulating the sector
— Therefore expected to cover:- water, gas and electricity transmission, interconnectors, distribution and
supply, - thermal (coal and gas), renewable and nuclear energy generation; - port and airport operators; and - the rail network.
— Telecom infrastructure? TBC
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Public benefit infrastructure exemption (cont.)
Integral services— ‘Ancillary services that are customarily provided using the … public benefit
infrastructure … where such services enable public benefit infrastructure to be provided on an economically viable basis’.
— i.e. across the ‘value chain’ of a UK infrastructure business, not just to the company which contains the ‘core’ infrastructure asset.
Rental property— Recognition that some elements of real estate will qualify as public benefit
infrastructure (albeit not property development) due to steady income flows.
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Other sector specific considerations
The draft legislation makes specific mention of the following sectors: — Oil and gas – Ring fence activities entirely excluded — Securitisation companies – Included within the regime, but with some
special measures— Authorised investment funds including tax elected funds – Included within
the regime— Investment trust companies – Included within the regime— Collective investment vehicles – Included within the regime— REITs – Included within the regime, but with some special measures— Corporate non-resident landlords – Consultation planned in 2017— Charities – Ignore loans from charity to a subsidiary where gift aid is available
Administration and next steps
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The draft legislation: Administration— A group must appoint a UK entity to be the ‘Reporting Company’ for the group.
HMRC must be notified of the appointment in the six months immediately following the end of the relevant period of account
— The Reporting Company must then submit an ‘Interest Restriction Return’ (IRR) to HMRC within 12 months of the end of the relevant period of account
— The Interest Restriction Return must include a prescribed list of information and set out the specific details of the interest restriction arising in the period (including a detailed statement of calculations), how this has been allocated between the UK companies and how any carried forward interest or capacity is allocated
— Companies covered by the IRR must declare their status as either a ‘Consenting’ or ‘Non Consenting’ company. This allows the Reporting Company allocate interest restrictions and reactivations and to sign the IRR on their behalf
— Where no additional restriction arises under the new rules an election is available to submit an abbreviated IRR
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Next stepsUnderstand the impact for your business— Quantify the impact— Identify any unexpected implications— Understand the administration and compliance of the new regimeCommunicate with your stakeholders— Within the business – e.g. Finance, Treasury and Board level— Externally – Consider commentary in Annual Report/other communicationsComment on the draft legislation— By 1 February 2017
Q&A
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