UK: CHANGES TO INTEREST DEDUCTIBILITY RULES, IMPLICATIONS FOR TRANSFER PRICING

Following the October 2015 release of the OECD’s base erosion and profit shifting (BEPS) deliverables, some consultations in the UK have already been opened—including one on the UK’s rules concerning the deductibility of corporate interest expense and how this treatment would be affected by BEPS Action 4 (which seeks to develop recommendations in the design of rules limiting the deductibility of interest and other financial payments made to third parties and related parties).

The UK’s current interest deductibility rules reside in the UK transfer pricing statutory provisions and apply an arm’s length test. A move towards the OECD’s proposed fixed rate of interest would constitute a fundamental change for all debt-funded businesses in the UK, with most taxpayers expected to experience a reduction in tax deductible interest expense.

CONSULTATION

The UK’s transfer pricing provisions would need to be re-written to accommodate such a change in law. This would be a major policy decision for the UK government, and is reflected in a consultation opened by HM Revenue & Customs (HMRC). The consultation concerning the tax deductibility of corporate interest expenses closes in January 2016. Read HMRC’s consultation announcement

KPMG OBSERVATION

Officials from the UK government have expressed their commitment to the BEPS outcomes. Still, the UK would want to remain “competitive,” and the UK interest deductibility regime is one reason why some taxpayers view the UK as a competitive jurisdiction.

Recent informal discussions with officials of HMRC and HM Treasury provide some insight concerning what the tax authorities would like to see from the consultation, including some clear and concise examples showing how the OECD proposals would affect UK corporate taxpayers. Multinational entities need to focus on how any changes could fundamentally affect their taxation.

For more information, contact professionals with KPMG’s Global Transfer Pricing Services group in the UK:
Daniel Head | +44(0) 161 246 4742 | daniel.head@kpmg.co.uk