Partner Article

Reform of the international tax system

The Chancellor is likely to reaffirm the Government’s commitment to reforming the rules governing the taxation of the profits of multinationals, but will not announce any substantive measures in the Budget.

Rather, he will confirm that the Government will await the recommendations of the Action Plan on Base Erosion & Profit Shifting (BEPS) published by the OECD in July 2013, which was endorsed by the G20 at its St Petersburg summit in September 2013.

He may however announce some minor amendments to the existing rules, to underline the Government’s belief that most of the UK’s international tax rules are fundamentally sound, and to demonstrate that the Government is taking measures to ensure that these are not abused, pending the OECD’s wider recommendations.

The Action Plan set out 15 topics that the OECD will report on, and although this was over a two year timescale at the time of publication, seven of the actions have an interim reporting date of September 2014 – now only six months away. This list is likely to be headed by changes to the definition of permanent establishments, where the current rules, both in UK law (which closely follows OECD guidelines) and our network of double tax treaties, are arguably inadequate to deal with the challenges of e-commerce and the digital economy.

The current definition has arguably been exploited by companies such as Google, which, although it has a significant UK marketing presence, contends that it has no taxable permanent establishment here, because all UK sales are actually concluded in Ireland.

A House of Lords Select Committee report was published around the same time as the OECD’s Action Plan. In some cases (such as transfer pricing), this advocated consideration of unilateral and more radical action by the UK. However, we do not expect any announcements in response to the report, on the basis that the government will give priority to the OECD’s plan.

All multinational enterprises (foreign and UK-parented) that try to plan their tax affairs internationally will be affected - and this could represent the biggest shake-up of the rules governing international taxation in a generation.

This was posted in Bdaily's Members' News section by Baker Tilly .