Tolley’s Tax Digest Topical Corporation Tax Issues for Large Companies Eloise Brown CTA ATT Practical, expert guidance including: Issue 125 | March 2013 • an overview of relevant draft legislation in Finance Bill 2013; • an overview of corporate tax reform measures and update on changes since introduction; • financing update including worldwide debt cap and changes to the 'deemed release' rules; • key international changes including an overview of FATCA; • and much more. Tolley’s Tax Digest To subscribe call 0845 370 1234 www.tax-digest.co.uk Tolley’sTolley’s TaxTax DigestDigest || IssueIssue 125125 || March March 2013 2013 TopicalTopical Corporation Corporation Tax Tax Issues Issues forfor LargeLarge CompaniesCompanies Contents Author Introduction 1 Eloise Brown CTA ATT Draft clauses for Finance Bill 2013 2 Eloise has many years' experience of advising a wide range Corporation tax rate 2.1 of clients, from standalone family owned companies to Annual Investment Allowance 2.2 fully listed groups, on their corporate tax affairs. She has worked on a wide range of transactions for corporate and Research and development 'Above the line' private equity clients on both buy and sell side and advised tax relief 2.3 on a variety of restructuring projects. She is a member of Controlled foreign companies 2.4 the Association of Taxation Technicians, a Chartered Tax Foreign currency assets and corporate Adviser and a member of the CIOT professional Standards chargeable gains 2.5 Committee. She has previously been a contributor to Tax Income tax withheld at source on interest Journal, Taxwise and led the development of content for payments 2.6 the initial launch of the Owner-managed Business and Corporate tax modules of TolleyGuidance. Worldwide debt cap 2.7 Group relief 2.8 Deferring payment of exit charges 2.9 FATCA 2.10 General anti-abuse rule ('GAAR') 2.11 Other measures 2.12 Corporate tax reform 3 Controlled Foreign Company ('CFC') Rules 3.1 Foreign Branch Exemption 3.2 Patent box 3.3 R&D tax relief – 'Above the line' tax credits 3.4 Distribution exemption 3.5 Financing update 4 The debt cap 4.1 Changes to the 'deemed release' rules 4.2 Income tax withheld at source on interest payments 4.3 UK implementation of the US 'Foreign Account Tax Compliance Act' (FATCA) 5 Overview of process 5.1 Definition of financial institutions 5.2 Custodial institution 5.3 Depositary institution 5.4 Tolley’s Tax Digest is produced and published by LexisNexis. Investment entities 5.5 Views expressed in this Digest are the author's and are not necessarily those Specified insurance company 5.6 of the author's firm or of the publisher. Exemptions 5.7 No responsibility for loss occasioned to any person acting or refraining from Residence 5.8 action as a result of the material in this Tax Digest can be accepted by the Financial accounts 5.9 author or publishers. Due diligence requirements 5.10 © Reed Elsevier (UK) Ltd 2013 Reporting requirements 5.11 Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland. Any European Penalties 5.12 material in this work which has been reproduced from EUR-lex, the official EU Financial Transactions Tax – update 6 European Communities legislation website, is European Communities Appendix 1: 'Above the line' credit for research copyright. and development – summary of calculation steps LexisNexis, a Division of Reed Elsevier (UK) Ltd, Halsbury House, 35 Appendix 2: Foreign Account Tax Compliance Act Chancery Lane, London WC2A 1EL (FATCA) and UK Regulations to implement US- Telephone: 020 7400 2500 Fax: 020 7400 2842 UK Treaty dated 12 September 2012 – overview of Printed and bound in Great Britain by Hobbs the Printers Ltd, Totton, process steps Hampshire 2 Topical Corporation Tax Issues for Large Companies Tolley’s Tax Digest | Issue 125 | March 2013 1 Introduction delivered on 5 December 2012. The window for providing comments on the draft legislation closed on 6 February The tax affairs of large companies have perhaps never been 2013. Finance Bill 2013 will be published on 28 March 2013 in the spotlight as much as they are at the time of writing. following the Budget which will take place on 20 March This is manifest not only in the hearings of the Treasury 2013. Select Committee, but has permeated all the way through to the front pages of broadsheets and tabloids alike. The knock- A summary of some key points from the Autumn statement on effect for large companies is a nervous environment and draft legislation of relevance to large companies for tax planning. Public relations and reputation are more follows. than ever a priority for boards when deciding whether to proceed with tax planning proposed by tax or finance directors or their advisers. These are unprecedented and 2.1 Corporation tax rate fascinating times to be working in the world of tax for large The main rate of corporation tax will be reduced by a companies. further 1% from 24% to 23% in April 2013. It will reduce by an additional 1% than was previously announced in April However, large companies have far more to be concerned 2014, to 21% rather than 22%, signalling an additional move about than public and government scrutiny of tax planning. towards a single rate of corporation tax for all companies ‘Routine’ tax compliance and regulatory obligations are regardless of their size. increasingly complex. As well as perennial difficulties such as compliance with transfer pricing and keeping track of With a main rate of corporation tax of 21% the UK would, permanent establishment rules, both in the UK and in other by current comparison, have the lowest corporation tax jurisdictions, there has been a vast amount of new and rate in the G7 and the fourth lowest in the G20. amended legislation in recent years. The tax environment for larger companies is also challenging as a result of effects 2.2 Annual Investment Allowance of the current economic climate, for instance difficulties in meeting financial covenants and increasing operations in Another positive change is the temporary increase of new and emerging markets with fledgling tax regimes. the 100% Annual Investment Allowance from £25,000 to £250,000 for a two year period. The increased level of the Despite widespread public perception that HMRC is ‘soft’ allowance will apply for expenditure incurred on or after on large companies, and that it is all too easy for them to 1 January 2013. Annual Investment Allowance is available structure their tax affairs so as to avoid UK corporation tax on a wide range of expenditure, including plant and or achieve distastefully low tax rates, HMRC’s interest in machinery and fixtures, but not on cars. large companies seems as intense as at any time historically. Whilst undoubtedly some of the largest businesses have 2.3 Research and development ‘Above the Line’ been involved in aggressive tax planning, it is probably tax relief fair to say that the majority of businesses have to focus Following a period of consultation, draft legislation has more and more of their resources on increasing HMRC been published for the new ‘Above the Line’ (‘ATL’) administrative and reporting requirements. research and development tax relief. The new relief is considered in more detail later in this publication; however This issue of the Tax Digest aims to provide a broad overview in summary some of the key features of the relief are as of the key new and amended corporation tax legislation follows: and changes to HMRC practice affecting large companies from the last few years. Necessarily some of the content is • Tax credits available under ATL are at a rate of 9.1% about legislation which is currently in draft, and on which of qualifying R&D expenditure incurred on or after comments are still invited at the time of writing, such as 1 April 2013; the proposed ‘Above the Line’ R&D tax credit and GAAR. Updated legislation will be available on 28 March 2013 • The amount of repayable ATL tax credit available is following Budget day on Wednesday 20 March. The main capped at the amount of PAYE and NIC in respect of focus of this issue is UK corporation tax legislation although R&D staff for the accounting period; reference may be made to other taxes and jurisdictions • ATL tax credits are given as a pre-tax item in the where pertinent. Whilst the aim is to give an overview of profit and loss account; new, recent and proposed changes of broad appeal, some significant changes with a narrower or sector-specific appeal • ATL tax credits are taxable (hence more akin to a is included, notably the implementation of FATCA. grant than previous forms of R&D relief in the UK); and • Companies in groups will have options to surrender 2 Draft clauses for Finance Bill 2013 the credit to other group members or to surrender the tax withheld on the credit to offset against other Draft clauses for inclusion in Finance Bill 2013 were first group members’ tax liabilities. published following the Autumn statement which was 1 Tolley’s Tax Digest | Issue 124 | February 2013 Transactions in Securities There will be an initial option for companies to claim for Several other measures proposed by the consultation the new ATL relief or to continue to claim relief under the process are included in the draft legislation, in particular current large company research and development tax relief. the requirement for the issuers of funding bonds to provide This option continues until 31 March 2016 after which time the recipient with a certificate stating the gross interest the existing large company scheme will be withdrawn and ‘paid’ by issue of the funding bond, the amount of tax ATL will be the only option for claimant companies.