UK consults on proposal to limit tax deductibility of corporate interest expense

As a part of its effort to address aggressive tax planning by large multinational groups, the UK government on May 12 launched a consultation on a proposal to introduce rules restricting interest deductibility.

The rules, consistent with recommendations in the OECD/G20 base erosion profit shifting (BEPS) plan, are designed to prevent multinationals from taking excessive interest deductions to limit UK corporate tax liability.

Consistent with the BEPS agreements, the UK intends cap the amount of corporate interest deductions to 30 percent of taxable earnings before interest, depreciation, and amortization (EBITDA) in the UK, or based on the group’s net interest to EBITDA ratio for the worldwide group.

There is a de minimis allowance of £2 million (USD 2.8 million) of net interest expense per year, so groups with deductions below this threshold are unaffected by the proposal.

The consultation sets out in detail the proposed design of the new rules and seeks stakeholder input on 46 questions. The answers to the questions will inform the drafting of legislation for Finance Bill 2017, the government said.

The goverment also said it received 163 responses to an earlier consultation on the interest deduction proposal, issued October  22, 2015. The goverment provided a summary of the responses received to 18 questions asked in that consultation, as well as the government’s decisions regarding those comments.

The majority of the responses to the earlier consultation expressed opposition to any rules limiting interest  deductions, and two-thirds of those commenting asked for the rules be delayed past the proposed April 1, 2017, effective date.

The goverment said it would nonetheless proceed with the rules and will not delay the effective date. The proposal to limit interest deductions “demonstrates the UK’s leadership in implementing the G20 and OECD recommendations to ensure that profits are taxed in line with activities in the UK,” the government said.

Feedback on the consultation is due August 4.

See:

• Consultation

Related MNE Tax articles:

• UK readying proposals to limit corporate interest deductions, revise patent box