UK

Market overview

The international transfer pricing environment has seen a lot of amendments in the past few years and tax advisers in the UK have been busy staying on top of the changing climate. The OECD's BEPS Project has been one of the hottest topics in transfer pricing this year, but as the UK voted to leave the EU on June 23 2016, there has been a rise in uncertainty as to what may happen to the market.

There are two key possible impacts of Brexit on the TP market in the UK: the freedom from relevant EU directives and the movement of companies and financial assets into or out of the UK.

The UK may still choose to comply with certain directives, but the extent to which EU rules will continue to apply is unknown. "The domestic TP rules were brought in mainly to assuage potential discrimination claims within the EU so if we wish, we can repeal them in future. I doubt that will happen however," said Wendy Nicholls, head of transfer pricing at Grant Thornton.

"Dependent upon our future relationship with the EU, we may potentially be able to step away from some of the European Commission's proposals like public country-by-country reporting (CbCR) for UK operations, and there will be less concern around whether advance pricing agreements (APAs) may be vulnerable to challenge under state aid rules – but it will not be the Wild West," she added.

Despite the Brexit vote, BEPS will undoubtedly remain a major talking point in the future as jurisdictions around the world implement the action points. Since the release of the reports in October 2015, taxpayers have been ensuring that they are BEPS compliant, particularly with CbCR, assessing the group's supply chain and determining the risks.

"BEPS is undoubtedly the genesis of the new world of transfer pricing," said Tom McFarlane, head of transfer pricing at Alvarez and Marsal, Taxand UK. "The key objectives of BEPS – coherence, substance, transparency and certainty – are all admirable and welcomed, but do however come at a cost. Many question whether such objectives are achievable given the complexities associated with implementation, in particular the ability of tax authorities to pick and choose which recommendations they will adopt creates uncertainty and potential inconsistencies."

The UK transfer pricing system is already mostly aligned with the OECD's recommendations and transfer pricing documentation rules are already in place; CbCR was enacted in the Finance Act 2015 and regulations came into force in March 2016. It is also one of the 83 countries that has signed the multilateral competent authority agreement for the automatic exchange of CbC reports. "We are still very much at the forefront of the BEPS project, which is of course not an EU affair but an OECD and wider initiative, and it is to the credit of the UK's officials that we are promoting a consistent approach, and not cherry-picking, like some countries. BEPS will only work if all countries implement it in the same way and at the same time," said Nicholls.

HM Revenue and Customs (HMRC) has been under increased pressure as they are lacking resources, however advisers reported that they are still cooperative. "Given the public scrutiny of certain group's tax affairs, companies were becoming increasingly conservative with respect to their tax planning. There is no doubt that BEPS has reinforced this trend," said McFarlane.


Tax authorities

Her Majesty's Revenue and Customs, Corporation Tax Services
PO Box 29997, Glasgow, G70 5AB
Tel: +44 151 268 0571
Website: www.hmrc.gov.uk


Tax rates at a glance

(As of April 2016)

Corporate income tax 20% (a)(b)(c)
Capital gains tax 20% (d)
Branch tax rate 20%
 
Withholding tax
Dividends n.a.
Interest 20% (e)(f)
Royalties 20% (e)
Branch remittance tax n.a.
 
Net operating losses (years)
Carryback 1
Carryforward Unlimited

  1. The rate of corporation tax is 20% for both large and small companies. Effective from April 1 2017, the rate of corporation tax will decrease to 19%, and will decrease by a further 1% to 18%, effective from April 1 2020. The main rate of corporation tax for ring-fence profits (that is, profits from oil extraction and oil rights in the United Kingdom and the UK continental shelf) is 30% (small profits rate of 19%). The rates for ring-fence profits are not scheduled to change.
  2. The small profits rate of 19% for ring-fence profits applies in certain circumstances if taxable profits are below £300,000. This benefit is phased out for taxable profits from £300,000 to £1,500,000. These limits are reduced if associated companies exist.
  3. An additional 8% surcharge is levied on the profits of banks in excess of £25 million (before the offset of losses carried forward), effective from January 1 2016.
  4. Capital gains are subject to tax at the normal corporation tax rate.
  5. This tax applies to payments to nonresidents and non-corporate residents.
  6. A 45% rate applies to compound interest received from the UK tax authorities in certain cases

Source: EY 2016 Worldwide Corporate Tax Guide


Firm contact details

Baker & McKenzie