U.K. International Tax Updates
Multinational enterprises (MNE) headquartered in the United Kingdom (U.K.) or MNEs with subsidiaries in the U.K. will likely be affected by two major proposals involving the U.K. corporate tax rate and revisions to the format of U.K. transfer pricing documentation. On March 3, U.K. Chancellor of the Exchequer Rishi Sunak put forth the 2021 budget, which included an increase in the corporate income tax rate from 19 percent to 25 percent. On March 23, the U.K. government announced its intention to adopt the Organisation for Economic Co-operation and Development’s (OECD) transfer pricing documentation standard, as well as the implementation of an International Dealings Schedule (IDS). Both proposals will no doubt require MNEs with U.K. entities to reassess their tax strategy pertaining to the U.K. and their level of U.K. transfer pricing documentation.
Over the last decade, the U.K. has ratably reduced its corporate tax rate in a bid to attract investment. In fact, the U.K. corporate income tax rate has not increased since the mid-1970s. The 2021 budget proposes to increase the corporate tax rate from 19 percent to 25 percent. The increase is necessary to cover stimulus measures, which are estimated to exceed £407 billion. The new rate will go into effect on April 1, 2023. Companies with profits greater than £250,000 will be subject to the new 25 percent rate, while taxpayers with profits of £50,000 or less will still pay tax at the existing 19 percent rate. There will be a tapered rate for taxpayers with profits above £50,000 but below the £250,000 threshold. It is projected that the increased rate will raise approximately £12 billion in the first year and would be applicable to approximately 10 percent of U.K. corporations. In 2018 to 2019, approximately 4,500 companies paid tax in excess of £1 million, which represented 55 percent (£30.2 million) of the total corporate tax liability, whereas just above 1 million companies had tax liabilities of less than £10,000 and only contributed 6 percent (£3.4 billon) of the corporate tax liability. Therefore, it is logical that the U.K. government would target larger companies with the tax rate increase.
In 2015, the OECD released its three-tiered approach to documentation: country-by-country reporting (CbCR), master file, and local file. The OECD’s documentation format was meant to promote consistency of transfer pricing documentation throughout the world. While the U.K. adopted CbCR in 2016, which is the minimum standard of required transfer pricing documentation as promulgated by the OECD, it did not formally adopt the master and local file concepts. Under the proposal, large U.K. MNEs would be required to prepare a master and U.K. local file. The proposal also includes the implementation of the IDS and a supplement evidence log. The IDS, which is a related-party disclosure form, would likely require all MNEs, regardless of the size of revenues, to disclose the following information to the U.K. tax authority: types of intercompany transactions; details of financial dealings; details of restructurings; transfer pricing methodologies applied; and existence of transfer pricing documentation, counterparties to the transactions and their country location, etc. The supplemental evidence log is essentially an index of information and facts that is attached to the local file and used to demonstrate the source of the local file data and pertinent facts used to prepare the technical portion of the local file. While the proposals have yet to be formalized, the U.K. government has requested comments on the proposals by June 1. However, the transfer pricing initiatives will most likely be implemented without many modifications, as the U.K. government’s transfer pricing compliance initiative, Profit Diversion Compliance Facility, has yielded £6 billion in additional tax revenue over the last five years.
Reach out to your BKD Trusted Advisor™ or submit the Contact Us form below to discuss how these proposals may affect your U.K. operations.