2014 Autumn Statement: What Multinationals Operating in the UK Must Know
By Khalid Sadur, Director, Corporate Tax, Advisory Services
The UK’s Autumn Statement addresses government spending and taxation plans, and is one of two annual statements presented to parliament by Britain's Chancellor. This year’s Statement was delivered by George Osborne on December 3, and deals in large part with domestic issues, such as property tax reform and plans to improve Britain’s roads. It also announced, however, important changes to international taxation and multinational companies operating in the UK had better be aware of them.
HM Treasury warns in its 2014 Autumn Statement summary that “the [UK] government is clamping down on tax avoidance by multinational companies.” Part of this clampdown is a new diverted profits tax, announced by Chancellor Osborne last week and sometimes referred to as the “Google tax,” after that company’s perceived practice of shifting profits across borders to avoid paying corporate taxes. The details of the tax have not been finalized, but it will apply to both UK companies and foreign multinational companies with UK activities. More specifically, it will affect all companies with cross-border operations that artificially transfer profits from the UK via the use of royalties, IP planning or other means.
The “diverted profits tax” seeks to prevent this kind of artificial diversion by applying a 25% tax on profits generated in the UK but recognized in other countries. The tax is likely to be based on a “deemed profit” or a “deemed amount diverted” basis, so as to not contradict the UK’s existing double tax treaties, which govern where actual profits of an international business are taxed. The “diverted profits tax” will be introduced in April 2015, and the 25% rate will be 5% higher than the normal UK corporation tax rate. 
The 2014 Autumn Statement also announced that the UK will be the first country to implement a “country-by-country” (CbyC) reporting model, as proposed by the Organisation for Economic Co-operation and Development’s (OECD’s) base erosion and profit shifting (BEPS) project. Under OECD guidelines, companies with cross-border entities will have to provide information to tax authorities of each country in which they operate. This will include information on commercial activity, as well as financial information such as turnover and taxes paid. UK authorities believe this practice will provide insight into the activities of multinationals operating in the UK and in turn lead to increased tax revenues. The 2014 Autumn Statement confirmed that the UK government will legislate for the CbyC measure in the Finance Bill 2015, to go into effect January 1, 2016.
CbyC reporting requirements may add significant burdens to multinational companies operating in the UK, and those companies should start planning now to account for those burdens. More details on the “diverted profits tax” will be revealed when the draft Finance Bill 2015 is published. As with the CbyC requirements, companies will need to assess if they are likely to be affected by the new “diverted profits tax” measure and, if so, consider changes to their existing operations to account for it.
Given the desire of tax authorities everywhere for multinationals to pay their fair share of taxes on profits generated in their respective jurisdictions, other countries are likely to follow the UK’s lead in both of these areas.
For information on how Radius can help you prepare for the UK’s coming “diverted profits tax” and country-by-country reporting requirements, contact us.