By email to: BEPSinterestconsultation@hmtreasury.gsi.gov.uk

12 January 2016

Dear Sir/Madam,

Tax deductibility of corporate interest expense: consultation

Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation document published on 22 October 2015. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future.

We wish to briefly comment on the current consultation.

Complexity

The consultation proposals would add an additional layer of complexity to calculations of deductible interest, given the existence of a plethora of rules across UK tax legislation which already deal with this matter.

It is envisaged that any new interest restriction would operate after the transfer pricing rules and anti-avoidance rules, including the anti-hybrid rules to be introduced following the OECD report on Action 2. However, in order to reduce the level of complexity, it is clear that any rules which become redundant as a result of any new rules introduced should immediately be repealed.

The consultation document also suggests that any new interest restriction would replace the worldwide debt cap (“WWDC”), or the WWDC would need to be adapted to fit with the new approach. Again, this has the potential to add additional complexity to the rules for interest deductions. We would thus be supportive of removing the WWDC rules instead of adapting them; to adapt them would simply add another unnecessary layer of complexity.

SME exemption

It is clear from the consultation that in order to meet the OECD recommendations, the UK Government considers there to be a need to introduce a new general rule for restricting interest. Clearly this would be a major change to the UK’s regime.

If a more general rule were to be introduced, we would be supportive of an exemption for small and medium sized enterprises (“SME”) and to grandfathering arrangements for existing debt. This SME carve out could be designed in the same way as the current SME exemption under transfer pricing legislation.

Deminimis test

For those companies not meeting the SME exemption test, we would recommend a deminimis exemption be included. This could be based on similar exclusions and carve outs provided for in the WWDC legislation.

For example, in the WWDC legislation, when calculating aggregate net debt of the UK companies in the group for the purpose of the gateway test, a company is ignored if it has net debt of less than £3 million. In addition, where the amount of the net finance expense for any relevant group company is less than £500,000, then that company is ignored for the purposes of arriving at the tested expense amount the excess of which, when compared with ‘available amount’, is then disallowed.

We would further suggest that if a company has an amount of interest to be disallowed, it be able to decide, in group scenarios, how the disallowance is to be allocated within its group. Again, this is currently provided for in the WWDC legislation.

Particular sectors

Should these recommendations be introduced, they will have a significant impact on the ability of multinationals to benefit from tax reliefs for financing costs in the UK thus making the UK a less attractive place to locate.

In its March 2014 report “Tackling Aggressive Tax Planning in the Global Economy”, the UK Government noted that a limited version of the group ratio method has been adopted by the UK, in the form of the WWDC legislation.

That report cautioned that restricting deductibility of interest would have a significant impact on many businesses and the design of the rules would need to recognise the impact on specific sectors, particularly those that have legitimately high leverage ratios. That concern remains and is a major issue.

Infrastructure projects

The potential exists to significantly impact on the real estate and private equity industries in particular. In addition, critical infrastructure projects would be impacted.

As the 2014 report recognises, most major infrastructure projects are financed and delivered through special purpose companies, which have a very high level of debt relative to equity. This is standard international commercial practice.

Financial sector

The UK financial sector would also be adversely impacted. Banks make trading profits from, among other things, the margin between interest paid on money borrowed and interest earned on money lent. Debt is thus part of the circulating capital of the business and the associated interest cost of servicing that debt is a core trading expense.

This particular issue was also recognised in the aforementioned report. As the report recognised, banking and insurance groups are subject to both group capital requirements and local capital requirements in respect of those parts of their groups operating in different local markets. Therefore any structural interest restriction or allocation method is likely to either create asymmetries or place a disproportionate burden onto the financial sector and would, in many cases, wholly undermine their business models.

We agree with the conclusion reached in the 2014 report that it would not be appropriate to apply a structural interest restriction model to the financial sector, and certainly not in relation to their day to day trading activities.

The WWDC rules do not apply to financial services groups who generate substantially all of their income from lending activity, insurance business or dealing in financial instruments. Any new interest deduction rule should contain a similar exclusion for such businesses.

Conclusion

Overall, there are many complex issues that arise as a result of the proposals in the consultation document. Not the least of these are issues such as retroactivity, transitional provisions, grandfathering, interaction with existing tax rules and the impact on particular sectors of the UK economy.

The consultation document suggests that if new rules are introduced in the UK it is unlikely this would be before 1 April 2017. That is just over a year away and simply does not allow sufficient time for full and proper consideration of the many issues raised by this consultation and the OECD recommendations on Action 4, as they would impact in the UK context.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website and will be available to all of our members and the general public.

Do not hesitate to contact Brian Keegan (brian.keegan@charteredaccountants.ie) or Leontia Doran (leontia.doran@charteredaccountants.ie) of this office should you require anything further.

Yours faithfully,

Paddy Harty

Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

Source: Chartered Accountants Ireland. www.charteredaccountants.ie