Alongside financial secretary David Gauke, the chancellor suggested the government would soon be delivering a low tax regime that would not only attract global firms to Britain, but ensure taxes are being paid in the UK as well.
“The approach we shall now be taking is guided by the best practice set out by the OECD, work which Britain called for, paid for and will be among the very first to implement,” Osborne explained. “This is due to some multinationals deliberately over-borrowing in the UK to fund activities abroad and then deducting the interest bills against UK profits.”
This comes hand-in-hand with the previous launch of the government’s Diverted Profits Tax, aimed at large firms artificially shifting profits offshore.
Osborne’s latest changes are designed to curtail the behaviour of large global businesses such as Amazon and Google which have operations in the UK but avoid paying corporation tax by having headquarters in locations such as Ireland and Luxembourg. Interest deductibility for the largest companies will be restricted at 30 per cent of UK earnings, while making sure firms whose activities justify higher borrowing are protected with a group ratio rule.
“We’re also setting new hybrid mismatch rules to stop the complex structures that allow some multinationals to avoid paying any tax anywhere, or to deduct the same expenses in more than one country,” the chancellor maintained. “Then, we’re going to strengthen our withholding tax on the royalty payments that allow some firms to shift money to tax havens.”
Read more about the Budget 2016:
- Capital gains tax cut from to 20 per cent to boost businesses
- George Osborne to cut corporation tax to 17 per cent
- Full transcript of chancellor George Osborne’s speech
This all means modernising the way Britain treats losses. Osborne explained that the UK would allow firms to use losses more flexibly, which would enable the nation to restrict the maximum amount of profits that can be offset using past losses to 50 per cent – allegedly a common tactic – in a year. Some of these changes will only take force in 2019 though, meaning companies will be given time to readjust. This will only apply to the less than one per cent of firms making profits over £5m – and the existing rules for historic losses in the banking sector will be tightened to 25 per cent.
Stella Amiss, international tax partner at PwC, suggested all UK bosses with borrowings will have to re-evaluate their tax position on the back of the announcement. “The move will likely increase costs at a time of economic uncertainty,” Amiss said.
“Whilst these changes have been on the cards since late 2015, the shock factor is the speed with which Osborne intends to make these changes and additional restrictions to losses. Businesses were calling for a decent amount of time for transition and this timetable risks introducing changes that even the OECD hasn’t worked out how to implement.
“The chancellor is keen to be seen as leading the way for the international community in tackling tax avoidance. With this in mind, it is not a surprise he is moving ahead of other G7 nations to adopt international recommendations on tax relief given to business for borrowing costs.”
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