The HM Treasury in the UK published a consultation paper last week, regarding plans to restrict the tax deductibility of corporate debt costs.
The consultation paper of the Treasury aims to counter aggressive tax avoidance, especially by multinational companies that use cross-border debts to shift taxable profits between jurisdictions.
The Organisation for Economic Cooperation and Development’s (OECD) had previously come up with the idea for a restriction on debt relief, by the Base Erosion Profit Shifting (BEPS) initiative.
According to the paper, the Treasury supports that “significant planning opportunities can arise from both external and intra-group interest expenses”. It also remarks on the effectiveness of a new general rule restricting interest, calling it “a major change to the UK corporate tax regime, requiring careful consideration to ensure any new rules work appropriately”.
The new rule is likely to suggest that a corporate group’s net interest relief should be capped at a fixed percentage of around 10 to 30% of any taxable profits in the UK. The percentage cap would be applied to the EBITDA measure of profits (earnings before interest, taxes, depreciation and amortisation).
Other possibilities included in the consultation suggest a cap based on worldwide debt/profit ratios, or even an ‘equity escape’ rule comparing tax-adjusted measures of an entity’s level of equity and assets to those of its parent group.
The consultation closes on January 14th 2016, with the measures expected to be introduced by April 2017.