Corporate Tax 2018

The Corporate Tax guide provides expert legal commentary on key issues for businesses. The guide covers the important developments in the most significant jurisdictions.

Last Updated March 07, 2018


Author



Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. The highly experienced tax group deals with the tax aspects of all corporate, commercial and financial transactions. Alongside a wide range of tax-related services, the team advises on: the structuring of the biggest and most complicated mergers and acquisitions; the development of innovative and tax-efficient structures for the full range of financing transactions; the documentation for the implementation of transactions so that the desired tax objectives are met; the tax aspects of private equity transactions and investment funds from initial investment to exit; and tax investigations and disputes from opening enquiries to litigation or settlement.


The tectonic plates of tax continue to move in a way that those who are involved in International tax, and will find this guide useful in their daily work, must be finding very destabilising.

Many multinational groups have extended supply chains, complicated R+D or service support arrangements and complex treasury or funding structures – so their tentacles stretch across many jurisdictions.

A number of things will now be putting pressure on them – change is very much in the air and the reach of tax authorities outside their own jurisdiction (to say nothing at this stage of the EU) becomes ever more threatening.

It seems a long time ago since the UK was focusing on tax reform as it moved to a territorial system and reduced its main corporate tax rate, in part to level the playing field for UK corporates deciding where to do business and in part to attract more business to the UK. “Race to the bottom” was the catchphrase then – but now we see not only that the UK’s annual yield from corporate taxes is not much diminished over the last ten years but also that other jurisdictions around the world have realised that low corporate tax rates can mean more jobs in the economy (with more yield from income taxes and VAT) without a concomitant drop in corporate taxes paid.

The US stood back from this for many years with a badly skewed tax system which:-

  • taxed domestic profits at a high corporate tax rate;
  • allowed inward investors to gear up on businesses in the US at much higher levels than was really commercially credible;
  • did not seem to attack offshoring of IP in the way in which many other jurisdictions in the world would have done; and
  • finally, had a benign regime in place so that much foreign-generated income was not subject to CFC apportionment and could be held offshore virtually indefinitely.

Once you have a system under which the jurisdiction stands back and allows its multinationals to do business abroad without the sort of safeguards that you see elsewhere, then you are on dangerous ground, because there is a powerful incentive (if you are not paying tax in your own jurisdiction) to find places where you can do business and avoid paying tax there, too.

This has led to increasingly artificial structures as businesses who established IP holding centres (for example) ten or more years ago have run out of the depreciation they claimed on the initial investment and are then looking to find a more imaginative way of not paying tax going forward.

BEPS was the initial result of all that – with the tax press around the world railing about “stateless income” and politicians talking about buildings in the Cayman Islands with several hundred companies said to be operating in them or telling business leaders (after the Starbucks publicity) that they should “wake up and smell the coffee”.

In the UK, diverted profits tax came in. That has always been given a bad name globally – as an attempt by the UK to tax extra-territorially. The clue, of course, is in the name – DPT only really applies to profits that “belong” in the UK but have been artificially booked elsewhere through wrong transfer pricing. The administration of DPT has sometimes left something to be desired but overall the tax seems to have been effective in achieving its aim of making people take transfer pricing enquiries more seriously. Transfer pricing with added brutality is probably the right tag.

Attempts to have a digital tax system under which you go beyond the current PE borders and tax people who are doing business in your jurisdiction from an offshore location (by selling products directly to consumers or businesses from internet platforms) have so far not really got off the ground – the BEPS process could not find an answer to this and many jurisdictions are clearly fearful as to whether or not a “market-access tariff” will backfire on them as other jurisdictions into which their multinationals make sales reciprocate.

Perhaps the best illustration of the way in which all this public pressure causes governance to do things which tax professionals might think to be illogical is in the anti-hybrid area and, in particular, the imported mismatch rules. For someone at the end of a UK supply chain and buying products where a contribution higher up the line has been assisted by a hybrid structure or artificial tax ruling, the impact of these rules can be totally unexpected. The UK disallowing the purchase price of the cost of goods simply because of something that is going on much higher up the chain and does not affect the UK is a surprising outcome.

It is no surprise that some jurisdictions have been slow to act in this area – typically, the UK has been an early mover.

Withholding taxes – always a good way of taxing people outside your jurisdiction on gross income that really ought to be taxed in the jurisdiction of residence – are also beginning to reappear. The UK, in particular, has been quick to impose withholding taxes on offshore royalties on the basis that no one else was going to complain if no one else was taxing the income. That policy is evidenced by the fact that treaty protection will usually wipe out the withholding tax. The UK is simply trying, like the BEPS process, to get multinationals to amend their structures in order to eliminate untaxed pools of profits. Whether or not that is the UK’s job is another matter.

Now, those looking in a worried way at their supply chains or R+D structures or treasury activities have two more things to worry about:-

  • US tax reform – where confusion reigns right now. The border tax intended to collect money from foreigners importing goods or services and people who had outsourced activities has gone. So has the excise tax, but it has been replaced by something not totally dissimilar. Many people will be looking very hard at their supply chains to reduce the impact of non-deductibility of the costs of importing services. Others will be thinking very hard about whether or not they return IP ownership to the US – only to find that a change of administration increases the tax rate again; and
  • State Aid – in some respects, it is odd that the EU is interfering with tax matters when the absence of fiscal unity means that tax does not otherwise feature in the treaties. However, a distorted tax system, favourable rulings or turning a Nelsonian blind eye to the true facts can distort trade. There will be much activity in these areas over the coming years and many people potentially affected will be looking very hard at their structures and how they can change or improve them. The impact on investment is difficult to predict – as many have pointed out, the fact that a corporate has delivered its part of the bargain by building a factory and employing people locally in reliance on a particular tax position but then has also to pay additional taxes to the state that has benefited from the inward investment feels totally unfair.

This guide will be useful to those who are having to make their way forward in an increasingly uncertain world (avoiding the earthquakes and volcanoes as they go).

Author



Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. The highly experienced tax group deals with the tax aspects of all corporate, commercial and financial transactions. Alongside a wide range of tax-related services, the team advises on: the structuring of the biggest and most complicated mergers and acquisitions; the development of innovative and tax-efficient structures for the full range of financing transactions; the documentation for the implementation of transactions so that the desired tax objectives are met; the tax aspects of private equity transactions and investment funds from initial investment to exit; and tax investigations and disputes from opening enquiries to litigation or settlement.