Hybrid and other mismatches

Finance Bill – in a Public Bill Committee am 11:00 am ar 5 Gorffennaf 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss that schedule 10 be the Tenth schedule to the Bill.

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee

The same general points that I made about clause 61 broadly apply to this clause. The United Kingdom finds itself occupying a new place in the world and the provisions in the clause relate to the difficult business of double tax treaties. Such treaties currently need to be negotiated on a bilateral basis with countries that are outside large trading blocs such as the EU. They are therefore a model for the sort of issues that will be vital for the UK outside the EU.

There are model double tax treaties created by the OECD, which will guide our work. A future Labour Government would be outward looking in forging alliances of the sort possible under the OECD umbrella to create viable tax regulation and financial regulation internationally. However, there are some contexts in which the provisions in schedule 10, which the clause introduces, appear to be a little vague. For example, proposed new section 259BD(8) prevents a company from being “under taxed”, by identifying the highest rate at which tax is charged and asking whether that is lower than the company’s full marginal rate of tax should have been.

That is to be done by taking into account, on a “just and reasonable basis”, any credit for underlying tax. The reference to just and reasonable appears somewhat vague when contrasted with, for example, provisions governing international accounting standards in earlier clauses. As a survivor of the legal world, will the Minister confirm what “just and reasonable” is intended to mean and how HMRC will use that broad measuring stick in practice? Does he think that is a sufficiently clear mechanism for identifying whether sufficient tax has been paid, or do the Government simply seek to grant HMRC as much slack as they can?

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

Clause 62 and schedule 10 make changes to tackle multinationals that avoid UK corporation tax through cross-border business structures known as hybrid mismatch arrangements. We are building on the new rules announced at autumn statement 2014 and extending them, not least so that they also cover overseas branches, leading the way on implementing international best practice in this area.

The changes will neutralise the tax effect of hybrid mismatch arrangements and effect the recommendations of action 2 of the G20-OECD base erosion and profit-shifting project. In addition, they will neutralise the tax effect of hybrid mismatch arrangements involving permanent establishments. That means that the measure will tackle aggressive tax planning where, within a multinational group, either one party gets a tax deduction for a payment while the other party does not have a taxable receipt or there is more than one tax deduction for the same expense. The aim is to eliminate the unfair tax advantages that arise from the use of hybrid entities, hybrid instruments, dual resident companies and permanent establishments. That will encourage businesses to adopt less complicated cross-border investment structures.

In 2013 the OECD and the G20 countries adopted a 15-point action plan to address base erosion and profit shifting. BEPS refers to tax-planning strategies that exploit gaps and mismatches in the tax rules of different countries to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but where the tax rates are low, resulting in little or no overall corporate tax being paid. The BEPS action plan is aimed at ensuring that profits are taxed where the economic activities generating the profits are performed, and where value is created.

Clause 62 and schedule 10 implement the recommendations on neutralising the effects of hybrid mismatch arrangements. The rules are designed to ensure that multinationals can no longer derive tax benefit from mismatch arrangements using hybrid entities, hybrid financial instruments or dual resident companies.

Clause 62 and schedule 10 also include rules to tackle hybrid mismatch arrangements that involve permanent establishments. Permanent establishments of companies are often used as an alternative to hybrid entities in tax planning arrangements, as they provide for similar mismatch opportunities. The clause covers such arrangements to ensure that groups cannot simply sidestep the OECD recommendations by using permanent establishments. Failing to tackle such permanent establishment arrangements would present an obvious opportunity for further avoidance, which would undermine the measure’s policy objective.

The Government announced their intention to introduce domestic legislation in October 2014. They consulted at autumn statement 2014 and later published draft legislation for technical consultation in December 2015. As a result, clause 62 and schedule 10 have been informed by consideration of responses to the consultation, by further engagement with interested parties, and by publication of the final OECD report.

The changes made by clause 62 and schedule 10 will address hybrid mismatch arrangements by changing the tax treatment of either the payment or the receipt, depending on circumstances. The rules are designed to work whether both countries affected by a cross-border arrangement, or just one of them, have introduced the OECD rules. The changes will affect large multinational groups with UK parent or subsidiary companies that are involved in transactions that result in a mismatch in tax treatment in the UK, or between the UK and another jurisdiction. The rules will take effect from 1 January 2017. In taking the action, and particularly in providing for the rules to cover permanent establishments, the UK will not only fully implement the agreed OECD recommendations; it will go beyond them. That will bring in more than £900 million over the next five years.

The hon. Member for Salford and Eccles raised a point about the definition of the expression “just and reasonable”. There is no definition; it takes account of the facts and circumstances of specific cases and does not give advantage to the tax Administration. It is a well used expression, which is understandably used in the circumstances in question.

The Government are stopping multinationals avoiding paying their fair share of UK tax through the use of cross-border business structures. We are building on the rules that we announced at autumn statement 2014 and extending them so that they also cover overseas branches, leading the way on implementing international best practice in the area.

Question put and agreed to.

Clause 62 accordingly ordered to stand part of the Bill.

Schedule 10 agreed to.

Clause 63