By Peter Mills, Tax Assistant Manager at Menzies LLP

Complex new rules restricting corporation tax relief for interest expenses are scheduled to be introduced in November 2017. For companies affected, the introduction of these rules could result in a significant increase in UK tax exposure and they could bring an increased administrative burden as well. Some groups may therefore need to rethink their existing financing arrangements in the UK to ensure they are optimal from both a commercial and tax perspective.

The rules, which are expected to have retrospective effect from 1 April 2017, will be most relevant for UK companies which are members of large international groups but can also affect groups that operate exclusively in the UK.

What are the key changes?

 For groups with annual UK net interest expenditure of more than £2m, relief for interest expenditure in the UK will, broadly, be limited to the lower of:

• The higher of:
  1. 30% of UK tax adjusted EBITDA; and
  2. The group’s ratio of interest to EBITDA applied to the UK’s tax adjusted EBITDA.
• The group’s consolidated net interest expense.

The rules do however include a £2m de minimis limit and therefore groups will always be able to deduct at least £2m of UK interest expense a year.

There are also a number of elections and reliefs which may be applicable in certain circumstances and the rules also allow unused interest allowances and previously disallowed amounts to be carried forward, subject to certain limitations, to alleviate the impact of any timing issues.

What do the changes mean?

For UK group companies the corporate interest restriction (CIR) rules could result in a significant increase in UK corporation tax exposure, particularly if they are highly geared, and may fundamentally alter the effectiveness of debt-financing arrangements.

The rules also impose further complex and burdensome computational and reporting obligations, which are likely to place additional strain on group administrative functions.

For a number of UK companies who may have historically operated as single autonomous business units with limited sight or influence over the wider group’s affairs, simply understanding and modelling the implications of the CIR rules could be difficult.

There may also be broader commercial challenges due to the requirement to share detailed (and potentially sensitive) financial data between group companies. For example, where those entities are naturally in competition with one another there may be a natural reluctance to share information in this way.

Is it time for simplicity?  

Debt financing has long been a common tool used by global groups to manage their worldwide tax exposure. However, in the face of widening complexity and as the cost of debt finance increases, these new restrictions may leave international groups wondering whether now is the time to reassess and simplify their financing arrangements.

The UK already operates a comparably low rate of corporation tax and there may already be instances where interest income is subject to a higher rate of tax overseas than it is saved in the UK.

It could therefore prove more tax effective for profits to arise in the UK, particularly where a parent entity operates in a jurisdiction which has a similar dividend exemption to the UK. Dividend repatriation could also help to simplify reporting requirements by removing the implications of CIR reporting and reducing the need to consider factors such as transfer pricing, thin capitalisation and withholding taxes.

In the right circumstances, a change of financing arrangements may also not limit the ability for parent entities to withdraw capital, given the UK’s relatively relaxed and generous approach to reducing share capital.

Re-evaluating the mix

A number of wider factors should be considered before taking a decision to refinance UK operations. CFOs and/or Boards will need to fully assess the commercial and financial impact of the new rules at jurisdictional and group levels; weighing up the comparable merits of debt and equity as means of financing UK operations. Caution may be needed in scenarios which would result in more of the same income unnecessarily being taxed in two jurisdictions, for example where a parent entity operates in a jurisdiction which taxes dividend income, such as the USA.

As corporate tax regimes around the world strengthen their focus on ensuring tax is ultimately being paid in the right jurisdictions, the benefits of operating a corporate structure with high levels of intercompany debt are decreasing whilst the associated administrative complexity continues to increase.

Depending on their commercial circumstances, now could be the time for groups affected by the new rules to re-evaluate their financing arrangements to ensure their group tax affairs continue to be conducted in an efficient manner.

About the Author

Peter Mills is a tax assistant manager at accountancy firm, Menzies LLP. He specialises in advising corporates and owner-managed businesses on their tax affairs in the UK including corporate transactions, group structuring and managing the impact of changes in the international tax landscape.

Website: https://www.menzies.co.uk/

To hear about taxation in Cyprus, this month Finance Monthly reached out to Panicos G. Loizou, a Board Member at KPMG in Cyprus. After obtaining an Honors degree in Economics from the University of Salford, he trained with a big eight practice in Manchester and became a member of the English Institute of Chartered Accountants and subsequently a Fellow member. Panicos has also attended a crash management Course at Wharton School, University of Pennsylvania, Philadelphia. He is a member of the Institute of Taxation by examinations, and a member of STEP and was recently elected as a member of the Council of STEP, taking full responsibility in January.

What are currently the hottest topics being discussed in relation to tax in Cyprus?

The implementation of standards and regulations about exchange of information like CRS and Country by Country reporting, increased the taxpayers’ desire for a last time tax amnesty, aligned with many other jurisdictions. Instead, the Cyprus House of Representatives introduced new legislation which incorporates special arrangements for the settlement of overdue taxes. The legislation has induced a number of tax payers to come forward and declare income and assets not previously reported in their tax returns.

What amendments have been made to the tax regulation recently?

Apart from the aforementioned legislation referring to the settlement of overdue taxes, recent amendments include mainly provisions relating to transfer pricing, as well as amending the tax residency definitions for individuals and non-domiciled individuals. These amendments have already arose increased interest by wealthy individuals and families, who are taking necessary steps in order to comply with the provisions of the new legislation. In this way, they will become Cyprus tax residents and at the same time they would be registered with the Tax Authorities for the Non-Dom status.

It is important to pay attention for the revised definition, meaning that the foreign national who is physically present in Cyprus for more than 183 days within a calendar year, will be considered as a Cyprus tax resident and he/she will be subject to taxation in Cyprus on his/her worldwide income. The definition has been amended to also provide that, an individual who does not stay in any other country, for one or more periods exceeding in aggregate 183 days in the same tax year and is not tax resident in any other country for the same year, is deemed as a resident in the Republic in that tax year, if all of the following conditions are met: (i) the individual stays in the Republic for at least 60 days in the tax year, (ii) exercises any business in the Republic and/or is employed in the Republic and/or holds an office with a Cyprus tax resident person at any time during the tax year, and (iii) maintains (by owning or leasing) a permanent residence in the Republic.

Do you believe there is potential for further significant legislative development in the tax field in Cyprus?

Yes, indeed, as the Cyprus Government is already fostering the efforts to prepare the new legislation concerning the audiovisual industry. Just to be on the same line, the forms of audiovisual communication include television advertising, sponsorship, teleshopping, product placement, on-demand audiovisual media services and radio broadcasting, which aim the provision of programs in order to inform, entertain or educate the general public. Bound by certain criteria, there would be a number of tax incentives such as “Cash Rebate”, “Tax Credit”, tax reduction for infrastructure and equipment investments and VAT return over eligible expenditure. Moreover, special attention is given by the Authorities to the benefits in kind provisions.

In terms of tax structures, what are the advantages for foreign companies wanting to establish a business operation in Cyprus?

Corporate tax of Cyprus tax resident companies is currently imposed at the rate of 12,5% for each year of assessment on the taxable income, derived from sources both within and outside Cyprus. In arriving at the taxable income, deductions on such income and exemptions must be taken into account. All relevant expenses incurred wholly and exclusively for the production of that income are deductible expenses whereas dividends, capital gains or profit from the sale of shares and other securities constitute tax exempt income. Expenses that directly or indirectly relate to tax exempt income are not tax deductible.

What actions has Cyprus taken towards remaining competitive as a financial centre?

In the current fluent, economic and political environment, Cyprus takes all appropriate measures to remain competitive as a financial centre. That includes, considering the measures adopted by other competitive countries and undertaking measures in order to attract business and investments through the implementation of tax incentives.

Website: https://home.kpmg.com/cy/en/home.html

Another financial year has passed, and as you look back, will you seek to do things differently next time around? Below, Dean Snappey, the President and Co-Founder of DocsCorp discusses with Finance Monthly 5 simple accounting tools that’ll make your life that much easier to navigate at this time of year.

Over the past 12 months we have seen considerable adjustments to taxation, such as changes to dividend taxation and the recent increased tax for landlords. Aim to prevent the end of year mess and avoid the kind of errors that carry implications to your and your company’s reputation.

There are several accounting tools and software solutions available at your fingertips to ease the process, stay organised and plan ahead. Make the most of these accounting tools and follow these five easy steps to make pre-emptive tax planning simple.

1. Bundle Documents. Best practice is to ensure any invoices, statements and paperwork are scanned and saved as a PDF document as paper filing systems and loose documents are at risk of being lost or damaged. Document bundling software gives you the ability to collate PDF content and bind all relevant documents such as tax returns, invoices and financial accounts into a single file for each client. By bundling all important documentation, it will make the process of finalising paperwork much easier as all documentation required will be stored together. Finalised documents can then be sent as a single secure file in one hit rather than multiple attachments, saving you time with each client and avoiding the risk of lost or separated files.
2. Redaction. As part of the process of preparing documents with such complex data, it is essential to redact classified or sensitive information. To redact is to remove, therefore ‘redacted’ is often used to describe documents from which sensitive information has been expunged. By using a redaction tool it is easy to search whole documents to redact multiple instances of a word or string of words in a way that is quick, easy and fail-proof. Redact personal information or bank account details in documents as part of an audit.
3. Make Scanned Documents Searchable. When you scan invoices, receipts and finalised paperwork onto your desktop, the scanned documents are image documents that do not have the text layer that’s needed to make them searchable. You can make the documents text-searchable with an Optical Character Recognition (OCR) tool. This software converts scanned, printed or handwritten files into its machine readable text format.  You can then search whole documents for a word, phrases or a set of numbers which makes finding information or documents for tax audits a breeze.
4. Remove Metadata. Metadata may appear hidden, however, every time you annotate, edit or alter a document, your decision is stored invisibly within the very document you’re working on. Metadata removal software removes metadata from files – eliminating any risk of unintentional information leakage. To put it simply, the metadata cleaner will ensure you only send the part of the document or spreadsheet you intend to – exactly what would be printed out on a piece of paper. Remove hidden cells and other sensitive metadata before uploading or attaching files intended to be sent to clients.
5. Compare Documents for Change. Working with numerous clients means navigating through each client’s financial accounts and complex paperwork. Throughout the year many changes can occur within clients’ businesses, often meaning multiple changes to important documentation. Analysing large volumes of documentation, in which precision is required, can be very time consuming. There is a simpler way to undertake this task, which is by using a Comparison software package. This enables you to compare and analyse the differences between two documents with incredible accuracy and reliability. The software is able to show you the smallest change in documents, spreadsheets, PDFs without needing to convert them first. Save time and never miss an important change again.

HSBC’s Group Chief Executive Stuart Gulliver blamed a ‘challenging year’ for the banking group’s 17% drop in profit before tax (PBT), as the financial giant posted its full year 2014 results today. The results follow allegations earlier this month that HSBC’s Swiss unit has assisted people to avoid and evade tax using hidden accounts in Geneva.

The beleaguered bank filed a PBT of $18.7 billion (€16.5 billion), down from US$22.6 billion (€19.9 billion) in 2013. The banking group said this primarily reflected lower business disposal and reclassification gains and the negative effect, on both revenue and costs, of significant items including fines, settlements, UK customer redress and associated provisions.

Adjusted PBT was broadly unchanged in 2014 at $22.8 billion (€20.1 billion) and excludes the year-on-year effects of foreign currency translation and significant items, compared with $23 billion (€20.3 billion) in 2013. Return on equity was lower at 7.3%, compared with 9.2% in 2013.

However, HSBC did report stable revenue, with 2014 adjusted revenue of $62 billion (€54.8 billion) compared with $61.8 billion (€54.6 billion) in 2013, underpinned by growth in Commercial Banking, notably in its home markets of Hong Kong and the UK.

Stuart Gulliver, Group Chief Executive said: “2014 was a challenging year in which we continued to work hard to improve business performance while managing the impact of a higher operating cost base. Profits disappointed, although a tough fourth quarter masked some of the progress made over the preceding three quarters Air Maniax. Many of the challenging aspects of the fourth quarter results were common to the industry as a whole. In spite of this, there were a number of encouraging signs, particularly in Commercial Banking, Payments & Cash Management and renminbi products and services. We were also able to continue to grow the dividend.”