Spring Budget 2017 – International Corporation Tax Changes and an extension to the Double Tax Treaty Passport Scheme

The proposed amendments in the international corporate tax sphere are minor adjustments to existing legislation.

The first amendment relates to the Passport Scheme which applies to UK corporate borrowers paying interest to non-UK corporate lenders resident in another country with which the UK has a double tax treaty. The withholding tax on such interest payments will be at the treaty rate without the need to seek prior clearance for each payment or new loan.

The second amendment relates to the taxation of hybrid tax arrangements within groups. Usually such arrangements are carried out between UK and foreign companies within the same group. As a result of the taxation treatment of these transactions within the relevant jurisdictions, a tax advantage arises within the UK. These advantages can be permitted in certain circumstances.

The changes to both these areas are largely administrative.

In relation to the Passport Scheme, simplifications within the process will give easier access to the reduced rates of withholding tax on interest on payments to persons in other countries as permitted within the UK’s double tax treaty network. Previously the scheme was only open to UK and overseas corporates. A welcome change to the scheme, effective from 6 April 2017, is that passports will now be available to all types of overseas lenders and UK borrowers.

The changes to the hybrid regime are minor and relate to the removal of the ability to lodge formal claims in relation to the permitted time period rules. This move is intended to reduce the compliance burden for taxpayers, given the high volume of transactions in hybrid financial instruments, which will be a welcome relaxation for those involved in this work.

The other change in this regime will remove amortisation from the category of relevant deductions. This is effectively implementing the OECD’s proposals within the Base Erosion and Profit Sharing (BEPS) action point 2 to ensure that amortisation will not give rise to cross-border mismatches and result in tax leakage in the UK.

The hybrid changes will largely affect multi-national groups of companies only and most businesses, even those with international transactions, will be outside these changes.

The Passport Scheme proposals will affect all those using the scheme and will open up the scheme to many more UK borrowers and overseas lenders. Many UK based individuals who borrow from overseas entities will now find it easier to pay interest with the minimal withholding tax rate without the need to repeatedly apply for clearance.