International tax outlook from the UK

International business everywhere will have been affected by the devastating events in Ukraine, with a knock-on impact on energy, supply chains, consequent inflation and the impact of sanctions. This comes with significant developments in the international tax landscape, which also requires attention. This article discusses the tax landscape from a UK perspective, considering domestic and international tax issues.

The most recent fiscal event in the UK was the Spring Statement on 23rd March. Assistance with spiralling energy prices was announced in the form of a cut in the rate of fuel duty of 5p per litre.

The impact of increased national insurance contribution (NIC) rates applying from 1st April 2022 on the costs of labour and take-home pay was mitigated to some extent for workers through a £3,000 increase in the threshold before which those rates apply. However, there was no mitigation for employers or individual UK investors (who will also be subject to a 1.25% increase in dividend tax and the 1.25% increase in employers’ NIC rates).

The Spring Statement also recognised that the UK lags behind many other jurisdictions in providing tax incentives for capital investment. The Government announced it is willing to consider many possibilities for improving the UK tax environment for capital investment, and more should be announced in the Autumn Budget. Meanwhile, the Government is in listening mode, so please get in touch if you have particular thoughts on how the UK’s capital investment tax policy should be refined.

Two other areas signalled for further attention included improvements to the tax regime for incentivising training/upskilling of the workforce and possible improvements to the UK’s R&D tax relief regime, particularly for larger corporates.

Despite the EU’s proposed intention to delay implementation of OECD pillar 2 minimum tax rules for a one year period to 31st December 2023, the UK still seems intent on implementation from 1st April 2023. The complexity of the rules, the additional information requirements, and difficulties that might be experienced in transition with the current OECD version of the rules mean this will be challenging for all businesses exposed to the UK rules. The uncertainties around the interaction of the OECD rules with the current US GILTI provisions were highlighted in the January 2022 UK consultation on implementing pillar 2 rules. However, it leaves resolution of these issues to international negotiations. Whether those negotiations are resolved before April 2023 remains to be seen. If there is no resolution, it will be interesting to see whether double taxation arises if GILTI, in its current form, is regarded as incompatible with the pillar 2 rules.

Since Brexit, the UK has put forward new proposals and legislation to facilitate the operation of business in the form of holding companies. In addition to the existing investment environment, there will be favourable tax treatment for qualifying asset holding companies from April 2022. There are also proposals to facilitate the transfer of an entity’s domicile to or from the UK with minimal tax impact. This direction of travel seems quite different to the rigid way in which the draft EU proposal for its unshell directive would operate. This proposed directive appears to open the possibility of increased compliance costs and physical/staff presence requirements that are out of line with the digital way in which business is carried on today. This is notwithstanding that in most cases in the EU, the principal purpose test must be applied before investment holding companies can access any treaty benefits.

For those businesses where the EU environment is becoming less amenable for investment holding activities, the UK could be a valuable alternative to consider.

There are several other developments in UK law of which larger international businesses with a UK presence should be aware. 

For businesses with gross UK turnover exceeding £200m or gross UK assets exceeding £2bn (of UK entities and UK permanent establishments), there is a requirement to report any uncertain tax treatments that exceed £5m in respect of either UK corporation tax, VAT or income tax (generally payroll taxes) from 1st April 2022.

This reporting requirement applies generally in line with the deadline for reporting the annual return for the relevant tax, though there are some particular rules to consider.

The UK has introduced a formal requirement to produce transfer pricing documentation in master and local file format from April 2023. Many groups may already be doing this, but there is still time for those who have yet to put such documentation in place. 

1st April 2023 is also when the UK corporation tax rate is set to increase from the current 19% to 25%. Looking at rates in 2021, this headline rate would still be the lowest of the G7 and the fifth or sixth lowest in the G20.

For a further discussion of international tax generally or from a UK perspective, please get in touch with a member of the Mazars global or UK tax teams.