International Tax Planning and Transfer Pricing Planning: United Kingdom from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country United Kingdom in the OECD context
    • 2.3 Transfer pricing rules of the United Kingdom
      • 2.3.1 Arm's length principle
      • 2.3.2 Transfer pricing methods
      • 2.3.3 Country-by-Country reporting
      • 2.3.4 Documentation requirements
      • 2.3.5 Cost sharing
      • 2.3.6 Business restructuring
      • 2.3.7 Interaction between customs valuation and transfer pricing
      • 2.3.8 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between the United Kingdom and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty UK-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 The United Kingdom in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from the United Kingdom to the US
      • 2.4.8 Case study 2: Intesests from the United Kingdom to the US
      • 2.4.9 Case study 3: Royalties from the United Kingdom to the US
      • 2.4.10 Case study 4: Management and technical service fees from the United Kingdom to the US
      • 2.4.11 Case study 5: Capital gains with the United Kingdom as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to the United Kingdom
      • 2.4.13 Case study 7: Interests from the US to the United Kingdom
      • 2.4.14 Case study 8: Royalties from the US to the United Kingdom
      • 2.4.15 Case study 9: Management and technical service fees from the US to the United Kingdom
      • 2.4.16 Case study 10: Capital gains with the US as asset country and the United Kingdom as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetory Fund the UK confirms in 2016 with a gross domestic product (GDP) of US$ 2,649,890 million the second-highest GDP of Europe. In the UK the corporation tax rate has fallen to 20.00% from 1 April 2015. For UK resident companies with taxable profits of below £300,000, the small profits rate of 20.00% applies. From 1 April 2015, the small profits rate is abolished and all companies are taxed at the main rate. A marginal relief applies for companies with income that is above the lower limit (£300,000) but equal or below the upper limit (£1.5 million). Thus, the UK is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. The UK has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, the Brexit referendum vote has reduced growth prospects and increased volatility, as reflected by the large currency depreciation. Monetary policy has mitigated the immediate impact of the shock by stabilising financial markets and shoring up consumer confidence. This projection assumes the United Kingdom will operate with a most favoured nation status after 2019, but there is considerable uncertainty about this, which will increasingly weigh on growth, and in particular private investment, including foreign direct investment. Higher inflation is projected to hit households’ purchasing power and to reduce corporate margins, weakening private consumption and investment. As growth slows, the unemployment rate is projected to rise. Macroeconomic policies need to be expansionary. Inflation is set to exceed the target of 2%, but the monetary policy stance is expected to be unchanged as the inflationary impact of currency depreciation should be temporary. The latest government plans released in the Autumn Statement indicate a slower pace of fiscal consolidation and some increase in public investment. A more significant increase in public investment would support demand in the near term and boost supply in the longer term. This chapter provides a survey on the actual tax law frame conditions in the United Kingdom and practical support in international tax planning and transfer pricing planning between the US and the United Kingdom based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing the United Kingdom applies the arm’s length principle and the OECD Guidelines, especially the the following transfer pricing methods: the comparable uncontrolled price method; the resale price method; the cost-plus method; the transactional net margin method; and the profit split method. Other methods are also permitted if the facts and circumstances of the case mean that a different method is a more reliable way of determining an arm’s length result. In limited circumstances, it may be appropriate to combine two or more methods. Two companies are related if one controls the other, or if they are both under common control. A company has “control” over another company, (i) if it has the power to ensure that the affairs of that other company are conducted in accordance with its wishes; and (ii) this power is exercised either by means of the holding of shares or the possession of voting power, directly or indirectly, or by virtue of any powers conferred in the articles of association or other document regulating that company. Companies are required to keep documentation on transactions with related companies. Cost sharing is allowed, with respect to business restructuring special rules apply, there is a conection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available. There are rules for dispute resolution and advance pricing agreemens are available.

Introduction

International tax planning and transfer pricing planning between the United Kingdom as most important national economy of the British Commenweath, partially regulated market economy, fifth-largest economy in the world and second-largest in Europe after Germany, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2015 3rd place of the most populous countries in the world (4.4% of the world population). [1] Further, the UK is one of the most populous countries in Europe (with 65 million inhabitants 0.88% of world population).

According to the International Monetory Fund[2] the UK confirms in 2016 with a gross domestic product (GDP) of US$ 2,649,890 million the second-highest GDP of Europe. In the UK the corporation tax rate has fallen to 20.00% from 1 April 2015. For UK resident companies with taxable profits of below £300,000, the small profits rate of 20.00% applies. From 1 April 2015, the small profits rate is abolished and all companies are taxed at the main rate. A marginal relief applies for companies with income that is above the lower limit (£300,000) but equal or below the upper limit (£1.5 million). Thus, the UK is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. The UK has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD[3], the Brexit referendum vote has reduced growth prospects and increased volatility, as reflected by the large currency depreciation. Monetary policy has mitigated the immediate impact of the shock by stabilising financial markets and shoring up consumer confidence. This projection assumes the United Kingdom will operate with a most favoured nation status after 2019, but there is considerable uncertainty about this, which will increasingly weigh on growth, and in particular private investment, including foreign direct investment. Higher inflation is projected to hit households’ purchasing power and to reduce corporate margins, weakening private consumption and investment. As growth slows, the unemployment rate is projected to rise. Macroeconomic policies need to be expansionary. Inflation is set to exceed the target of 2%, but the monetary policy stance is expected to be unchanged as the inflationary impact of currency depreciation should be temporary. The latest government plans released in the Autumn Statement indicate a slower pace of fiscal consolidation and some increase in public investment. A more significant increase in public investment would support demand in the near term and boost supply in the longer term. With a weak economic outlook, further raises in the minimum wage should be considered prudently. Despite recent increases, long-term interest rates remain low, creating fiscal space as debt service obligations fall. Reducing tax expenditures and adopting a single VAT rate would improve both efficiency and fairness, but would require flanking policies to protect the poor. More spending on physical infrastructure and skills in regions lagging behind would raise productivity and wages, making fiscal policy more inclusive.

According to Orbitax[4] (Daily Tax News Digest of 7 December 2016)

on 5 December 2016, the UK published the draft provisions for Finance Bill 2017, which includes the measures announced as part of the Autumn Statement 2016.

What has been published? - The government is publishing draft provisions for Finance Bill 2017 for consultation. Where secondary legislation will give substantive effect to the Finance Bill clause, this has also been published in draft.

Each provision is accompanied by:

  • a tax information and impact note (TIIN) which sets out what the legislation seeks to achieve, why the government is undertaking the change and a summary of the expected impacts
  • an explanatory note which provides a more detailed guide to the legislation

TIINs are published in the overview of legislation in draft document, and are also available individually on the tax information and impact notes page. [5]

Contacts and closing date - If you wish to comment on any of the draft clauses, please use the contact details provided at the end of the relevant explanatory note. The closing date for comments is...

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