BEPS Bill could impact leveraged UK firms, says Fitch

Corporates with large shareholder loans may see a reduction in the tax deductibility of their interest expenses, rating agency cautions

Legislation designed to align the UK with the global effort against base erosion and profit shifting (BEPS) could impact upon leveraged firms with shareholder loans, says Fitch.

In a recent opinion, the ratings agency assessed the potential effects of the UK Finance Bill 2017.

Under that package of laws, it noted, firms will be entitled to an interest allowance. But any net tax-interest expenses above that allowance – plus any previous unused allowances – cannot be offset against tax.

“An analysis of our corporate portfolio,” Fitch wrote, “shows that around two-thirds have an interest expense below 30% of EBITDA, which is a key benchmark set by the fixed-ratio rule, and means they probably will not be affected.

“The remainder have the option to apply a different rule known as the group-ratio rule, and we think most will be able to use this option to greatly reduce or eliminate any disallowed interest expense.”

However, the rating agency pointed out, “this rule specifically excludes debt owed to related parties. Companies with large shareholder loans – often used in leveraged buyouts – may therefore be affected”.

Multinational corporates with UK subsidiaries that issue either third-party or related-party debt, it warned, “may see a reduction in the tax deductibility of interest expense if the UK group is more leveraged than the wider group”.

While Fitch said that initial talks with its rated companies “indicate that the [Bill’s] impact is not likely to be material”, it has produced a report – a available to subscribers – that sets out the essential concerns which some firms may run into.

Coordinated by the Organisation for Economic Co-operation and Development (OECD), the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS was finalised in November last year, and adopted by more than 100 jurisdictions.

The Convention is designed to clamp down on tax-avoidance loopholes within its signatories’ legal systems.

At the heart of the Convention is what OECD secretary-general Angel Gurría has described as a “powerful legal instrument” that will be promulgated in various pieces of national legislation – such as the UK Bill that Fitch examined in its opinion.

“Let’s be clear,” Gurría said. “We cannot afford to wait another 150 years for the existing, extensive network of tax treaties to be amended through the time-consuming process of bilateral renegotiation.

“This Multilateral Convention… will facilitate implementation of two of the four BEPS minimum standards – countering treaty abuse and improving dispute resolution mechanisms – alongside other measures to improve tax treaties. It will save countries time by avoiding multiple bilateral negotiations and renegotiations.”

The OECD will hold a formal signing ceremony for the initiative during the first week of June.

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