Corporate interest restriction webinar June 2017

Corporate Interest RestrictionBased on draft finance bill 2017 issued 20 March 2017—

28 June 2017

Document Classification: KPMG Public

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

With you todayRob LantHead of Corporate Tax Partner, KPMG LLPTel: +44 (0)20 7311 1853rob.lant@kpmg.co.uk

Daniel HeadUK Head of Transfer PricingPartner, KPMG LLPTel: +44 (0)161 246 4742daniel.head@kpmg.co.uk

John MondsGlobal Transfer Pricing ServicesDirector, KPMG LLPTel: +44 (0)161 246 4761john.monds@kpmg.co.uk

Agenda

Where are we now?

Overview of the rules

Key issues & complexities

Compliance implications & managing the impact

What next?

Where are we now?

We are here!

2016 Consultation and draft legislation

20 March 2017Finance Bill 2017

31 March 2017Draft guidance published byHMRC

8 June 2017General election

Summer/Autumn 2017Measures likely to be reintroduced in a post election Finance Bill (with 1 April 2017 start date?)

25 April 2017Omission from FB 2017

1 April 2017Commencement?

Why should you care?

1 Subject to confirmation, the rules are now “live” (from 1 April 2017)

Complexity – c.160 pages of draft rules + c.290 pages of draft guidance

Potential impact on cash tax, quarterly instalments & accounts

Increased cost of debt funding & implications for financing strategy

Significant additional compliance burden

Overview of the rules

Key steps

Step 1 Identify the worldwide group, financial statements and period of account

Step 2 Determine the group’s net tax-interest expense (+ if it is less than £2m)

Step 3 Calculate the group’s tax-EBITDA, ANGIE, QNGIE and Group EBITDA

Step 4 Calculate the disallowance (or reactivation) under the Fixed Rate Method

Step 5 Calculate the disallowance (or reactivation) under the Group Ratio Method

Step 6 Consider the impact of other elections

Step 7 Allocate the disallowance among UK group companies

Step 8 Comply with administrative requirements

Overview of calculation rulesTotal Disallowed Amount = Aggregate Net Tax Interest Expense

> Interest Capacity

Interest Allowance + B/F Unused Interest Allowance (Min £2m)

Basic Interest Allowance

30% x Aggregate Tax EBITDA

Fixed Ratio Debt Cap (FRDC)

Lower of:

Fixed Ratio Method

Excess Debt Cap for Prior Period

Aggregate Net Tax Interest Income

Group Ratio Method Election

Lower of:

QNGIE / Group EBITDA xAggregate Tax EBITDA

Group Ratio Debt Cap (GRDC)

Interest Reactivation Cap = Interest Allowance > Aggregate Net Tax Interest Expense

Overview of calculation rulesTotal Disallowed Amount = Aggregate Net Tax Interest Expense > Interest Capacity

Interest Allowance + B/F Unused Interest Allowance (Min £2m)

Lower of:

Fixed Ratio Method

Lower of:

Aggregate Net Tax Interest Income

QNGIE / Group EBITDA x Aggregate Tax EBITDA

Interest Reactivation Cap Aggregate Net Tax Interest Expense= Interest Allowance >

Key Group Inputs

Key UK Inputs

— Aggregate Net Tax Interest Expense (or Income)

— Aggregate Tax EBITDA

Key Group Inputs

— ANGIE (Adjusted Net Group Interest Expense)

— QNGIE (Qualifying Net Group Interest Expense)

— Group EBITDA

FRM: Simple example

OverseasParent

£150m ANGIE

£50m AggregateNet Tax Interest Expense

UKSubsidiaries

£100m Aggregate

Tax-EBITDA

No GR Election

Lower of:

30% of Aggregate tax-EBITDA £30mFixed Ratio Debt Cap * £150mBasic interest allowance £30mAggregate Tax Interest Expense £50mTotal Disallowed Amount * £20m

* Assuming (i) no excess debt cap brought forward from prior period and (ii) nounused interest allowance brought forward from prior period that would provide addition “interest capacity”

GRM: Simple example

OverseasParent

£150m QNGIE

£50m Aggregate Net Tax Interest Expense

UKSubsidiaries

£100m Aggregate ax-EBITDA

£400m Group EBITDA

Lower of:

QNGIE / Group EBITDA x Aggregate Tax EBITDA

GR % (QNGIE / Group EBITDA) £37.5%GR% of Aggregate tax-EBITDA £37.5mGR Debt Cap (QNGIE) * £150mBasic interest allowance £37.5mAggregate Tax Interest Expense £50mTotal Disallowed Amount * £12.5m

* Assuming (i) no excess debt cap brought forward from prior period and (ii) no unused interest allowance brought forward from prior period that would provide addition “interest capacity”

Key issues & complexities

Key issues and complexities

Worldwide group & financial statements

Grouping – ExampleLimitedPartners

Corporate General Partner

Fund P’ship

HoldCo 1

BidCo 1

OpCo 1

HoldCo 2

BidCo 2

OpCo 2

LimitedPartners

Corporate General Partner

Fund P’ship

HoldCo 1

OpCo 1

HoldCo

HoldCo 2

BidCo 2

OpCo 2

BidCo 1

Key issues and complexities

“Cleansing” data Derivatives

Worldwide group & financial statements

Capitalised interest

Elections

Group ratio rule & related party debt

Sector specific considerations

Carry forwards

Compliance implications & managing the impact

Compliance - Overview

Reporting Company

Interest Restriction Return (IRR)

EnquiryPowers

Info Powers

CT Returns

UK CT-Paying

Group Companies

Provide copy of IRR

Info Powers

Other compliance points

01Abbreviated

(or nil) Returns

Record keeping

Enquiries

04Time limits & amendments

05Mismatches and

elections

Penalties

07Information

powers

SAO Regime

Managing the impact Scenario analysis of

elections

Allocation of disallowance/reactivation

Interaction with loss rules & wider CT position

Determine impact on QIPS & accounts

Consider restructuring options

Revisit transfer pricing

What next?

Three steps to get prepared

Assess the impact 1— Estimate potential impact over

a 5 year period— Engage key stakeholders— Determine key areas where

further work required

2 Develop your plan

— Conduct detailed analysis of key areas— Analyse impact of making different elections— Consider potential restructuring options— Perform transfer pricing review— Engage with HMRC, where relevant

Comply with the rules 3— Ensure adequate systems are

in place to gather data, perform calculations & prepare returns

— Make strategic decisions re elections & allocations

22© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Examples of how we are helping clients

Practical application of the KPMG three stage

approach

Making a targeted election to reduce the

CIR disallowance

Advising on the interaction with the new

loss rules

Making representations

to HMRC

Q&ARob LantHead of Corporate Tax Partner, KPMG LLPTel: +44 (0)20 7311 1853rob.lant@kpmg.co.uk

Daniel HeadUK Head of Transfer PricingPartner, KPMG LLPTel: +44 (0)161 246 4742daniel.head@kpmg.co.uk

John MondsGlobal Transfer Pricing ServicesDirector, KPMG LLPTel: +44 (0)161 246 4761john.monds@kpmg.co.uk

Wrap up and next stepsDownload our guide today.

It explores how:— To fully understand your usage of loss and

interest tax relief and prepare to make the first corporation tax instalment payment on 14 July (for those with a December year end)

— You can make the necessary changes to your business to reduce inefficiencies effectively

— You can reduce the burden of compliance and reporting

— You can take practical steps to prepare your organisation and stakeholders for the complex changes.

Also visit our BEPS Action 4/CIR diary at:https://home.kpmg.com/uk/en/home/insights/2016/04/beps-action-4-tax-updates.html

For the history of and latest developments in relation to CIR

kpmg.com/uk

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks or trademarks of KPMG International. CREATE: CRT083305B

Corporate interest restriction webinar June 2017

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