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The UK is open for businessBuilding on our strengths
John Dixon [email protected] + 44 20 7951 2164
Matthew Mealey [email protected] + 44 20 7951 0739
Kate Alexander [email protected] + 44 20 7951 8196
Jason Lester [email protected] + 44 121 535 2998
Simon Atherton [email protected] + 44 20 7951 4892
For further information on any of the issues raised here, please contact one of the following or your usual EY contact:
In February this year, we published The UK is open for business highlighting the progress the Government has been making in achieving its stated aim of turning the UK into the “most competitive corporate tax regime in the G20” and the best country in Europe for locating headquarter (HQ) operations.
Since then, companies have faced an unprecedented focus from the media, non-governmental organizations (NGOs) and the Government on the tax they pay in the UK. At the same time, changes announced in the 2013 Budget continue to demonstrate the sustained and long-term nature of the current Government’s commitment to a competitive corporation tax policy. So, where does that leave the UK in terms of its position as an HQ location?
In this follow up to The UK is open for business, we discuss the UK’s position as a place to do business, and consider some of the most significant trends we are seeing in the market. In particular, we discuss advance pricing agreements (APAs) with HM Revenue & Customs (HMRC) as a key part of international tax risk management and the Government’s aim of encouraging innovative activities in the UK.
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2 The UK is open for business
The UK raises its gameOur 2013 UK attractiveness survey has confirmed that the UK remained Europe’s top destination for foreign direct investment (FDI) projects in 2012. The UK also secured more investments and a higher market share than in 2011, demonstrating a clear improvement year on year. Our survey showed that investors feel the UK has improved its environment for inward investment through:
► A more flexible financial system
► An effective policy framework to support businesses to set up operations
► The facilitation of trade missions
► More investment incentives in key industries
However, competition for FDI within Europe and high-growth markets elsewhere remains intense and our survey concludes there is no room for complacency.
Many of the recent changes to the UK corporate tax regime mean that it is now seen as a facilitator, rather than a barrier, to groups achieving their commercial goals. A key announcement in this year’s Budget was the 20% corporation tax rate. Evidence for the success of this policy is very clear. Outward migrations of UK companies overseas have largely ceased. A number of high-profile multinationals have relocated to the UK with some groundbreaking moves announced very recently including, notably, from Switzerland, Italy, the Netherlands and Ireland extending the range of redomestications from the first wave of US transactions. And for every HQ transaction that requires public disclosures under relevant stock exchange rules, there are many more regional HQ and other business reorganizations into the UK without publicity. We are advising many groups that are considering moving HQs and operations to the UK.
3Building on our strengths
The UK tax regime today The UK tax regime has changed significantly in recent months. It is now attractive to business from both a commercial and corporation tax perspective, and features:
► A low headline rate of corporation tax reducing to 20% by 2015
► Competitive reliefs for innovative and high-tech industries, including an “above the line” research and development credit and a 10% rate of corporation tax on profits from the development and use of patents and certain other intellectual property in the UK
► Competitive rules for taxing the profits of a parent or regional holding company, with new, largely territorial, controlled foreign company rules, a broad-based dividend exemption, a foreign branch exemption, a substantial shareholding exemption (applying, broadly, to disposals of shares in trading companies by trading groups) and an extensive network of double taxation conventions
► Favorable interest deductibility with no territorial limitation, although with comprehensive anti-avoidance to protect from abuse
► A robust and highly respected tax authority, which is keen to engage with groups that wish to gain certainty on opportunities presented by these changes to the UK tax regime and a Treasury department that consistently demonstrates commitment to early and transparent consultation on tax law change
4 The UK is open for business
Other trends to highlight A positive trend relates to certainty, which businesses making significant investments require. In our experience, the UK Government is committed to giving certainty to business in relation to the taxation consequences of UK investment plans. In practice, this is typically through clearances agreed with HMRC. We believe that, surprisingly, many established UK HQ multinationals were slower to adapt their investment decisions to the changed UK environment than some non-UK HQ groups. We are now seeing more UK HQ groups reshaping their global business models and working with HMRC to obtain certainty and reduce tax risk. UK investment is now coming from UK HQ as well as non-UK HQ groups.
The level of interest in UK inward investment transactions has led to the creation of a specific team within HMRC dedicated to supporting such transactions. The Inward Investment Support team effectively fulfils the role that the Customer Relationship Manager would play for an established UK business. Many inward investment transactions change the footprint of people, functions and risks across countries within a global group. This means that certainty around transfer pricing treatment is a key part of many transactions. HMRC has also been investing additional resource into its existing APA team.
In an increasingly complex world, with high levels of controversy and comprehensive fiscal authority reviews occurring all across the globe, we believe that APAs fundamentally reduce corporation tax risk and are a key part of international tax risk management.
5Building on our strengths
By March 2012, HMRC had over 60 APAs in force with an average time to agreement of less than 18 months. Our experience is that most APAs can be concluded in less than a year and even very significant APAs have been agreed in less than three months where the right quality of value chain information is made available for review by HMRC. In addition to the extensive APA program, HMRC successfully resolves 40–50 mutual agreement procedure (MAP) cases in a typical year.
The UK has bilateral APA and MAP experience across a broader range of countries than we see in the vast majority of other fiscal authorities around the world. We see this as a major differentiator for the UK as a country in which to locate business activity, because of the combination of a competitive tax regime with a sophisticated and respected tax authority that can work bilaterally to reduce global tax risks.
A second positive change to highlight is around wider government commitment to maximize the benefits to the UK of a competitive tax policy. This has been visible in the trade missions of members of government and in high-quality literature supporting UK policy in this area, such as The UK – number one for European headquarters and Guide to UK tax, both published in 2013.
6 The UK is open for business
The global tax landscape is evolvingA detailed summary of the various workstreams and action plans that will follow from the base erosion and profit shifting (BEPS) report is outside the scope of this report. However, some very clear, and we believe irreversible, themes are emerging from the OECD project on this topic, which include:
► More information will be available to more fiscal authorities to allow them to target their resources better to respond to what are perceived as higher-risk areas of international corporate tax.
► The broad trend, which has existed for many years, towards an increased alignment of commercial and global tax planning strategies with economic substance will continue and accelerate.
► Global corporate tax, and especially transfer pricing, risks will continue to increase.
In our view, all of these themes reinforce and support the impact of the UK’s competitive tax policy.
The likelihood of high levels of substance in the UK, the breadth of the treaty network, the competitive tax regime and the bilateral experience of HMRC in agreeing APAs and MAPs mean the UK should continue to be a beneficiary of global investment flows.
7Building on our strengths
The specific focus on innovation A key part of the current UK Government’s aim for the UK to be the most competitive tax regime is to encourage the holding of innovative activities in the UK and to encourage foreign investors to move innovation to the UK.
The UK Government’s new patent box regime that enables patent box profits to be taxed at 10% is a key part of this. The regime is potentially relevant to all businesses involved in innovation and to a wide range of businesses across all segments. The added benefit of research and development “above the line” tax incentives are available where the research and development itself is performed in the UK.
The key question we are often asked is whether the regime is making a difference to behaviors and, therefore, ultimately whether it will deliver on its policy objectives of making the UK a global innovation center. While it is early days, in our experience the outlook is very positive:
► For groups that already have significant innovation hubs in the UK, the regime has been very well received and many corporates are positive about using the UK for innovation in the medium-term.
► Many outbound investors have gone further and have, or are in the process of, consolidating the ownership of their intellectual property (IP) back in the UK, moving it away from their other traditional innovation centers of the US, Japan and Germany.
► For inbound investors, the fact that the UK tax rate is now so favorable means that other advantages can be brought into the decision-making process: in particular, the UK’s attractiveness to foreign nationals, availability of skilled labor and access to capital markets.
The UK is clearly open for business ...
8 The UK is open for business
Overall, the trends are indicating that the UK is becoming the center of choice for UK-headed groups and many IP-rich inbound investors. Crucial to this is the fact that HMRC continues to demonstrate that it is keen to engage with
groups wishing to obtain more certainty on opportunities presented by recent changes to the UK tax system, and on what the new rules actually mean in practice.
... now is the time to build on its strengthsThe UK is clearly open for business ...
9Building on our strengths
The UK is clearly open for businessOur UK attractiveness survey showed that the six aspects of the UK that foreign-based companies consider most attractive from an investment location perspective are:
► Quality of life, diversity, culture and language
► Technology, and telecommunications infrastructure
► Stability and transparency of the political, legal and regulatory environment
► Entrepreneurial culture and entrepreneurship
► Stability of the social climate
► Education in trade and academic disciplines
The combination of these strengths with a competitive tax regime makes the UK an attractive place for business. The fact that the UK also has a globally respected tax authority could be a powerful asset in an environment of increasing global tax risk. However, this is not a time for the UK to rest on its laurels.
The challenge for the UK now is to build on its strengths, to define a long-term growth strategy by sector, function and region, and continue to position the UK positively with investors. However, it will be important for the UK to continue to provide certainty around the tax regime in the mid- to long-term and support businesses as they consider their options for undertaking more business activities in the UK.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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