Corporate Tax 2024

Global Taxation Dynamics: Navigating the Evolving Corporate Tax Landscape From a UK Perspective

As before, in the introduction to this excellent guide providing a truly global picture jurisdiction by jurisdiction, we look at the issues around corporate taxation from a UK perspective, the UK sitting (as it does) between the US and mainland Europe and being subject to influences from both directions. We hope, however, what we have to say will resonate in other major trading centres and be of some interest to others as well.

Although UK national elections could technically slip into 2025, the betting money is on these taking place in late 2024. Tax, which was already a major item on the political agenda in 2023, is now coming to reprise its usual role as a pawn in the games played by the major political parties, and the volume on the tax-related rhetoric has been “cranked up to 11”. See, for example, how the abolition of the UK’s preferential tax regime for non-domiciled individuals quickly became a very public part of the pre-election political wrangling between the Conservative Party government and the Labour Party opposition. The same appears to be the case in many other jurisdictions, where crucial national elections are set to take place over 2024 (eg, the United States and Spain).

But away from the party political arena, the actual changes we are seeing in the tax landscape appear to be the outcome of much longer-term trends, influenced primarily by a confluence of ever increasing demands on government spending and (generally) a growing consensus at the international level around tackling tax avoidance. An obvious example of this is the changes made by many jurisdictions in 2023 to implement the OECD’s Pillar 2 global minimum tax rate, which in one form or another has been on the agenda of introductions to these sorts of corporate tax guides going back to the BEPS project in 2013 (and, arguably, even further).

Although some of the biggest challenges that tax practitioners will have to grapple with in 2024 enter the scene with an equally big fanfare, others have arrived more quietly. As public purses are stretched further and further, tax authorities across the world are coming under increasing pressure to deliver. This naturally results in tax authorities amending long-standing taxpayer-friendly policies, opening more investigations, taking more aggressive lines of argument, and becoming more litigious. When combined with tax authority budget cuts and increasingly complex tax legislation to deal with the modern business landscape, it is no surprise that taxpayers are having to spend more and more of their time and resources on tax compliance and tax disputes.

Some of these issues can be shown by taking two key developments in the UK as examples – the approach of the UK tax authority to “purpose” tests and the introduction of Pillar 2.

Purpose tests

UK tax legislation is littered with anti-avoidance rules looking to limit the benefit of certain reliefs and exemptions where a purpose of the relevant transaction or action carried out by the taxpayer is to seek some sort of tax avoidance benefit. The exact wording of these purpose tests differs depending on the context in which they are used, but a common test, which will be familiar to many practitioners no matter their jurisdiction, is to limit the application of a legislative provision where the action’s main purpose, or one of its main purposes, is to secure a tax advantage.

Occasional cases examining how these tests should apply to real world commercial examples have appeared over the years, and the UK tax authority even carried out a public consultation on them in 2009, but we have seen a rapid increase in the number of these cases going through the courts since just before 2020. As well as examining purpose tests in the context of domestic legislation (including in relation to the deductibility of interest paid on share acquisition financing) one of the cases also considers the main purpose test in Article 12 (Interest) of the UK/Ireland double tax treaty (Burlington Loan Management DAC v HMRC [2022] UKFTT 00290 (TC)). The next round of hearings in many of these cases has recently started, and is due to carry on throughout spring 2024.

As well as having a significant impact on how purpose tests should be applied in a range of scenarios, and thus on the day-to-day work of many UK tax practitioners, the recent proliferation of these cases and the lines of argument being run by the UK tax authority show the practical outcome of the gradual but steady change in attitude (globally, as well as specifically in the UK) towards tax planning/mitigation.

Pillar 2 implementation

The UK, like many OECD member states, passed legislation in 2023 to implement the first part of “Pillar 2” (the “Income Inclusion Rule” (IIR) alongside a “Qualified Domestic Minimum Top-up Tax” (QDMTT)) in 2023, so that it applies for accounting periods beginning on or after 31 December 2023. However, unlike many of those other OECD member states, the UK did not opt to copy and paste the OECD Model Rules into its domestic legislation, but to draft its own legislation from scratch – aiming to achieve the same outcome (the IIR becoming the “multinational top up tax” and the QDMTT becoming the “domestic top-up tax”). 

As previously mentioned, the introduction of these rules represents the culmination of many years of international engagement at the OECD level, and is a reflection of a gradual change in attitude towards tax planning/mitigation over that same period. Yet the impact of their introduction is only just beginning to be felt by taxpayers. The complexity of the rules, the enormous compliance burden of carrying out the required calculations, the practical application of the rules to real-world scenarios, and the interaction of taxpayers with tax authorities on areas of uncertainty, look set to have a significant and long-term impact on the tax landscape for years to come. And that is without even mentioning how these rules interact with M&A transactions.

Improving tax administration

It is not all bad news though. Despite Pillar 2 preventing governments from attracting investment through changes to the headline rate of their national corporate income tax, tax and tax administration continues to play a key role in investment decisions. As discussed in the introduction to this guide last year, a focus on improving the ease of dealing with domestic tax administrations, and the efficiency with which taxpayers can resolve issues around double taxation of the same profits, remains a key area that jurisdictions would be wise to focus on. In the UK, one of the ways this manifests itself is in the requirement on HMRC to publicly self-report a range of statistics about its activity, including the number of enquiries it opens, the time to resolution of the same, and the number of enquiries that proceed to litigation (often split out into a surprising amount of detail, such as the number of APAs it agrees, or the number of MAP cases resolved and how long it took to resolve them).

Of course, whether governments and tax authorities will achieve improvements in this area remains to be seen – it certainly seems like a tall order if tax legislation and regulation increases in scope and complexity, but tax authority budgets continue to shrink or remain static.

The US influence

We would be remiss not to mention the influence of the US on the global tax landscape, and the uncertainty therefore created by the upcoming 2024 US presidential election. It is hardly a novel development to find the progress of international tax reform at the mercy of US politics, but the scale of the current ambitions in this field, and the breadth of the existing non-US consensus on the OECD Two-Pillar proposals, make the potentially polarising impact of having either Biden or Trump in the White House particularly striking. Although the OECD’s Pillar One proposals are not yet entirely dead and buried, they almost certainly will be with a Trump win. The wait until November 2024 will seem especially long for the OECD.

Conclusion

Given developments on the international stage, using low headline rates of tax and concessionary regimes to attract inward investment is now no longer practical for the majority of governments. However, tax is still a crucial part of the puzzle that investors look to when choosing where to invest – governments would be wise to consider the complexity of their tax regimes, and the efficiency of their tax administrations, as part of the wider value proposition they put forward to international markets.