The Chevron case concerned the tax consequences of the company’s intra-group lending arrangements.
The UK has transfer pricing rules that set out how transactions between connected parties are priced for tax purposes. In common with many countries (including Australia), the UK rules are based on the internationally recognised arm’s length principle. HM Revenue and Customs challenges arrangements that do not allocate the right amount of profits to the UK.
The UK Corporation Tax code contains a number of rules to deter companies from using excessive levels of debt to reduce their profits by way of inflated or artificial interest payments. Financial transfer pricing (thin capitalisation) rules limit interest deductions to an arm’s length amount, unallowable purpose rules deny deductions for interest incurred with a main purpose of avoiding UK tax, and hybrid mismatch rules, introduced in Finance Act 2016, counteract arrangements which exploit mismatches between different tax jurisdictions.
Finance (No.2) Act 2017 introduced a new corporate interest restriction rule which aligns interest deductions with the economic activities undertaken and taxed in the UK. The UK is the first country to introduce such a new rule to implement the recommendations of the OECD Base Erosion and Profit Shifting Project and the requirements of the EU Anti-Tax Avoidance Directive. This new UK rule includes a “debt cap”, which limits interest deductions by reference to a group’s external interest expense, so a group which does not borrow externally cannot use interest deductions to significantly reduce the tax it pays in the UK.