Property groups say BEPS will cost UK sector £660m
UK property companies are seeking changes to the proposed implementation of a global agreement to fight tax avoidance that is set to add £660m to their annual tax bill.
Private equity and infrastructure companies are also among those groups facing additional payments under OECD rules on base erosion and profit shifting (Beps), which place limits on the tax deductibility of debt.
The OECD deal aims to combat tax avoidance by multinational companies but also affects the use of debt by domestic businesses that are not engaged in tax avoidance. The Treasury on Thursday concluded a consultation on how to enact the Beps agreement, which is due to take effect in 2017.
The British Property Federation has written to David Gauke, the Treasury minister, seeking exemptions to the rules to prevent a reduction in investment in UK real estate.
The BPF estimated a total extra tax bill of £660m, based on De Montfort University data on total outstanding UK property debt.
The current proposals would in effect increase the cost of debt funding routinely used by property companies, cutting into the net asset value of a highly leveraged company by as much as 11 per cent.
Ion Fletcher, director of policy for finance at the BPF, said: “The proposals go much further than is necessary, and are particularly punitive for capital-intensive industries like real estate.”
He said members of the body, which represents most of the UK’s big property companies, were “worried — the more debt they have, the more worried they are”.
The Beps rules will limit tax-deductibility on loan interest to between 10 per cent and 30 per cent of earnings before interest, tax, depreciation and amortisation. Most interest payments are tax-exempt in the UK under existing regulation.
The change aims to prevent aggressive tax planning — for example, the placing of debt in high-tax countries to achieve “excessive” tax deductions from interest.
The current proposals would cover both domestic and multinational companies and would apply to both internal and third-party debt.
The BPF argues that third-party debt should be exempted. But problems would still remain for big regeneration projects receiving both debt and equity funding from the same source, said Bill Hughes, head of real assets at Legal & General Investment Management.
The UK government has strongly supported the OECD’s tax avoidance recommendations, limiting its scope for flexible interpretations of the rules, Mr Fletcher said.
He pointed to the example of Germany as an alternative approach. It already limits tax deductibility but only above €3m of net interest expense. Companies above that tend to use separate corporate entities to avoid falling into the tax net.
The Westminster consultation suggests banks and insurance companies will be exempt from the Beps rules, while transitional arrangements will be put in place for existing loans.
There is also a potential exemption for “public interest projects”, which is likely to apply to infrastructure and renewable energy companies, according to analysts at Stifel.
Mike Prew, analyst at Jefferies investment bank, said that real estate investment trusts, a tax-exempt format, face a separate knock-on effect from Beps in which they would be forced to pay out more in dividends than they earn.
“It’s not priced at all and could powerfully compound the bear case [on Reits],” Mr Prew said.