The UK property industry has expressed concerns over the latest proposals made by the Organisation of Economic Cooperation and Development (OECD) as part of its Base Erosion and Profit Shifting (BEPS) initiative.
BEPS’ aim is to prevent multinational companies (MNCs) from artificially ‘shifting’ profits between different countries in order to reduce their tax bill. The OECD regards interest on debt as a high risk area which can facilitate ‘profit shifting’ and recommends that the tax deductibility of interest be restricted to between 10%-30% of earnings.
However, the British Property Federation (BPF) fears that, if implemented by the UK government, such a reduction could impact in a significant reduction of investment into the built environment.
The BPF argues that restricting the tax deductibility of debt will increase its overall cost to real estate investors in particular, as the real estate industry is so capital intensive. This will likely reduce the amount of debt capital that the industry can deploy, which “will have a negative and incalculable impact on investment in the built environment”.
The Federation has urged the government to take a consultative approach to implementing any recommendations in order to ensure that the UK’s tax system remains competitive.
“While we support the OECD’s intent, which is to address tax avoidance by MNCs, we are talking about a potentially very significant change to how debt finance is taxed in this country,” commented Melanie Leech, the BPF’s chief executive. This could have an enormous impact on capital intensive industries like real estate that are heavily reliant on debt funding.
“The proposals will make it more expensive for real estate investors to fund themselves through borrowing and this will have a knock-on effect on how much investment makes its way into our towns and cities. Government must bear this in mind and consult closely with industry before taking forward any of the OECD’s recommendations.”