Restricting the tax deductibility of debt for real estate investors would have a damaging impact on investment in the built environment, according to the British Property Federation (BPF).
Responding to an Organisation for Economic Co-operation and Development (OECD) consultation on proposals to clamp down on tax “Base Erosion and Profit Shifting” (BEPS) the BPF outlines how the real estate industry’s capital intensive nature and considerable use of debt finance would lead to it being particularly affected by the proposals.
It explains that if the tax deductibility of debt is restricted, it will increase its overall cost to real estate borrowers. This is likely to reduce the amount of debt capital that the industry can deploy, which will lessen investment in the built environment. Curtailing investment in the built environment will, in turn, negatively impact on the UK’s economy. Depending on how they are implemented, the proposals could also result in extensive administrative costs for real estate businesses.
The BPF is concerned that as the OECD, at the request of the G20, has had to carry out an incredibly comprehensive review of taxation avoidance in a short time frame, the BEPS proposals are not as well-targeted as they could be. This means that tough rules designed to tackle the worst of the avoidance might end up applying to everyday commercial transactions, causing ‘collateral damage’ and concern for law-abiding taxpayers.
Ion Fletcher, director of policy (finance) at the British Property Federation, said:
“Tackling tax avoidance is important, and we understand that it has to be made a priority. We are concerned, however, that in the rush to meet the G20’s targets, the OECD is forsaking valuable thinking time, resulting in blunt polices that capture innocent commercial transactions. The current proposals to reduce the tax deductibility of debt, for example, could be a real deterrent to those who invest in improving the UK’s built environment and infrastructure. We need them to be properly targeted so that they do not discourage development.”