RSS feedsThe UK government has put off plans to change the taxation of foreign profits regime, which business groups and tax experts say has created a climate of greater uncertainty that may damage UK business competitiveness.
In letters to the Confederation of British Industry and The Hundred Group of Finance Directors, Jane Kennedy, the financial secretary to the Treasury, wrote that replacing the credit system with an exemption for dividends from overseas subsidiaries in next year’s finance bill could cost too much.
“Although it remains our objective to introduce a dividend exemption, our estimates show that to do so could impose significant costs on the Exchequer,” she wrote.
The current Controlled Foreign Companies (CFC) tax regime provides safeguards to ensure profits from economic activity are properly taxed in the UK. But the government has admitted that the system needs to be amended because the mechanisms for relieving double taxation of these profits within the UK and other countries is cumbersome, particularly for large companies with complex structures. This has resulted in UK business calling for a tax exemption of profits made abroad that are repatriated into UK operations. However, the government is wary that implementing such a regime will result in large scale tax avoidance.
A technical note on the progress of the consultation with taxpayers on the foreign profits regime was published at the same time as the letter. It forecast that, under the present system, the corporate tax paid on foreign dividends would be £300m in the 2012/2013 fiscal year.
Tax avoidance
The note added that while an exemption would mean taxpayers would not have to
plan to avoid tax on dividends, it would encourage them to move profits into low
tax jurisidictions. While it estimated that this could cost the government
£600m, it said it could be anything between £200m and £1.1bn.
The CBI and others had urged the Treasury to press ahead with the exemption ahead of the introduction of extra anti-avoidance rules. But Kennedy has said that “the fiscal risks are too great” to introduce a dividend exemption in next year’s Budget without accompanying anti-avoidance measures. Controversial anti-avoidance proposals affecting the tax treatment of intellectual property have been dropped.
The Treasury’s technical note says an amended form of this sort of “controlled companies” regime has not been ruled out, but business appears to prefer continuing with some form of the existing anti-avoidance rules. The Treasury also floats the idea of introducing “additional but still limited” restrictions on interest deductibility.
The Treasury also postponed plans to cut the amount of interest on company loans that could be deducted from a company’s tax bill and to replace the controlled foreign companies rules with a controlled companies regime that would have sought to tax UK taxpayers that received passive income from overseas units. These proposals were particularly unpopular with companies, such as in the pharmaceutical and entertainment industries, whose wealth is based on the value of their intellectual property.
The document questions the assertion by business that an exemption would trigger the repatriation of billions of pounds to the UK which could be used to repay debt, so increasing the UK tax take. On the contrary, the Treasury suggests that businesses would increase their debt because they would use the exemption to return funds to shareholders.
But tax experts say that the Treasury technical note which confirms the decision to scrap the proposed changes to the taxation of foreign profits will lead to a further extended period of uncertainty.
According to Baker Tilly’s international tax partner Kevin Phillips, “This could be seen as the Treasury confirming that it is backing down over its original proposals for wholesale replacement of the CFC rules and opting instead for changes to the existing rules.
“However, following the recent Cadbury Schweppes and Vodafone judgments, there is a huge question mark about the enforceability of these rules in the case of CFCs resident in the European Union, even after changes from 2007 onwards that were supposed to make the rules compliant with EU law. Therefore, it’s far from clear to me that relying on changes to the existing rules is a sound strategy until the ultimate outcome of the Vodafone case is known. Even then, there’s the possibility of a further case to test whether the 2007 changes really do now make the legislation EU compliant.”
No movement
However, Peter Cussons, international tax partner at accountants Pricewaterhouse
Coopers, says that while business should continue to lobby the government for
changes in the foreign profits tax regime, the recent announcement is not really
a setback to UK business in the short-term.
“While the government’s delay on implementing these changes is causing companies some confusion, it is seriously doubtful that any large company would seek to relocate elsewhere because of the UK’s tax regime. Companies want to make tax savings where possible, but not usually at the expense of moving operations.”
In brief
The Treasury’s current views can be summarised as follows:
• The commitment to introduce a foreign dividend exemption is confirmed, but not
before the Finance Bill 2010.
• The proposals for a new income-based CFC regime are effectively to be
scrapped.
• The need to protect the UK tax base alongside the introduction of a foreign
dividend exemption is
reaffirmed, but a willingness to try to achieve this by changes to the existing
entity-based CFC rules instead is now expressed.
• The proposal to cap UK interest deductions is reaffirmed, but with the
possibility of a relaxation for temporarily cash-rich groups.
• The proposal to scrap Treasury consent for certain transactions and replace
this with a more targeted reporting obligation is reaffirmed.
Source: Baker Tilly
Useful links
See the Treasury website at
www.hm-treasury.gov.uk,
then click on ‘consultations and legislation’ and go to ‘Latest live
consultations’
