Further Delay In Foreign Profits Legislation Deals Blow To Business Certainty

by Robert Lee, Tax-News.com, London

23 July 2008

The UK Government's announcement of progress on the taxation of foreign profits on Tuesday evening shows promising signs of sensible legislation being developed on the taxation of passive offshore business income, but that policy is unlikely to be implemented before 2010 at the earliest, according to leading business and financial adviser Grant Thornton.

The proposals, communicated yesterday in a letter to the CBI with accompanying technical note, have moved a long way since the Discussion Document of June 2007 and it appears representations from business have been listened to, Grant Thornton stated. For example, hard-line proposals on the taxation of Controlled Foreign Companies have been dropped while the Treasury has moved closer to the possibility of a dividend exemption.

In its 2007 Budget, the government put forward proposals for eliminating the foreign dividend tax in order to reduce the administrative burden for international businesses, while at the same time putting in place tough measures on the permitted overseas activities of such firms, in order to prevent them from using the dividend exemption to avoid paying tax in the UK altogether.

However, the UK Treasury made moves on Monday which appeared to indicate that it has stood down its proposals to change the way that the foreign profits of UK-based multinationals are taxed.

Heather Self, an international tax partner at Grant Thornton, is pleased that representations from business have been taken into account in the latest Government announcement and that there is further consultation to be had before the final package is put forward, but says the constant delays have created a complex and uncertain environment for businesses to operate in.

"Overall, the Treasury announcement is a sensible response to a constructive period of consultation, but it is disappointing that progress has been so slow and that we are unlikely to get more detail before the Autumn. The continuing uncertainty is damaging UK competitiveness, particularly if the UK wants to remain a gateway to Europe for new investors from countries such as India, China and Brazil," she commented, further stating:

"It is now unlikely that we will get any concrete policy on the taxation of foreign profits before 2010 at the earliest and at that point we may well be in the middle of an election."

Self says that Monday's announcement confirms that the Government wishes to introduce an exemption for foreign dividend income received in the UK and that this will be as wide as possible, but that it remains concerned about the risks to tax revenue and therefore won't be implementing such a move next year.

"The dividend exemption will be warmly welcomed by business as it will allow large corporates to repatriate what is estimated to be billions of pounds of foreign income to the UK with limited or no UK tax. But the Treasury is worried that it will be missing out on a large slice of tax revenue by implementing the exemption so is wanting further consultation on measures to protect tax revenues," she explained.

The technical document also says there will be further discussion on CFC rules and interest deductibility.

Self added:

"On CFC rules, we are almost back to square one, with a proposal that any changes may simply be improvements to the existing regime rather than an entirely new set of rules. This is a sensible withdrawal, although no mention is made of the Government's continuing difficulties with the European Courts on the application of CFC rules within the EU."

There is also confirmation that comprehensive interest allocation rules will not be introduced, "a welcome move," says Self, but there is a vague threat of "additional but still limited restrictions" on interest deductibility.

Recommended