At the end of last week the UK government tabled its promised amendments to the Finance Bill 2000 on double taxation relief in order to defuse the row over taxation of companies' overseas profits, or the so called "mixer tax" rules. The government has essentially watered down its proposals to close tax loopholes for overseas subsidiaries of British companies and yet the climbdown has been greeted with caution and concern by tax professionals and those whom the tax changes will affect.
Following the amendments, a form of onshore mixing will be allowed to continue. The Inland Revenue said that companies would be allowed to continue the practice of pooling foreign earnings from high-tax regimes with income from low-tax regimes to minimise their British liabilities. However, companies with foreign subsidiaries will be limited to mixing profits which have been taxed at no more than 45 per cent, and companies will only be able to pool profits from directly held subsidiaries, not subsidiaries of subsidiaries.
The Inland Revenue said in a statement 'This will allow onshore pooling of dividends without allowing companies to obtain excessive amounts of relief.' The government has still not changed its stance on preventing multinationals from holding profits in controlled foreign companies in order to reinvest, and companies will have to bring profits back to the UK and pay tax before spending them.
The Confederation of British Industry was less than enthusiastic about the government's compromise. Digby Jones, its Director-General, said 'We remain concerned that these fundamental and complex changes are being brough forward without time for proper consultation. These amendments are a substantial improvement on the Budget proposals. But we are still unclear as to what the overall impact will be on the UK's competitive position. Member companies will need time to assess the impact, which will depend on the structure of their business. The CBI will comment further when we have had an opportunity to gather their views.'
The main bone of contention over these amendments seems to be that they arbitrarily penalise some companies, for instance multinationals with subsidiaries in New York - mainly banks and financial services companies - which pay more than 45% tax. The Inland Revenue maintains that the 45% limit covers New York, as well as EU states and Japan, but some tax experts are not so confident. City, state and federal taxes in New York already add up to more than 45%, before adding in a 5% withholding tax on dividends.
The general view among senior tax advisers was that the Government's concessions fell well short of what had been expected, and are excessively complicated. But this is probably as far as the Treasury will go: the Finance Bill is nearing the end of its progress through the Commons, and the Lords cannot be expected to put up much resistance on such arcane matters. In the weeks following Chris Gent's £10m bonus, and other well-publicised cases of high executive remuneration, public sympathy may also be limited for 'fat cat' companies which use the tax system to their advantage.
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