Speculation Over McCreevy's Next Move On CFCs Increases

by Jason Gorringe, Tax-News.com, London

06 August 2002

Following the surprise inclusion of Ireland on a list of countries classified by the UK government as 'tax havens' for the purposes of CFC (Controlled Foreign Companies) regulation, speculation has been increasing as to what Finance Minister, Charlie McCreevy's next move will be.

CFC rules, which are applied in one form or another by most high-tax countries, prevent companies from holding their profits in low-tax jurisdictions away from home-country taxation. Typically, such profits get taxed under CFC rules unless the holding company can prove that they have been genuinely reinvested in a way which would be deductible under home country rules.

Along with Bermuda, the Bahamas, the Channel Islands and the Isle of Man, Ireland will now be counted as a low tax jurisdiction, and Irish subsidiaries of UK companies will have to satisfy a series of tests if their Irish profits are not to be charged to UK tax as well as to Irish tax.

Some sections of the Irish media have suggested that the government became complacent once the European Union's objections to Ireland's low corporate tax rates had been seen off by the promise to introduce a 12.5% uniform rate in 2003. However, the Sunday Business Post suggested at the weekend that now:

'The rest of Europe and beyond is now looking on intently from the sidelines to see if the British government gets away with it, and if they too can chip away at Ireland's low tax regime.'

The newspaper went on to observe that: 'Over at the Department of Finance, the self-imposed purdah points to activity behind the scenes.' However, it added that: 'It is not in the interests of Ireland Inc to highlight the issue through a blaze of publicity. There'll be no fighting talk from the Irish, even if the ultimate resort is via the courts system in Europe.'

The article concluded that: 'The Department of Finance faces a race against the clock: September 20 is the date on which the rules take effect. Getting the British to drop the proposed rules or modify them is, realistically, best done before then.'

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