Tax Issues Damage Attractiveness Of UK For Foreign Business

by Robin Pilgrim, LawAndTax-News.com, London

01 October 2008

The importance placed on tax by overseas companies looking to do business elsewhere does not bode well for the UK, according to a recent report from Grant Thornton.

The firm's annual International Business Report found that 77% of global private companies and 70% of those parented in the US say tax issues are a significant factor in deciding where to establish an operating base overseas, which is worrying news for the UK due to the uncertainty that continues to surround its corporate tax system.

Only 57% of UK private companies said tax was a significant factor when investing overseas, arguably reflecting the relative simplicity of other tax regimes for UK business compared to domestic rules and regulations.

The survey covered 7,400 owners and senior managers in 33 countries, including 600 in the UK.

Roopa Aitken, International Corporate Tax partner at Grant Thornton commented:

"It is interesting to compare the UK statistic for private companies in light of the recent rise in larger listed multinational corporations (MNCs) such as Henderson, Charter and Regus who have relocated their parent company out of the UK, with the bulk of the recent relocations going to Ireland.

"In light of the emphasis US groups place on tax when setting up new business overseas there is a real concern that the UK will not be the preferred choice for a European holding company. This is partly because the UK tax system currently taxes dividends when they are paid back to the UK, and also other income arising offshore under the Controlled Foreign Companies, or CFC regime. This often leads to significant complexity and compliance burden for UK companies even if relatively little UK tax is at stake. Companies looking to invest in the UK will recognise and compare this with other countries; in many, perhaps most cases the conclusion will not favour the UK.

"Ireland for example is often a favourable choice as a combination of its business and tax laws creates an accommodating environment for inward investment, parent company location and European holding companies. Although the headline corporate tax rate is low at 12.5%, compared to the UK's 28%, Ireland has other attractions such as a reduced administrative burden and greater certainty since there are no CFC or transfer pricing rules. However, activities actually carried on in the UK will continue to be subject to UK tax at the normal rate of 28%.

"A review of the UK taxation of foreign profits is currently underway, aimed at improving competitiveness and the attractiveness of the UK. Hopefully this will boost its attraction as a holding company location of choice, but it is unlikely that any changes will be implemented before 2010," Aitken concluded.

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