UK Foreign Branch Tax Plans Slammed By Bankers

by Jason Gorringe, Tax-News.com, London

24 April 2002

Concern is growing in the City over new plans for the taxation of UK branches of overseas companies.

Chancellor Gordon Brown announced in his Budget report last Wednesday that foreign companies operating in the United Kingdom will, from January 2003, be reclassified as 'permanent establishments', and as such will be subject to tax on their profits as if they operate as separate firms from their parent company.

This has caused consternation amongst the City's banking community, and there are fears that the Chancellor is attempting to jump the gun on an OECD agreement on the issue currently under discussion.

Speaking to the Daily Telegraph on Tuesday, an unnamed banking association source explained that:

'The OECD is working towards an international level playing field. I am worried that if the Government comes in and cherry picks the bits they like, then the other governments can come in and cherry pick whatever they like.'

He added that: 'The OECD has been working on this for over 18 months, and there was a meeting of its tax committee only last week. What we could have now is every member with a different tax system.'

The British Bankers' Association recently revealed that under such a move, one in three of its member organisations could be affected, and there has been widespread concern that an effective increase in taxation on the UK branches of foreign companies could do a great deal of damage to the country's international competitiveness.

However, for some, it is the suddenness with which the measures were introduced that sticks in the craw. One City banker revealed to the Telegraph that:

'It is the lack of consultation that concerns us. The Chancellor has spent the past 18 months discussing a new regime for derivatives and loans, which raises about £230 million a year, but this was just thrust upon us without any warning.'

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