Among a number of measures to tidy up UK corporate taxation, and clarify some of the provisions of this year's Finance Act, yesterday's 'Pre-Budget' Statement included improvements to the international tax regime for UK companies.
The Finance Act 2000 abolished the use of overseas 'mixer' companies which were used to blend foreign income streams which had suffered taxation at rates above and below the UK mainstream corporation tax rate (now 30%) so that foreign tax paid in excess of 30% did not go unrelieved against UK tax. The result of the new rules was that mixing could be done onshore, with foreign income taxed at up to 45% being mixed with lower-taxed income - but the rule only applied to tax paid at one subsidiary level below the UK holding company.
Yesterday's announcement means that the highly-taxed foreign income (still only up to 45% tax) can have come from any level in the corporate hierarchy. The announcement also corrects what seems to have been a clear error in the algebraic formula used to 'gross up' foreign income. In the words of the Inland Revenue:
The formula used to calculate the maximum amount of underlying tax allowable will be changed. At present it takes the dividend coming into the UK (D) and grosses it up by the maximum relievable rate (M):
D x M / (100 - M)
The formula will now add the actual underlying tax paid (U) to the dividend and multiply it by the maximum relievable rate:
(D + U) x M.
These new proposals will mean that the FA 2000 provisions operate in the way in which they were intended.
In other words, we cocked up! At least they have the grace to admit an error in elementary algebra. Ratio and proportion at this level is taught to nine year-olds. At least it used to be when your correspondent was at school. Another triumph for the New Educationalists.
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