UK Publishes New Proposals For Multinational Taxation

by Robert Lee, Tax-News.com, London

28 January 2010

The UK government has published a discussion document on proposals for reforming the UK tax treatment of controlled foreign companies (CFCs).

The proposals set out in the discussion document are intended to enhance the competitiveness of the UK, while providing adequate protection of the UK tax base. The discussion document sets out the overarching framework of the new rules and proposals for how monetary assets and intellectual property could be treated.

The reforms aim to address growing concern from business that the UK's CFC rules are too complex and reverse a steady flow of companies shifting their tax bases to jurisdictions considered to have more business-friendly tax regimes such as Ireland, Luxembourg and Switzerland.

In an attempt to achieve this, the discussion document sets out proposals for a more targeted CFC regime to catch profits being artificially diverted to low-tax jurisdictions, rather than a "one size fits all" approach.

The discussion document also outlines possible approaches to reform the treatment of intellectual property with the aim of more effectively targeting situations "where there is a risk of erosion of the UK tax base."

The current CFC rules generally target income from IP on the grounds that it is passive income from a mobile asset. The government is therefore concerned that there is a risk that UK tax can be avoided through the artificial movement of intellectual property (IP) into a low tax jurisdiction. Business, however, has emphasized that many offshore IP companies undertake genuine and effective management activity with the aim of maintaining or increasing the value of their IP, and that a new CFC regime should reflect the extent to which active management of IP takes place offshore.

One proposal for a new regime would be to identify companies that carry on sufficient IP management activity offshore and to exempt these companies from the CFC rules. However, the paper also suggests that an additional tax charge be applied in certain circumstances, for example where IP is transferred out of the UK before its value can be accurately determined.

The discussion document also highlights the need for the new CFC rules to interact efficiently with current UK transfer pricing rules, and points out that the proposed "patent box" regime announced in last month's pre-budget report, which will offer a reduced rate of corporate tax on patent income, will have a bearing on the reforms.

Financial Secretary to the Treasury Stephen Timms said: “Modernizing these rules is crucially important to maintaining and enhancing the UK’s attractiveness as a base for global business. This report, drawing on our discussions with businesses, is a key step in designing a system that better recognizes the way multinationals operate today, while protecting our tax base.”

This reform is the second part of the foreign profits package. The first part was introduced in Finance Act 2009 and included an exemption for foreign dividends and an interest restriction measure.

The consultation period for this discussion document began on January 26 and runs to April 20, 2010. The government aims to release a further document on the proposals along with draft legislation later in 2010, with a view to legislating in the 2011 Finance Bill.

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