UK Treasury Climbs Down Over Taxation Of Foreign Profits

by Jason Gorringe, Tax-News.com, London

23 July 2008

The UK Treasury on Monday appeared to have stood down its proposals to change the way that the foreign profits of UK-based multinationals are taxed.

The government, in its 2007 Budget, put forward proposals for eliminating the foreign dividend tax in order to reduce the administrative burden for such businesses, while at the same time putting in place tough measures on the permitted overseas activities of such firms, in order to prevent them from using the dividend exemption to avoid paying tax in the UK altogether.

Although the proposals were, according to the Treasury, designed to be revenue neutral, several large multinationals have taken fright and headquartered themselves elsewhere following the announcement of the government's plans, including pharmaceutical firm, Shire.

Multinationals which have intellectual property as a key part of their business were expected to be hardest hit by the move.

However, in a letter sent to the Director General of the CBI on Monday, Financial Secretary to the Treasury, Jane Kennedy appeared to signal an U-turn on the issue.

Responding to a CBI contribution to the debate on the matter, she told Richard Lambert that:

"Since the publication of the discussion document, we have had extensive and constructive engagement with business on the detail of these proposals. It is clear there is still a strong case for dividend exemption but we are yet to reach agreement on proposals that would minimise the fiscal risk it could imply."

"In your letter you suggest it would be possible to proceed with a dividend exemption, perhaps accompanied by a form of debt cap, with minimal fiscal risk, but that other anti-avoidance measures could follow at a later stage if necessary. Although it remains our objective to introduce a dividend exemption, our estimates show that to do so could impose significant costs on the Excheqer."

"Based on these estimates, my current view is that the fiscal risks are too great to enable us to introduce a dividend exemption in next year's Finance Bill."

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