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Academic Report Urges UK To Consider Issue Of Interest Deductibility

by Jason Gorringe,, London

14 December 2006

A tax research centre linked to the University of Oxford has urged the UK government to carefully consider the views of business in its review of the corporate tax system.

The new report on Interest Deductibility for UK Corporation Tax, released by the Oxford University Centre for Business Taxation at Saïd Business School on Tuesday, comes shortly after Chancellor of the Exchequer Gordon Brown announced in the pre-Budget report last week a new consultation with business in 2007 on a package of reform of corporation tax.

In its first report, the institution, which was set up last year and received funding from the Hundred Group of top UK companies, predicts that the review could lead to fundamental reforms, and it said that the extent to which interest payments continue to be deductible from corporate profit is likely to be an important element of this reform, especially in the light of recent judgments by the European Court of Justice.

The report concluded from interviews with the tax directors of 14 large multinational groups in the UK that a proposal to simply reducing the rate of tax relief on interest from the current rate of 30% to 15% was not supported by business. Such a reform would be likely to impose considerable costs, and reduce the attractiveness of the UK as a location for economic activity, it found.

However, the report suggested that there was some support for a reform which reduced the rate of relief on interest payments to 15%, as long as the rate charged on interest received was also reduced to 15%. Most considered that this would be sufficiently competitive to substantially reduce the incentive for offshore financial planning.

In addition, if foreign repatriated profits were not taxed in the UK, then dividend repatriation to the UK would also be encouraged, the report stated.

The survey found some support for a form of interest apportionment to restrict relief to interest on borrowing which finances activity in the UK. However, a consensus amongst tax directors was that it would be impossible to introduce any form of apportionment in practice without creating considerable administrative and compliance cost, and uncertainty.

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