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Advisors Welcome UK Review Of Foreign Profit Taxation

by Robert Lee, Tax-News.com, London

26 June 2007


Tax advisors Deloitte have welcomed the UK Treasury's new proposals on the taxation of foreign profits, and are urging companies to participate in the discussion process, to ensure that any changes are proportionate and don't unduly widen the tax base.

The far-reaching proposals contained in the Treasury's discussion document, announced by Paymaster General Dawn Primarolo last week, will impact both companies based in the UK, and UK subsidiaries of foreign multinationals.

The proposals cover two main areas: foreign dividends, where the UK company receiving the dividends owns 10% or more of the foreign company’s shares, and several linked measures designed to protect the UK tax base.

Commenting on the proposals, Bill Dodwell, Deloitte's head of tax policy, stated: “We strongly welcome the proposal to exempt dividends from foreign companies from UK taxation, where the UK recipient owns 10% or more. The cost of this measure is very low and may cost nothing at all, as UK companies can take the opportunity to repatriate profits currently held overseas and, thereby, reduce their UK borrowing costs."

However, Dodwell added that: “The proposals to protect the UK tax base are more complex. It’s important for UK companies to participate in discussions with the Treasury, to ensure that the proposals in this area are proportionate and do not unduly widen the UK tax base.”

The proposals cover: the charging of UK tax on the passive income of foreign companies (interest, dividends, royalties, rental income and equivalents), where the foreign companies are controlled from the UK; excluding from this UK tax charge intra-group interest earned overseas, where it is derived from a group of companies engaged in active business (subject to the overseas finance company being properly capitalised); restricting interest deductions in the UK members of a group by reference to the group's total external finance costs; and widening an existing anti-avoidance rule covering interest expense and financial instruments.

Mr Dodwell added: “A final measure, which will be welcomed by UK business, is the abolition of Treasury Consents. These consents which date back to the time of exchange control are widely viewed as anachronistic and burdensome. The Government intends that the rules will be replaced by a reporting obligation, so that the Revenue receives the information they need."

“Small companies will largely be excluded from these reforms. Whilst we welcome the exclusion of small companies from the new controlled company regime, we think that they too would benefit from the administrative savings of dividend exemptions.”

There will be consultation around the taxation of portfolio dividends, where the European Court of Justice recently ruled that the UK’s current system is not compatible with the European treaties. The three proposals included in the document are: allowing relief against UK tax for tax paid by the overseas company; exemption; and taxing both UK and overseas dividends from portfolio holdings.

“In our view, there is an easy answer here: the only acceptable method would be dividend exemption. The first proposal would be impractical, since it would be almost impossible to obtain the required information from a company where the shareholder had less than 10% of the shares. The third proposal would simply increase the overall tax burden,” commented Dodwell.

The main beneficiaries of a dividend exemption for portfolio dividends are likely to be taxable fund management companies, such as insurance funds, and the tax savings from exemption (which are less than 0.5% of UK corporation tax) are likely mainly to benefit savers, Deloitte concluded.

A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report7.asp

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