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UK Corporate Tax Review 'Not A Moment Too Soon,' Says Advisor

by Robert Lee, Tax-News.com, London

25 July 2007


A survey conducted for KPMG in the UK indicates that the UK is at a key 'tipping point' in terms of its tax competitiveness, and that recent consultations announced by HMRC have not come a moment too soon.

In the survey “UK tax competitiveness – where are we now?”, published on Monday, 50 senior tax decision-makers of FTSE 100 companies, FTSE 250 businesses and large UK subsidiaries of major foreign corporates were polled by business advisers, Lighthouse Global on their opinions regarding the UK’s tax competitiveness.

The survey's key findings were that company bosses believe the UK has failed to move forward in terms of its attractiveness as a business destination from a tax perspective since last year, and that negative feelings around certain elements of the UK tax system seem to have deepened. It also revealed that tax has become an increasingly important factor in influencing businesses’ choice of location.

However, with the launch earlier this month of two consultation papers by HM Revenue and Customs addressing some of the issues raised by the corporate sector, KPMG suggested that these concerns are at last getting through to government. Among these was a key “discussion document” containing proposals for radical reform of the way in which foreign profits are taxed – a major area of concern.

Sue Bonney, head of tax and people services at KPMG in the UK, stated that:

“The noise from business around the UK’s declining tax competitiveness has become deafening. But the message is most definitely getting through and policymakers’ hearts are in the right place in terms of a genuine desire to create a competitive tax system that is good for business and good for the economy."

“The level of dissatisfaction among big business with the current system shows that the current proposals for tax reform come not a moment too soon. In particular, the options put forward for discussion around the taxation of foreign profits represent the most radical reform in corporate tax ever."

“The proposals aren’t perfect and there will undoubtedly be winners and losers as they stand. But unfortunately, we have found many companies are simply focusing on the anti-avoidance provisions or saying they want to wait to see draft legislation before forming a view. If they wait, they will miss the boat. It’s absolutely vital that business engages in an informed dialogue with the tax authorities to ensure they play a part in shaping future policies.”

In other key findings, the survey showed that:

  • Tax is increasingly influencing where corporates choose to operate - 86% of respondents (up from 68% in 2006) agreed that tax was a growing influence on where companies choose to locate.
  • There is a mixed picture in terms of the UK tax regime’s competitiveness compared to its main rivals, with the UK ranked ahead of major economies such as the US, France and Germany, but trailing Ireland, the Netherlands and Luxembourg by a significant margin.
  • Business is not afraid to consider leaving the UK. Almost half of respondents (44%) said they had looked into the implications of moving their tax residence away from the UK. 6% of the sample were actively considering such a move.
  • It’s not just about tax rates - clarity and consistency are still the most important factors for business in making a tax regime attractive. However, a low tax rate is growing in importance, and was cited by 84% of respondents, up from 68% last year.
  • There is positive sentiment with regard to the Varney Review (the 2006 Review of Links with Large Business) and the proposals unveiled in related consultation documents. 70% of those questioned think that the Varney Review will result in better consultation with business. 88% said they were likely to take advantage of new clearance/advance rulings processes.
  • Specific and strong views were expressed on options for changing the way in which foreign profits are taxed. 92% felt an exemption system for UK and foreign dividends was important.

KPMG's recently published Global Corporate and Indirect Tax Rate Survey also showed that the UK had slipped from having the 4th lowest corporate tax rate of the 15 EU member countries in 1997 to 21st place (out of 27) in 2007.

Sue Bonney added:

“In a decade where average EU corporate tax rates have come down by over ten percentage points - a reduction of almost a third - the UK’s headline corporate tax rate has moved by just one percent. Consequently we have tumbled down the table in terms of relative rankings. The Chancellor’s announcement in this year’s budget of a reduction in the UK’s main rate of corporation tax from its current 30 percent to 28 percent from April 2008 is a move in the right direction."

"Of course, as was made clear by the other KPMG research announced today, the tax rate is just one of many factors a corporate will consider when weighing up alternative locations, but in a climate where businesses can increasingly pick and choose where they locate, the UK needs to remain competitive on the tax front compared to other jurisdictions.”

Gary Harley, head of indirect tax at KPMG in the UK, commented: “This is the first year that this survey has looked at indirect tax but the data does seem to confirm a trend for indirect taxes to rise to compensate for lower corporate tax rates. With only one year’s figures, it is too early for us to say definitively that there is a link but our data is in line with what various governments are saying about tax policy. It’s a dynamic system and where the balance between indirect and corporate tax rates will settle remains to be seen.”

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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