Treasury Today Country Profiles in association with Citi

Tax doesn’t have to be taxing

In the UK, the subject of overseas profits is back on the agenda. The Treasury has issued a consultation document containing proposals that will simplify the way overseas financial centres are taxed but what will the changes mean for MNCs headquartered in the UK and will the reforms make the country a more attractive place to do business?

The chancellor has said the measures outlined in the consultation document will help to clarify the country’s position on tax and send out the message that ‘Britain is open for business’. Under the proposed legislation, off-shore financing companies will be subject to an ‘ultra-competitive’ tax rate 5.75% on the profits they derive from intra-group financing by 2014. It has also been suggested that in certain circumstances, some financing companies will be exempt altogether.

The proposals are the second stage of what the Treasury says will be an overhaul of the way overseas profits of UK-based companies are currently taxed. As things stand, the profits multinationals derive from their non-UK operations are subject to a complex set of rules which were introduced in the 1980s. The Controlled Foreign Companies (CFC) legislation, as it is known, has grown unwieldy as businesses have become increasingly globalised over the past two decades.

The relaxation of the CFC rules is the government’s response to the steady trickle of companies that have left the UK’s shores to establish their headquarters in more business friendly countries like Ireland, Switzerland and Belgium. It will also bring UK tax rules more into line with Europe, where European Commission (EC) directives protect the individual’s right to freedom of establishment and freedom of association.

The likes of WPP, the marketing group, the publisher Informa, and the builders’ merchants Wolseley have fled Britain over the past few years in search of lower tax environments. Wolseley’s Group Treasurer, Mike Verrier, cited the ‘uncertainty’ surrounding the CFC legislation on overseas profits when he was asked why the company had shifted its headquarters from the UK to Zug in Switzerland last year. The move, he said, has afforded the group much greater “clarity and stability on tax issues”.

It remains to be seen if the new rules go far enough to convince foreign and formerly British-based businesses that the UK is the place to put their headquarters. The headline figure of 5.75% is competitive, but the figure is still above that in Ireland, Switzerland, and the Netherlands, for example.

“I’m not sure many businesses will return if they have already gone, but it will probably stop the flood-gates opening and lots more leaving,” says Heather Self, director of tax at McGrigors, the law firm. “We’ve ended up with layer upon layer of very complex legislation and it’s acting as a drag on business. I would like to see bolder rules, saying the UK is the best place to do business. Some companies will still be put off by the complexity with the CFC rules.”

Moreover, some lawyers remain unconvinced that the proposals go far enough for the EC, which brooks no hindrance to the movement of people and the right of establishment.

Gary Richards, a partner at the law firm Berwin Leighton Paisner, says he believes the proposed CFC legislation still falls short of European rules on the right of establishment. “One issue that remains is whether HMRC’s view that EU law permits a UK tax charge on artificially diverted profits is right, or if even these reforms may yet be open to challenge.”