| The UK's
International Competitiveness |
Introduction
Although the
UK has not historically set out to compete with countries
such as Holland and Denmark, which set their cap at international
businesses with extremely permissive taxation structures,
reckoning that the gain from extra employment and trade would
outweigh the loss of tax, the UK has nonetheless been an acceptable
place in which to have your headquarters, if that was where
it needed to be.
Thus, large international
companies with listings on the London Stock Market, or which
had British origins, could put up with being based in the
UK even if it wasn't ideal from a tax point of view, because
the rules for the treatment of overseas profits were reasonably
flexible. In particular, it was possible to 'mix' highly-taxed
profits from some overseas markets with lowly-taxed profits
from other markets, generating a blended rate which would
offset the maximum amount of mainstream UK corporation tax
and reduce double taxation. It was also possible to retain
profits in overseas companies in many circumstances without
incurring UK taxation.
Over recent years
this convenient equation has been thrown into doubt, with
the Finance Act 2000 in particular worsening the UK's tax
regime for international companies to such an extent that
some large ones, such as Vodaphone and BAT threatened to move
their base of operations out of the UK altogether.
These threats
are not thought to be serious, yet, but pressure from business
has nonetheless caused the Treasury to back off some of the
measures it had originally proposed. The ongoing discussion
between Government and the tax profession, in effect representing
international business, has now moved up from worries about
the detail of particular taxes to consider the overall subject
of the UK's international fiscal competitiveness.
The 2001 budget
contained some detailed measures to improve the ill-thought-out
onshore mixing rules contained in the Finance Act 2000, the
promise of further consultation on the bigger issue of a possible
participation exemption for income and capital gains, and
the threat of a further tightening of the CFC (Controlled
Foreign Corporation) rules. Indeed, enabling legislation in
the 2002 Finance Act allowed the British government to alter
the tax treatment of controlled foreign companies in jurisdictions
which are considered to allow 'harmful tax practices'. Not
much has happened since, though, although the 2005 budget
tightened up on some aspects of the CFC regime, perhaps reflecting
the government's deepening fiscal woes as much as the innate
prickliness of the subject.
According
to a report published in December, 2005, by the accounting
firm Deloitte, the UK at the time was ranked sixth amongst
25 world economies as the most competitive place in the world
to do business, but this position was projected to slide to
12th if Government and business didn't take action.
The
Deloitte Competitiveness Index (DCI) is a ranking based on
key drivers of wealth creation – innovation, enterprise, investment
and macroeconomic data. The report includes a survey of 300
UK business leaders who provide their perspective on the UK's
business environment today as well as predictions for the
future.
International
Tax Issues
There are three
main issues which dominate the international tax competitiveness
argument:
1. Double
Tax Avoidance
This is mostly
the 'mixing' question. The Finance Act 2000, after changes
made in response to pressure from business, allowed some types
of 'onshore mixing', that is, companies could mix highly-taxed
and low-taxed income streams in the UK, but there are so many
limitations ('anti-avoidance' provisions) that what started
as a good idea, to allow companies to do at home what they
had previously had to do in offshore or tax-privileged overseas
countries such as the Netherlands, became an expensive straight-jacket.
For example, the mixing privilege only extended to the first
layer of subsidiaries, unless the intermediate company was
in the UK, which would have forced on many groups a complete
global restructuring, with other uncalculable tax consequences.
Onshore mixing
(called 'pooling' by the Treasury) was also limited to 30%
for many foreign income streams, with some allowance for tax
paid up to a maximum of 45% in some special circumstances.
The 2001 Budget however went a long way towards allowing flexible
mixing of income streams, mostly removing problems caused
by the 'first layer only' problem.
See Inland
Revenue notes below which explain the detail of the amended
system included in the Finance Act 2001.
The Holy Grail
for international businesses would be a 'participation exemption',
such as exists in both Holland and Denmark, for both income
streams and capital gains (see below). A widely-drawn participation
exemption would allow foreign income to remain untaxed in
the hands of an onshore parent, regardless of its origin.
Some of the Dutch and Danish rules were in fact attacked in
the Primarolo Code of Conduct Committee 'harmful tax practices'
report.
The Budget 2001
included some quite open discussion of the possibility of
an income participation exemption for the UK, and promised
a consultation paper. But these good intentions have been
overtaken by events, and a participation exemption for income
is now on the farthest edge of what is likely.
In
February 2005, in advance of the budget, UK Paymaster General,
Dawn Primarolo, announced a package of new measures to 'prevent
tax avoidance by companies', including a rule that relief
for foreign tax on income received as part of a company's
trade would be restricted to the UK tax on the net profit
derived from that income. The change was initially due to
enter into force on Budget day. However, the Treasury saw
fit to bring the rule forward so that it would apply to income
received from February 10.
The
budget itself in March 2005 contained threatening wording:
"The
disclosure rules have revealed a number of areas of the tax
system at risk from high levels of tax avoidance. International
transactions have emerged as a particular concern, with increasing
globalisation presenting new opportunities for those attempting
to avoid their obligations."
"Building
on the action taken in the 2004 Pre-Budget Report, the Government
is introducing two new anti-avoidance rules which will allow
the Inland Revenue to issue a notice to counter a tax advantage
in specific circumstances where a UK tax avoidance motive
is present. These new measures will tackle arbitrage, where
companies seek to gain a tax advantage by exploiting differences
within and between tax codes and excessive claims for double
taxation relief."
Slaughter
and May tax chief, Tony Beare observed at the time that: "This
is a major change and one that could make the UK far less
attractive to business if it is stringently applied." Meanwhile,
global head of tax at Linklaters, Guy Brannan commented: "I
am sceptical that they will raise any more money as people
will stop doing deals. In the short-term we will see lots
of plcs unwound and restructured, but in the long term there
will be a slowing down in derivatives and structured finance-type
deals."
See Inland
Revenue notes on the future of UK corporate taxation.
2. Controlled Foreign Companies
The Finance Act
2000 tightened up on the definition of control, and changed
the detail of the various tests concerned with the character
of income, ie whether it should be permitted to remain in
the foreign jurisdiction or not. Business protested (it was
this that caused Vodaphone to make its threat rather than
loss of offshore mixing), but the Treasury has not backed
down on the CFC regime.
Predictably,
the 2001 Budget did not contain any loosening of the CFC rules,
since they are mainly directed at offshore jurisdictions,
and whatever may be changing in Washington's now firmly Republican
Treasury, Gordon Brown remains aligned with the OECD's anti-offshore
(say, pro-onshore) campaign. Indeed, buried in a footnote
of one of the Inland Revenue's budget documents is a threat
to tighten the rules still further: the Finance Act 2001 contained
new rules against 'artificial avoidance schemes, which exploit
a loophole in one of the exemptions from the UK's Controlled
Foreign Company regime'.
Of course, if
there was a participation exemption for foreign income, there
wouldn't need to be CFC rules - but that's too much to hope
for. Small countries like Denmark and Holland can afford to
do without the tax from foreign income streams, because they
never had much of it, but larger countries with many multinationals
are in a more difficult position (that's the Treasury's stock
response to requests for a participation exemption).
The UK Finance
Bill, 2007, implemented changes to the Controlled Foreign
Company regime made in response to the previous year's high-profile
Cadbury-Schweppes decision by the European Court of Justice.
Although
CFCs were not mentioned in the Chancellor's March Budget speech,
the Treasury released a detailed response to the ECJ's decision,
which commentators said represented the minimum that the Government
could have done to comply with Cadbury; in fact, many consider
that the Treasury has not gone far enough and remains vulnerable
to a new ruling.
The
new provisions restrict the application of CFC rules to profits
arising from the activities of employees but not of capital,
meaning that they will only become significant in respect
of trading operations in a 'low-tax' EU or EEA territory.
The ECJ did not make such a distinction. To the disappointment
of many tax advisers, the Treasury has not provided for an
advance clearance mechanism for the CFC regime. In addition,
the Treasury has stiffened the effective management test,
making it more difficult for EEA-based companies to satisfy
the Exempt Activities exemption.
The
Government did however announce that it would publish a paper
in relation to CFCs before the end of May 2007, so that the
Finance Act measures (effective from 6th December 2006) may
have just been a holding operation.
Under
United Kingdom tax legislation, the profits of a foreign company
in which a UK resident company owns a holding of more than
50% (known as a controlled foreign company, or CFC) are attributed
to the resident company and subjected to tax in the UK, where
the corporation tax in the foreign country is less than three
quarters of the rate applicable in the United Kingdom. The
resident company receives a tax credit for the tax paid by
the CFC. That system is designed to make the resident company
pay the difference between the tax paid in the foreign country
and the tax which would have been paid if the company had
been resident in the United Kingdom.
There
are a number of exceptions to the application of the legislation,
inter alia where the CFC distributes 90% of its profits to
the resident company or where the ‘motive test’
is satisfied. In order to obtain the latter exception, a company
must show that neither the main purpose of the transactions
which gave rise to the profits of the CFC nor the main reason
for the CFC’s existence was to achieve a reduction in
UK tax by means of the diversion of profits.
Cadbury
Schweppes plc is the parent company of the Cadbury Schweppes
group which operates in the drinks and confectionery sector.
The group includes, inter alia, two subsidiaries in Ireland,
Cadbury Schweppes Treasury Services (CSTS) and Cadbury Schweppes
Treasury International (CSTI), which are established in the
International Financial Services Centre (IFSC) in Dublin,
Ireland, where in 1996 the tax rate was 10%. Those two companies
are responsible for raising finance and providing that finance
to the group. In the view of the UK courts, CSTS and CSTI
were established in Dublin solely to take advantage of the
favourable tax regime of the ISFC and in order not to fall
within the UK tax regime.
In
2000 the Commissioners of Inland Revenue, taking the view
that the CFC legislation applied to the two Irish companies,
claimed corporation tax from Cadbury Schweppes of GBP8.6m
on the profits made by CSTI in 1996. Cadbury Schweppes appealed
before the Special Commissioners of Income Tax, maintaining
that the CFC legislation was contrary to Community law, in
particular in the light of freedom of establishment. The Special
Commissioners asked the Court of Justice whether Community
law precluded rules such as the CFC legislation.
Said
the ECJ: 'The Court recalls that companies or persons cannot
improperly or fraudulently take advantage of provisions of
Community law. However, the fact that a company was established
in a Member State for the purpose of benefiting from more
favourable legislation does not in itself suffice to constitute
an abuse of the freedom of establishment. Therefore the fact
that Cadbury Schweppes decided to establish CSTS and CSTI
in Dublin for the avowed purpose of benefiting from a favourable
tax regime does not in itself constitute abuse and does not
prevent Cadbury Schweppes from relying on Community law.
'The
Court notes that the CFC legislation involves a difference
in the treatment of resident companies on the basis of the
level of taxation imposed on the company in which they have
a controlling holding. That difference in treatment creates
a tax disadvantage for the resident company to which the CFC
legislation is applicable. The CFC legislation therefore constitutes
a restriction on freedom of establishment within the meaning
of Community law.
'As
regards the possible justifications for such legislation,
the Court points out that a national measure restricting freedom
of establishment may be justified where it specifically relates
to wholly artificial arrangements aimed solely at escaping
national tax normally due and where it does not go beyond
what is necessary to achieve that purpose. Certain exceptions
in the UK legislation exempt a company in situations in which
the existence of a wholly artificial arrangement solely for
tax purposes appears to be excluded (for example distribution
of 90% of a subsidiary’s profits to its parent company
or performance by the SEC of trading activities).
'As
regards the application of the ‘motive test’,
the Court notes that the fact that the intention to obtain
tax relief prompted the incorporation of the CFC and the conclusion
of transactions between the CFC and the resident company does
not suffice to conclude that there is a wholly artificial
arrangement. In order to find that there is such an arrangement
there must be, in addition to a subjective element, objective
and ascertainable circumstances produced by the resident company
with regard, in particular, to the extent to which the CFC
physically exists in terms of premises, staff and equipment,
showing that the incorporation of a CFC does not reflect economic
reality, that is to say it is not an actual establishment
intended to carry on genuine economic activities in the host
Member State.
'It
is for the Special Commissioners to determine whether the
motive test lends itself to an interpretation which takes
account of such objective criteria. In that case, the legislation
on CFCs should be regarded as being compatible with Community
law. On the other hand, if the criteria on which that test
is based mean that a resident company comes within the scope
of application of that legislation, despite the absence of
objective evidence such as to indicate the existence of a
wholly artificial arrangement, the legislation would be contrary
to Community law.'
A
survey conducted on behalf of KPMG earlier in 2006 had found
that CFC rules were "hugely unpopular" with firms
operating in the UK, with two-thirds of respondents saying
that UK tax rules had hindered cross-border investment for
their groups. The CFC regime was the most commonly cited problem,
because it was deemed unfair and complex, and made normal
business transactions difficult.
3. Capital Gains Tax On Disposals Of Substantial Shareholdings
In the UK, capital
gains tax for corporates has been to a great extent a voluntary
tax, in the sense that there was usually some kind of structure
for a deal which would would avoid it - but the consequences
in terms of loss of economic efficiency were often severe,
and it takes teams of expensive professionals to optimise
on each occasion. As a result, the corporate CGT rules are
of hideous complexity. Far simpler would be a 'substantial
participation exemption' which exempted gains from corporate
restructurings and disposals altogether. A number of foreign
countries have this, including several EU member states.
The Treasury
has traditionally come at this from the opposite direction,
of course, in order to preserve the existing tax base, although
there were glimmerings of light in the Government's consultation
document, reflecting a Blairite take on UK plc:
'Developments
in technology are fast opening up new markets and increasing
international competition. The Government's aims are to ensure
that in the new global economy the UK is seen as an attractive
place in which to do business, and UK businesses can compete
successfully.'
'To achieve these
aims, the Government is promoting innovation and modernisation
in UK business, as well as working to make the UK a more competitive
environment for businesses generally.'
' Certain aspects
of the current tax code for capital gains can hinder businesses'
international competitive position and distort their commercial
decisions, forcing them to adopt structures that they would
not have needed otherwise. It may also act as a disincentive
to companies that are investing to innovate and modernise.
In particular, it can result in a charge to tax where a company
sells a shareholding in a successful business that it has
developed in order to invest in further developing the business
or in developing another business.'
' To address
these problems, the Government is considering introducing
a substantial relaxation in the taxation of corporate capital
gains by introducing a new tax relief for companies alongside
the existing rollover relief so that the charge to tax is
deferred where a company realises a gain on the sale of a
shareholding in a business or assets of that business; and
invests the proceeds in developing that business or another
business or acquires shares in another business.'
But then the
Treasury took over, and starts talking about trading companies
v non-trading companies, taper relief, etc etc. The whole
emphasis was on a carefully limited loosening of the current
rules; although to be fair the Government did propose to reduce
the definition of 'substantial' from 30% to 20%.
See http://www.inlandrevenue.gov.uk/consult/ct_relief.htm#s
for the full consultation paper.
Disappointingly,
the 2001 Budget kicked the issue into touch, merely promising
further consultation papers. However the Inland
Revenue's notes did at least discuss the issue of a participation
exemption quite openly.
In April 2002,
the UK government announced plans to put in place (with effect
from April 1) a participation exemption meaning that, in certain
circumstances, a UK company will not be subject to UK tax
on gain from the sale of shares in a subsidiary in which the
UK company holds a 'substantial' (10% or larger) share.
The participation
exemption also aims to prevent UK companies from recognizing
taxable losses on the disposal of shares in circumstances
where the exemption applies.
The
EU Dimension
One of the reasons
for lack of action on international company taxation in the
UK has been the series of European Court of Justice rulings
in defence of 'freedom of establishment' which are threatening
to drive an express train through the ability of EU Member
State governments to apply national tax regimes to their resident
companies.
In
September 2004, for instance, the ECJ
ruled to allow a Finnish investor to collect a tax credit
in his home country for a dividend received from an overseas
firm. Under Finnish tax law, foreign dividends do not carry
a tax credit, whilst domestic dividend payouts do. However,
the ECJ announced that this was in contravention of European
laws on the free movement of capital, and ruled to allow the
taxpayer in question, Petri Manninen, to claim a 10% tax credit
for the dividend paid out by a Swedish company.
Head
of KPMG's EU tax group in London, Chris Morgan, suggested
that although the case related to an individual, there were
likely to be ramifications for corporate taxpayers as well.
"The implications of the case are pretty huge - confirming
the ECJ's position on the tax treatment of domestic and foreign
dividends - which will be of financial benefit for both individuals
and corporates throughout the EU, including the UK," he explained.
Then
in March, 2005, came the initial result of the much-followed
Marks and Spencer case. Marks & Spencer had argued that UK
provisions on group tax relief were in breach of European
law, as they prevent an EU-based parent company from offsetting
losses incurred by subsidiary companies in other member states,
thus violating the principle of freedom of establishment,
a reading of the situation with which Advocate General Mr
Poiares Maduro agreed.
European
Union finance ministers however vowed to find a "defence mechanism"
to counter the likelihood of tax revenue shortfalls should
the British retailer ultimately be successful in its legal
bid to offset losses made by foreign subsidiaries against
tax. The issue formed one of the main talking points during
an Ecofin meeting of EU finance ministers. "There is great
concern about this," remarked Jeannot Krecke, Economy Minister
of Luxembourg, which is holder of the rotating EU presidency.
He went on to add that EU ministers "will try to find a defence
mechanism" against such claims.
The
AG stated that the risk of significant falls in tax revenues,
as Germany had been arguing, was not a justifiable defence
of the current system. But he also argued that firms should
not be able to offset tax loses against profits in the country
where the parent company is based if they can also offset
losses in the country where their subsidiary is based - which
may offer an escape route to governments.
The
Advocate General's opinion was supported later that year by
the full ECJ.
The
UK Treasury's relative powerlessness in terms of corporate
tax legislation was rammed home forcibly in April 2006 when
European Court of Justice Advocate General, Leendert Adrie
Geelhoed, gave an opinion in favour of four UK companies who
had claimed that corporation tax charged on dividends received
from EU subsidiaries was illegal under EU free movement of
capital rules.
Between
1973 and 1999, when the UK scrapped its Advanced Corporation
Tax system, which allowed UK companies to pay up dividends
domestically at a favourable rate, dividends from non-UK EU
subsidiaries of UK companies were charged at higher rates.
Although
the four companies in the present case, British American Tobacco,
British Petroleum, Aegis Group and Imperial Chemical Industries,
were claiming refunds of 'only' some hundreds of millions
of pounds, the UK government warned during court proceedings
that the total cost of an adverse ruling might be as high
GBP7 billion if many companies applied for refunds, and -
following Germany's example - that the ECJ should therefore
reject the companies' case on the grounds that the UK's financial
stability could be affected. Mr. Geelhoed denied this reasoning.
At
first sight, UK plc should have been having a party based
on the Advocate-General's ruling, but companies worry that
the Government might react in ways which could cost them more
than they will save through the ruling.
At
issue was the highly complex system of 'onshore pooling' in
which foreign dividends are mixed with domestic ones according
to an intricate set of rules before final taxation rates are
determined.
In
December 2006, the European Court of Justice followed the
earlier Advocate General opinion, and ruled that ACT operated
illegally between 1973, when the UK acceded to the EU, and
1999, giving rise to the prospect of substantial rebates to
companies which have paid this tax in the past.
The
Treasury warned that such a ruling could leave it open to
repay claims totalling GBP9 billion, although draft blocking
legislation which would limit a company's claims to six years
would reduce this to about GBP2 billion, the government has
estimated. However, this legislation itself is to be challenged
in the courts, and while accountants say that the ECJ's decision
is a boost for companies, the full consequences won't be known
until the next legal battle is resolved.
“In
principle, today’s decision is good news for companies
hoping for an ACT rebate. However, they are unlikely to receive
anything until the UK and European courts reach a decision
as to the legal status of the blocking legislation –
a process that is likely to take some time," observed
Jonathan Bridges of KPMG’s EU law group at the time.
The
Court referred the matter back to the UK courts to determine
whether the UK rules operate to achieve this parity.
“It
is disappointing that the ECJ has stopped short of ruling
that the UK should apply the same rules to both UK and foreign
sourced dividends," Bridges noted.
He
continued: “Achieving equality of treatment via a credit
system may, on the face of it, sound reasonable but it is
not straightforward."
"The
ECJ’s ruling today fails to fully appreciate the fact
that not all profits in the UK are taxed at the corporate
tax rate of 30%. For example those deriving from share sales
are completely exempt."
Bridges
concluded:
"What
today’s ruling does is potentially introduce yet another
layer of complexity into the UK’s already overly cumbersome
corporate tax system.”
In
March 2007, Gordon Brown surprised many by announcing a 2%
reduction in the rate of corporation tax (to 28%) and a 2%
cut in the basic rate of income tax, representing the first
major cut in these taxes in many years.
According to the Chancellor, this would bring the UK's corporate
tax rate below both the OECD and EU15 average. However, tax
experts suggested that while the Chancellor had given with
one hand, he would claw back much of this lost revenue with
the other through changes in capital allowances.
According
to the Treasury, the reform of the capital allowance regime
will "better reflect true economic depreciation,"
by ensuring that business investment decisions reflect commercial
rather than tax considerations. But for manufacturers and
companies with large property portfolios, the changes could
well cancel out any benefit brought by the cut in corporate
tax.
Summary
Below is the
text of the two Inland Revenue Budget 2001 documents describing
changes to the corporation tax regime in the UK:
REV BN 24: Double
Taxation Relief (at http://www.inlandrevenue.gov.uk/budget2001/revbn24.htm);
and
REV 2: A Competitive
and Modern Tax System for Multi-Nationals and Large Business
(at http://www.inlandrevenue.gov.uk/budget2001/rev2.htm)
REV
BN 24: Double Taxation Relief
Summary of measures
Two changes to
double taxation relief were announced in the Pre-Budget Report:
extension of
on-shore pooling rules for DTR to allow relief for rates of
foreign tax paid up to 45% even if this was at more than one
level in a chain of companies; and changes to the way in which
the mixer cap is calculated. These will be supplemented by:
- allowing companies
to claim relief for less than the full amount of foreign
tax if they so wish. This will mean that the mixer cap is
not triggered in relation to a particular dividend, so that
eligible unrelieved foreign tax (EUFT) arising on other
dividends may be credited against the UK tax payable on
it. This will also help companies which try to keep the
rate of tax at or below 30% but which subsequently find
that the actual rate is above that figure;
- deeming the
rate of underlying tax attributable to dividends from UK
subsidiaries held by an overseas holding company to be equivalent
to the UK corporation tax rate at the date that the dividend
was paid; and
- amending Finance
Act 2000 where it refers to "accounting periods"
ending on or after 21 March 2000 in the provision that extends
double taxation relief to non-residents trading here. This
will be changed to "chargeable periods" to ensure
that the provision works properly for non-residents other
than companies.
Apart from the
last bullet point, these changes apply for dividends paid
to the United Kingdom on or after 31 March 2001.
The Inland Revenue
has had very useful discussions with business about the DTR
regime. The Government intends that this dialogue will continue
both on specific issues and to ensure that the DTR regime
fits with other elements of the system for taxing companies.
Two matters in
FA2000 were left to be dealt with by regulations. These were
detailed provisions on the mixing of dividends within a country
and for surrendering eligible unrelieved foreign tax around
a group.
Following further
discussions with business, it will now also be possible to
claim relief for part only of the foreign tax. In addition
the rate of underlying tax on dividends paid from UK subsidiaries
via an overseas holding company will be deemed to equate to
the main rate of corporation tax.
These additional
changes mean that:
it will be possible to pay a dividend from a high-taxed company
through a chain of companies without worrying whether the
rate of underlying tax will exceed 30% and produce an amount
of EUFT which would taint other, lower taxed, dividends within
the chain. This will mean that it will now be possible for
the mixed dividend to be pooled with others onshore so that
EUFT arising elsewhere can be used against it, as provided
in Finance Act 2000;
Many groups hold one or more UK subsidiaries below an overseas
holding company. UK tax paid by UK sub-subsidiaries held in
this way has always been treated in the same way as foreign
tax for the purposes of double taxation relief. A dividend
from the overseas holding company will be taxed in the hands
of its UK parent, and if it includes an element of already-taxed
UK profits then UK tax already paid on them will be available
for relief;
However the rate of underlying tax is based on a different
calculation from that of taxable profits. If the rate of underlying
tax is less than the rate of corporation tax additional UK
tax would be payable on the portion of the foreign dividend
which represented profits already subjected to UK tax, and
if more, then EUFT might arise. To prevent such anomalies
the rate of underlying tax paid on a dividend from a UK subsidiary
paid to an overseas holding company will be deemed equal to
the rate of corporation tax in force when the dividend was
paid.
FA 2000 introduced a general rule allowing any non-resident
with a branch in the UK to claim credit relief for foreign
tax paid on the profits of the branch, and this applies in
relation to "accounting periods" ending on or after
21 March 2000. However only companies have "accounting
periods". To ensure that the change works for persons
other than companies, the start date will be amended to refer
to "chargeable periods".
Background notes
A company which
receives a dividend from an overseas company may claim a credit
against the UK tax payable on the dividend for tax paid on
the profits of overseas company and its subsidiaries. Pre
FA 2000, if the tax exceeded the UK tax payable on the dividend,
the UK recipient could not get relief for all the foreign
tax. Offshore intermediate companies were therefore set up
to mix high-and low-taxed dividends so that they came into
the UK at an averaged rate. FA 2000 introduced provisions
to prevent this. Since then the Revenue has been consulting
with business and studying the effects of the new provisions
in detail.
The proposals
announced today and on 8 November will mean that the FA2000
provisions operate in the way in which they were intended
to work. They will significantly benefit UK groups who acquire
or already have existing business structures where tax in
excess of 30% is paid at several levels in that structure,
or tax at rates both below and above 30% are paid at different
levels.
REV
2: A Competitive and Modern Tax System for Multi-Nationals
and Large Business
The Government is committed to further reform of the company
tax system to ensure long-term stability and strengthen the
competitiveness of business, the Chancellor confirmed today.
Three strands
will be taken forward to secure a competitive environment
for business that, with globalisation, can change very quickly:
A consultation
paper will be published in June that will set in a broader
context the current proposals for a relief on gains arising
on the disposal of substantial shareholdings. Considerable
progress has been made on developing this relief. The further
consultation will allow consideration of detailed proposals.
It will also provide the opportunity to consult business on
possible associated reforms aimed at producing a flexible
and competitive tax system for parent companies based in the
UK;
A new technical
note published today by the Inland Revenue gives details of
a proposed new regime for providing relief to companies for
the costs of intellectual property, goodwill and other intangible
assets. The technical note builds on earlier detailed discussion
with business on the design of a more up-to-date regime, and
includes draft legislation.
The changes to
the regime for double taxation relief (DTR) announced in the
Pre-Budget Report will be supplemented by further measures
to make the system more flexible for UK-based parent companies.
The Government has consulted further with business about the
DTR regime over the last year and intends that this dialogue
will continue, both on specific aspects and to ensure that
the DTR regime fits with other elements of the system for
taxing companies.
Commenting on
these announcements, the Paymaster General, Dawn Primarolo,
said
"These take
forward the Government's reforms of the company tax system,
and the consultation we now propose offers business an excellent
opportunity to shape the outcome."
The Chancellor
also announced a range of measures aimed at providing a more
modern environment in which businesses can thrive:
A consultation
document 'Increasing Innovation' examines the case for further
measures to boost UK innovation and to seek views from businesses
and others on the design of a new tax R&D tax credit aimed
at encouraging innovation by larger companies.
Consultation
on the design of a new, targeted tax credit and related measures
to encourage development and distribution of vaccines and
drugs and to tackle the major killer diseases of the developing
world;
Abolition of out-dated requirements for the deduction of tax
on most intra-UK payments between companies of interest, royalties,
annuities and annual payments;
Measures to protect
the tax base while facilitating business efficiency and promoting
competitiveness.
Details
Substantial shareholdings
The Inland Revenue's
Technical Notes of June and November 2000 consulted on a deferral
relief for gains realised by companies on substantial shareholdings
in trading companies. A large number of helpful responses
were received. In addition there have been many meetings between
representatives of the business community and Inland Revenue
and Treasury officials.
The deferral
relief that has emerged would be much more flexible than that
originally envisaged. The present form of the relief is outlined
in the Budget Note (REV BN 23) which sets out the significant
changes that have been adopted as a result of consultation.
The Government
considers that the introduction of such a deferral relief
would provide a significant advantage to UK companies. Multinationals
with UK bases would then benefit from a parent company tax
regime that provided: one of the lowest rates of corporation
tax among major industrialised countries; generally, relief
for interest expense on loans funding investment in the UK
or overseas; a system for crediting overseas tax that can
substantially relieve tax on foreign dividends; and the opportunity
to defer the charge to tax on the disposal of a substantial
shareholding in a trading company or group.
The consultation
now announced will give a further period to assess the detailed
deferral proposals and allow them to be considered in a broader
context.
The UK today
is a very attractive location for multinational business for
tax and non-tax reasons. The Government is committed to ensuring
that this remains the case and recognises that, with globalisation,
the competitive environment can change very quickly. A reform
package should therefore look beyond the immediate future
and reflect the need for flexibility. In this context the
Technical Note that was published in November floated the
alternative of an exemption, rather than a deferral, for most
company gains on substantial shareholdings in trading companies.
Many of those
who responded to the Technical Note felt that an exemption
for gains would be preferable, but recognised that this could
have far-reaching implications. One of the main questions
that arose was whether an exemption for gains on substantial
shareholdings could be introduced without changes elsewhere
in the system and this will be important in the further consultation.
For example,
some felt that an exemption for gains might point to an exemption
for foreign income as well. And some were concerned that,
in evaluating the options, it should be clear whether the
Government's view was that any wider changes might involve
some restriction of interest relief where loans were funding
investment overseas.
The introduction of an exemption for gains and foreign source
dividends, together with some form of interest restriction,
would bring the UK system closer to that of many other European
countries and a reform of that sort could enhance the competitive
position of UK companies. But while some UK based multinationals
would welcome such changes, others more affected by an interest
restriction would probably not. And for Government, the possibility
of a new restriction on interest deductibility raises important
practical issues.
These are important
issues for the future direction of company taxation. Business
has expressed considerable interest in a broader discussion
of this nature and the Government considers that it is right
that there should be a full and open discussion of the issues.
The Chancellor therefore proposes to publish a further consultation
paper in June, which will launch a period of open discussion
on the changes that should be introduced and the wider implications
for the competitiveness of businesses based in the UK. Underpinning
that consultation is a strong presumption in favour of introducing
a major new relief for capital gains on the sale of substantial
shareholdings in Finance Bill 2002.
Double Taxation
Relief
Two changes to
double taxation relief were announced in the Pre-Budget Report
(details in Inland Revenue Press Release REV5/2000).
In response to further consultations, further changes are
to be made to the provisions in Finance Act 2000. Full details
are in the Budget Note (REV BN 24).
Two matters in
Finance Act 2000 were left to be dealt with by regulations.
These were the detailed provisions for the mixing of dividends
within a country and for surrendering eligible unrelieved
foreign tax around a group. The regulations are now on the
Inland revenue website, and business will have a brief opportunity
to comment at them (until 19 March) shortly after which they
will be made and laid before Parliament.
Increasing Innovation
In the Pre-Budget
Report, the Chancellor said that the Government would be looking
at measures aimed at boosting investment in R&D across
business. Last year, the Government introduced new R&D
tax credits to encourage research and development by small
and medium sized enterprises (SMEs). This provided SMEs with
an additional deduction for qualifying current R&D spending
over and above the amount deducted in the accounts by raising
the effective rate of relief from 100 per cent to 150 per
cent.
With the publication
of "Increasing Innovation", the Government is seeking
views on the design of a new tax incentive aimed at encouraging
innovation by larger companies.
The consultation
paper describes what would be involved in the design of an
incremental R&D tax credit incentive. An incremental R&D
tax incentive would reward businesses in proportion to their
additional R&D expenditure above current levels.
The paper outlines
the issues that would need to be considered, including eligibility
criteria, base periods and amounts, how groups might be dealt
with, the treatment of sub-contracted expenditure, and the
interaction with the existing SME reliefs. Two main options
are described, a CT incremental credit and a wages-based incremental
scheme.
Simplifying
and Protecting the Tax Base
The Government
is aware that the requirements of the tax system can lower
profitability and reduce competitiveness. Unnecessary and
outdated tax rules that detract from business efficiency are
to be cut. These include abolishing outdated requirements
for the deduction of tax on intra-UK payments between companies
of interest, royalties, annuities and annual payments. This
will increase competitiveness and reduce administrative burdens
for businesses.
The Government
is grateful for the responses to the Technical Note issued
at PBR about corporate debt, financial instruments and foreign
exchange gains and losses. The reform and simplification proposals
were broadly welcomed. Most respondents felt careful consideration
of the details over a reasonable time scale was needed. The
Government will therefore publish a consultation document
in the summer that further develops the ideas raised in the
Technical Note in light of the representations.
|
