The Government is offering businesses a further opportunity to contribute to the review of the taxation of foreign profits.
In a letter dated 21 July, the Financial Secretary to the Treasury confirmed that the proposed dividend exemption will probably not be introduced in Finance Bill 2009, because of perceived concerns about the fiscal risk. A controlled companies regime and further restrictions on the deductibility of interest had been included in the proposals, to produce a package of changes which were broadly “revenue-neutral”. These proposals had proved controversial, and the Government has decided not to proceed with the dividend exemption without revenue protection measures. It plans further discussion with businesses on the details of the package.
What are the current proposals?
The proposals deal with four issues:
- Taxation of foreign dividends. The proposal is to exempt non-UK dividends from corporation tax; many details remain to be resolved about the scope of the exemption; for example, will some dividends be excluded from the exemption? Should the same regime apply to large and small businesses?
- Controlled Company (CC) regime. This proposal was particularly controversial, and the Government is now focusing on achieving revenue protection by improving the existing “entity-based” Controlled Foreign Company (CFC) rules rather than developing “income-based” CC rules. This is alongside a continuing use of litigation to reinforce the existing regime.
- Restrictions on the deductibility of interest. The proposals for a worldwide debt cap have been refined further, and the Government has expressed a commitment to strengthening the “unallowable purpose” rules. In addition, it is considering whether further restrictions on interest deductibility would remove the need for the proposed CC regime. Businesses may be relieved to hear that the Government appears to have ruled out introducing a comprehensive set of interest allocation rules.
- Treasury consents. Replacing the Treasury consents regime with a “targeted” reporting regime continues to be the objective, although details of the new regime (including the penalties for non-compliance, which are to replace the current criminal sanction) are open for discussion. This is less controversial and in principle, could be introduced separately.
Why should I contribute to the debate?
Some of the largest UK corporates were invited to meetings with HM Treasury officials last year, to provide their comments on - and suggestions for - the proposals in the June 2007 discussion document, and they will continue to have the opportunity to shape the revised proposals through forums such as the Business-Government Forum on Tax and Globalisation.
The consultation is no longer limited to selected large corporates and the Government appears keen to hear from any business which might be affected by the proposals. It is important that each business considers whether the proposals would cause it particular problems, as there may be only limited opportunity to amend any proposals which are developed jointly by HM Treasury and business representatives. The proposals will not only affect large UK headquartered multinationals. The proposed restrictions on the deductibility of interest expense could, for example, have implications for businesses which do not have significant foreign operations, but which are part of a multinational group - eg, UK sub-groups and subsidiaries could see their interest relief restricted if they borrow heavily from a non-UK parent group which is itself not heavily geared. The changes may particularly affect companies with valuable intellectual property assets.
Many businesses will doubtless contribute to the debate, to ensure that their particular concerns are addressed. This is an opportunity which you should consider participating in, particularly if the proposed changes could adversely affect your business.
How can I ensure that my views are heard?
There are a number of ways in which you can contribute to the proposals. You may be able to contribute through any industry body or professional body of which you are a member. If you wish your contribution to remain anonymous, or to see if your concerns are shared by others, you may prefer to contribute to the debate through a professional adviser of your choice. We would be happy to arrange a meeting to discuss the current proposals, and either assist you in formulating your response to the proposals or add your thoughts to any response we make.