Treasury consultation call over tax on foreign profits
4 Aug 08
The Treasury has provided an update on the review of the taxation of foreign profits
The 21 July document is the latest development in this area, and comes after much media coverage and speculation, and also a series of legal judgments that have undermined the enforceability of the UK’s controlled foreign companies (CFC) regime (see below for the latest ruling).
The current view of the Government is that the fiscal risks of introducing a dividend exemption in next year's Finance Bill are too great. However, the document says it would welcome a discussion on the analysis of the associated costs.
The Government will explore at least two options in relation to the controlled foreign company rules:
• Improving the current entity-based CFC rules; and
• Adopting an income-based approach that would not, however, apply (i) to all embedded royalties or intangible property which does not have a connection to activities which took place or take place in the UK and (ii) to capital gains overseas.
The Government will explore the option of interest restrictions as a possible alternative to the controlled companies rules which were put forward in the earlier discussion document.
The inclusion of a main benefit test in the “unallowable purpose” rule has been dropped.
However, the Government is still looking to extend the rule so that it applies to schemes and arrangements.
If the worldwide debt restriction, as set out in the original discussion document, is taken forward, this could be set aside where the group is in a cash-rich position in the short term (for example, after a sale).
The Government still wishes to repeal the Treasury consents regime, and replace it by a targeted reporting regime. This is being discussed with business.
The Treasury technical note and related documents can be found at: www.hm-treasury.gov.uk./consultations_and_legislation/foreign _profits/consult_ foreign_profits.cfm