Tax on profit from abroad faces reform

TAX should not be levied on profits made from genuine overseas business, the Treasury said yesterday in a bid to stem the flow of internationalcompanies moving their headquarters out of the UK.

Publishing details of its corporate tax reform programme, the Treasury said controlled foreign company (CFC) tax should only be levied on profits that are artificially diverted away from the UK, and that it is not designed to catch a firm’s commercial offshore operations in the UK tax net. The proposal was published alongside plans for a reduction in corporation tax to 24 per cent from 28 per cent, by reducing it by one per cent a year starting in April 2011.

The proposals are designed to simplify the CFC tax regime, which currently levies tax on profits UK companies make overseas and which many businesses have criticised as being overly complicated and unfair.

Several firms, among them United Business Media, the advertising agency WPP, pharmaceutical giant Shire and Henderson Group, have in the last year moved their tax base to Ireland citing CFC as the main reasons for doing so. Ireland also has a lower rate of corporation tax at 12 per cent.

Toby Ryland of chartered accountants Blick Rothenberg said while the discussion paper was a step forward business had been asking for clarity for several years without success.

He added given it would take at least six months for any concrete proposals to be put forward, and a year before draft legislation, the uncertainty would remain regarding the CFC meaning businesses “may still be tempted to move out of the UK”.

But Chris Sanger, head of tax policy at Ernst & Young said UK companies would be “breathing a collective sigh of relief.” “The proposals have ruled out a restriction on interest, helping to ensure that the UK remains a stable environment for companies to invest in. It will also take the UK one step further forward to the coalition’s pledge of making the UK the most competitive corporate tax system in the G20,” he said. The government said it would introduce more targeted rules in 2012 but that a package of interim improvements would be introduced as early as next year.