Further delays in foreign profits legislation deals blow to
business certainty
But latest Government announcement shows progress
towards sensible legislation
The Government's announcement of progress on the taxation of
foreign profits yesterday evening shows promising signs of sensible
legislation being developed on the taxation of passive offshore
business income, but that policy is unlikely to be implemented
before 2010 at the earliest says leading business and financial
adviser Grant Thornton.
The proposals, communicated yesterday in a letter to the CBI
with accompanying technical note*, have moved a long way since the
Discussion Document of June 2007 and it appears representations
from business have been listened to. Hard-line proposals on the
taxation of Controlled Foreign Companies have been dropped while
the Treasury has moved closer to the possibility of a dividend
exemption.
Heather Self, an international tax partner at Grant Thornton, is
pleased that representations from business have been taken into
account in the latest Government announcement and that there is
further consultation to be had before the final package is put
forward, but says the constant delays have created a complex and
uncertain environment for businesses to operate in.
"Overall, the Treasury announcement is a sensible response to a
constructive period of consultation, but it is disappointing that
progress has been so slow and that we are unlikely to get more
detail before the Autumn. The continuing uncertainty is damaging UK
competitiveness, particularly if the UK wants to remain a gateway
to Europe for new investors from countries such as India, China and
Brazil," says Self.
"It is now unlikely that we will get any concrete policy on the
taxation of foreign profits before 2010 at the earliest and at that
point we may well be in the middle of an election," she says.
Self says yesterday's announcement confirms that the Government
wishes to introduce an exemption for foreign dividend income
received in the UK and that this will be as wide as possible, but
that it remains concerned about the risks to tax revenue and
therefore won't be implementing such a move next year.
"The dividend exemption will be warmly welcomed by business as
it will allow large corporates to repatriate what is estimated to
be billions of pounds of foreign income to the UK with limited or
no UK tax. But the Treasury is worried that it will be missing out
on a large slice of tax revenue by implementing the exemption so is
wanting further consultation on measures to protect tax revenues,"
she says.
The technical document also says there will be further
discussion on CFC rules and interest deductibility.
Self says, "On CFC rules, we are almost back to square one, with
a proposal that any changes may simply be improvements to the
existing regime rather than an entirely new set of rules. This is a
sensible withdrawal, although no mention is made of the
Government's continuing difficulties with the European Courts on
the application of CFC rules within the EU."
There is also confirmation that comprehensive interest
allocation rules will not be introduced, "a welcome move," says
Self, but there is a vague threat of "additional but still limited
restrictions" on interest deductibility.