Delay and more discussion on Foreign Profits

Monday 28 July 2008

At 5.30pm on 21 July - on the eve of Parliament's rising for the Summer - the Government issued a Technical Note with an update on the review of the Taxation of Foreign Profits. What was announced and what are the implications?

What did the Technical Note contain?

The Government has confirmed that it wishes to introduce an exemption for foreign dividend income received in the UK, and that this will be as wide as possible. However, the Government remains concerned about the risks to its tax revenue, and considers that these are too great for a dividend exemption to be put in place in 2009.

There will also be further discussion on controlled foreign company (CFC) rules and interest deductibility. 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. There is welcome confirmation that comprehensive interest allocation rules will not be introduced, but there is a vague threat of "additional but still limited restrictions" on interest deductibility.

What does this mean for business?

The good news is that the proposals have moved a long way since the Discussion Document of June 2007. Business representations have been listened to, and there is to be further consultation before a final package is put forward. However, this means further delay and uncertainty, as it is now almost certain that there will be no change introduced until 2010 at the earliest - and that may leave us in the middle of a General Election.

The dividend exemption will be warmly welcomed by business and is a major step towards making the UK a more attractive holding company location. The rethink on the CFC rules 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 European Union.

Heather Self, an international tax partner at Grant Thornton says: "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 to UK competitiveness, particularly if the UK wants to remain a gateway to Europe for new investors from countries such as India, China and Brazil."

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