UK Corporate Tax Reform Update - September 2011
While the UK Government's blue-print for corporation tax reform was put forward in June 2010, key elements of the reform programme have become much clearer during the course of the Summer of 2011. The long awaited detailed and extensive consultation documents on the reform of the UK controlled foreign companies rules and the UK Patent Box have been published, alongside a consultation on changes to the UK debt cap rules and extensive guidance on the foreign branch tax exemption which was enacted in the Finance Act 2011.
Taken together, these initiatives mark the latest developments in the Government's aim "to create the most competitive corporation tax regime in the G20".1 The Government's priorities in the corporate tax reform programme are to broaden the UK tax base, lower corporate tax rates, and promote a more territorial approach to taxation while also creating a tax system which is stable, aligned with modern business practices and which avoids complexity where possible.
In this Clients & Friends Memorandum, we have drawn together both summaries and analysis of the four key elements of corporate tax reform during this summer: the consultation on the controlled foreign companies rules and the Patent Box, the proposed changes to the UK debt cap rules and the position which has been reached regarding the foreign branch exemption.
As the summer draws to a close, we can be confident of saying that the corporate tax reform programme has been advanced by each of these initiatives. However, we can be equally confident that much work remains to be done by the Government to ensure that changes announced can be translated into workable legislation which is both integrated across all the reformed areas of corporate taxation and which, taken as a whole, achieves the overall objective of increasing the competitiveness of the UK as an attractive jurisdiction for business.
Consultation on Controlled Foreign Companies Reform
On 30 June 2011, HM Treasury and HMRC published a consultation document (the "Consultation Document") setting out in detail their proposals for full reform of the UK controlled foreign companies ("CFC") rules.
Overview
The Consultation Document identifies the Government's aims for the revised CFC regime as being:
to target and impose a CFC tax charge on profits artificially diverted from the UK; to exempt foreign profits where there is no artificial diversion of UK profits; and to ensure that profits arising from genuine economic activities undertaken outside the UK are not subjected to UK corporation tax. The Consultation Document is detailed, weighing in at 110 pages, including annexes which cover certain aspects of the reform in more detail. The key proposals of the Consultation Document through which the Government's aims are to be achieved include the following:
the CFC regime will continue to be entity based, but will impose a tax charge only on profits of a CFC which have been artificially diverted from the UK; the focus of the regime is on CFCs which are perceived as being the greatest risk to the UK tax base. These are CFCs with significant monetary assets, with risks and profits which are not commensurate with their underlying activities, or which hold, or have interests in, certain intellectual property ("IP"); the introduction of a partial exemption for finance companies; the introduction of a new approach in respect of CFCs holding intellectual property, in particular where the relevant circumstances relate to exploitation of IP transferred out of the UK in the last six years or where the profits arising from the IP are excessive in relation to the activities undertaken; and the new regime will adopt a proportionate approach, ensuring that a CFC charge will only be imposed on a UK company on a proportion of profits in a CFC which have been treated as being artificially diverted from the UK. A substantial amount of the new CFC regime rebrands the current rules in the existing CFC existing regime while refocusing on perceived areas of greatest risk to the UK tax base. Perhaps the most noteworthy example of rebranding is that the general purpose exemption in the proposed regime (which is available where no artificial diversion of profits from the UK has taken place) fulfils the same function as the motive test in the current CFC rules, but without a default presumption that profits would have arisen in the UK if the CFC had not existed. The provenance of the new regime will be helpful in assisting taxpayers and advisers through the network of rebranded exemptions and new provisions, with a non-statutory clearance procedure being available to provide certainty in cases of difficulty or particular uncertainty.
The proposed date for the introduction of the new CFC regime will be, at the earliest, for accounting periods beginning on or after Royal Assent...
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