A special low rate of UK corporation tax on finance profits from overseas financing within multinational groups will offer a ‘very significant’ benefit to groups setting up a structure that represents, according to a leading tax expert, ‘almost government-approved tax avoidance’.
Heather Self, a Director at the law firm McGrigors which is set to merge with Pinsent Masons, provided an overview of a major reform of the UK’s controlled foreign companies (CFC) anti-avoidance rules in a Tax Journal webcast published yesterday.
The reform occupies 100 pages of the current Finance Bill, which MPs began to debate yesterday. It has been widely welcomed by business and tax professionals as part of a move towards a ‘more territorial’ tax regime. The policy objectives include an exemption for profits arising from genuine economic activities undertaken overseas and an exemption where there is no ‘artificial diversion of UK profits’.
Anti-poverty campaigners claim that the changes will ‘water down’ the CFC rules and cost developing countries up to £4bn a year. The reform comes at a time of widespread criticism – on all sides of the political spectrum – of corporate tax avoidance by some of the world’s largest groups.
‘A real benefit’
In an update on CFC reform published earlier this year, HM Treasury said: ‘The partial exemption rules provide an effective rate of tax of [then] 5.75 per cent (by 2014) on finance profits from overseas intra-group financing. This is intended as a competitive and pragmatic approach by the government to the issues raised by the fungibility of monetary assets, avoiding the need for complex tracing rules.’
Heather Self said the taxation of finance profits would be ‘radically different’ from the existing rules, and a new ‘finance company partial exemption’ for non-trading finance profits would be ‘a real benefit’ to groups.
She offered the following example: ‘I’m assuming that a UK-headed group with some bank debt has a genuine operating company, elsewhere in the world, that needs finance for its business. If the UK plc sets up an offshore finance company, it can funnel that bank debt through the finance company to the operating company, get a deduction in the UK for the bank interest, a deduction in the operating company for the loan, and then the really good news – the tax in the finance company will only be 5.5%. That’s a quarter of the corporation tax rate of 22% which we’re now heading for. In summary, a double deduction in exchange for just a 5.5% charge.’
Writing in Tax Journal on 29 February, Martin Lambert and Zoe Wyatt of Grant Thornton said the changes would provide ‘an opportunity for a UK multinational group to reap the benefits of locating a group finance company overseas; typically in territories such as Belgium, Cyprus, Ireland, Luxembourg, Malta, the Netherlands and Switzerland or a combination of such territories’.
They added: ‘Being able to have a foreign finance company within a group without attracting harsh UK CFC tax charges should facilitate the circulation of cash around the group to more easily deploy the resources where needed and help groups to expand their overseas operations.’
A structure that ‘the government has set up’
Self emphasised in her webcast that there would be ‘lots’ of conditions and specific anti-avoidance rules. For some groups a ‘FinCo structure’ could reduce overall finance costs.
Other groups would be familiar with the CFC rules and have existing, complex structures. ‘They should consider whether they can refinance and use this structure instead,’ she said. ‘They might pay a little bit more tax, but on other hand this is almost government-approved tax avoidance. It’s a structure that the government has set up, and providing you meet the conditions you will benefit. So it’s a low risk structure.’
Self told Tax Journal today: ‘It is clear that the UK Treasury now considers it acceptable for multinational groups to use low tax offshore finance structures – but there are a lot of traps for the unwary.’
‘Stop the new loophole’
Critics of the CFC reform say the government is ‘watering down’ the anti-tax haven rules that have acted as an ‘obstacle’ to multinationals seeking to use tax havens to reduce their tax bills in the UK and in developing countries.
ActionAid has estimated that the reform could cost £4bn a year in developing countries and £1bn a year in the UK. It is seeking 15,000 signatures to a petition calling on the government to ‘stop the new loophole’. It pointed out that ‘if a British company tries to move money from a developing country into a tax haven, it will be completely ignored’.
But Self told Tax Journal: ‘A key part of the solution for developing countries seeking to build their tax base is for their governments to adopt OECD transfer pricing principles, and for the UK to help them develop the skills and expertise they need to enforce the legislation.’
Multinationals that ‘rip off our country’
At the beginning of yesterday’s seven hour debate on the Bill, Charlie Elphicke, Conservative MP for Dover, welcomed the reduction in the main rate of corporation tax but asked: ‘Should not we take proper action against multinationals that rip off our country and do not pay proper taxes, and ensure that they pay a fair share of tax, like every British business, so that we have a level tax playing field for all companies?’
Danny Alexander, the Chief Secretary to the Treasury, said there were a number of measures in the Bill that were ‘precisely aimed at ensuring that businesses pay their fair share of tax’. The changes to the CFC rules were ‘vital reforms’ and the new patent box would allow UK businesses to ‘operate in an ever-more globalised world’.
Winding up the debate, David Gauke, the Exchequer Secretary, said: ‘We are updating our [CFC] regime ensuring that companies choose to locate here, not move away. We are implementing the patent box, which is already resulting in additional investment in the UK, as announced by GlaxoSmithKline and AstraZeneca, and we have more generous arrangements for enterprise investment schemes and venture capital trusts, and a new enterprise investment scheme.’
A special low rate of UK corporation tax on finance profits from overseas financing within multinational groups will offer a ‘very significant’ benefit to groups setting up a structure that represents, according to a leading tax expert, ‘almost government-approved tax avoidance’.
Heather Self, a Director at the law firm McGrigors which is set to merge with Pinsent Masons, provided an overview of a major reform of the UK’s controlled foreign companies (CFC) anti-avoidance rules in a Tax Journal webcast published yesterday.
The reform occupies 100 pages of the current Finance Bill, which MPs began to debate yesterday. It has been widely welcomed by business and tax professionals as part of a move towards a ‘more territorial’ tax regime. The policy objectives include an exemption for profits arising from genuine economic activities undertaken overseas and an exemption where there is no ‘artificial diversion of UK profits’.
Anti-poverty campaigners claim that the changes will ‘water down’ the CFC rules and cost developing countries up to £4bn a year. The reform comes at a time of widespread criticism – on all sides of the political spectrum – of corporate tax avoidance by some of the world’s largest groups.
‘A real benefit’
In an update on CFC reform published earlier this year, HM Treasury said: ‘The partial exemption rules provide an effective rate of tax of [then] 5.75 per cent (by 2014) on finance profits from overseas intra-group financing. This is intended as a competitive and pragmatic approach by the government to the issues raised by the fungibility of monetary assets, avoiding the need for complex tracing rules.’
Heather Self said the taxation of finance profits would be ‘radically different’ from the existing rules, and a new ‘finance company partial exemption’ for non-trading finance profits would be ‘a real benefit’ to groups.
She offered the following example: ‘I’m assuming that a UK-headed group with some bank debt has a genuine operating company, elsewhere in the world, that needs finance for its business. If the UK plc sets up an offshore finance company, it can funnel that bank debt through the finance company to the operating company, get a deduction in the UK for the bank interest, a deduction in the operating company for the loan, and then the really good news – the tax in the finance company will only be 5.5%. That’s a quarter of the corporation tax rate of 22% which we’re now heading for. In summary, a double deduction in exchange for just a 5.5% charge.’
Writing in Tax Journal on 29 February, Martin Lambert and Zoe Wyatt of Grant Thornton said the changes would provide ‘an opportunity for a UK multinational group to reap the benefits of locating a group finance company overseas; typically in territories such as Belgium, Cyprus, Ireland, Luxembourg, Malta, the Netherlands and Switzerland or a combination of such territories’.
They added: ‘Being able to have a foreign finance company within a group without attracting harsh UK CFC tax charges should facilitate the circulation of cash around the group to more easily deploy the resources where needed and help groups to expand their overseas operations.’
A structure that ‘the government has set up’
Self emphasised in her webcast that there would be ‘lots’ of conditions and specific anti-avoidance rules. For some groups a ‘FinCo structure’ could reduce overall finance costs.
Other groups would be familiar with the CFC rules and have existing, complex structures. ‘They should consider whether they can refinance and use this structure instead,’ she said. ‘They might pay a little bit more tax, but on other hand this is almost government-approved tax avoidance. It’s a structure that the government has set up, and providing you meet the conditions you will benefit. So it’s a low risk structure.’
Self told Tax Journal today: ‘It is clear that the UK Treasury now considers it acceptable for multinational groups to use low tax offshore finance structures – but there are a lot of traps for the unwary.’
‘Stop the new loophole’
Critics of the CFC reform say the government is ‘watering down’ the anti-tax haven rules that have acted as an ‘obstacle’ to multinationals seeking to use tax havens to reduce their tax bills in the UK and in developing countries.
ActionAid has estimated that the reform could cost £4bn a year in developing countries and £1bn a year in the UK. It is seeking 15,000 signatures to a petition calling on the government to ‘stop the new loophole’. It pointed out that ‘if a British company tries to move money from a developing country into a tax haven, it will be completely ignored’.
But Self told Tax Journal: ‘A key part of the solution for developing countries seeking to build their tax base is for their governments to adopt OECD transfer pricing principles, and for the UK to help them develop the skills and expertise they need to enforce the legislation.’
Multinationals that ‘rip off our country’
At the beginning of yesterday’s seven hour debate on the Bill, Charlie Elphicke, Conservative MP for Dover, welcomed the reduction in the main rate of corporation tax but asked: ‘Should not we take proper action against multinationals that rip off our country and do not pay proper taxes, and ensure that they pay a fair share of tax, like every British business, so that we have a level tax playing field for all companies?’
Danny Alexander, the Chief Secretary to the Treasury, said there were a number of measures in the Bill that were ‘precisely aimed at ensuring that businesses pay their fair share of tax’. The changes to the CFC rules were ‘vital reforms’ and the new patent box would allow UK businesses to ‘operate in an ever-more globalised world’.
Winding up the debate, David Gauke, the Exchequer Secretary, said: ‘We are updating our [CFC] regime ensuring that companies choose to locate here, not move away. We are implementing the patent box, which is already resulting in additional investment in the UK, as announced by GlaxoSmithKline and AstraZeneca, and we have more generous arrangements for enterprise investment schemes and venture capital trusts, and a new enterprise investment scheme.’
