During the last few weeks there has been speculation about whether more multinationals based in the UK would move their headquarters to another country. The Chartered Institute of Taxation (CIOT) believes that the main factor that has prompted this is the climate of uncertainty caused by inadequate pre-consultation on changes that have been made in successive Budgets and Pre-Budget Reports (PBRs). This has meant that international business structures have to be regularly rearranged to deal with the latest changes.
Ian Menzies-Conacher, Chairman of the CIOT’s Technical Committee, says: “Regarding the substance of the recent proposals on foreign profits, the Government does have a need, which we recognise, to protect the corporate tax base.”
The CIOT believes, however that protecting the UK tax base could be achieved more effectively, and less disruptively, by more targeted measures than the 'controlled companies' regime envisaged by the foreign profits proposals. These would be very compliance-burdensome by requiring detailed annual calculations in respect of many, if not all, overseas subsidiaries of a UK headed group or subgroup. Historically little revenue has been raised on profits earned outside the UK - appropriately so, as they are mostly taxed in other countries, sometimes at high effective rates. The focus of the proposals on what should therefore be a very secondary area, a tightened CC regime, has also fuelled fears that the package is, despite its stated intention, a revenue-raising one.
Ian Menzies-Conacher adds: “The Chartered Institute of Taxation believes that consultation is the key to producing tax law that achieves the Government's objectives. The Government adopted a good approach in producing the discussion document last year to canvas opinion. It is far better to use the various consultation mechanisms available - informal, formal and responses to consultation documents - than to produce a 'rabbit from a hat'. As tax is complex, the latter almost inevitably leads to unintended consequences and it is much better to take the time necessary to get it right. The whole point of a consultative approach is to listen to what is said, reflect on it and consider proposed changes. Where a consultative approach has been employed from the start, the CIOT does not think that it is accurate or helpful to describe this process in terms of ‘u-turns’ or climb downs.”
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NOTES TO EDITORS
The UK raises about £50bn pa in corporation tax, nearly 10% of Government tax revenues.
This is a high proportion of tax revenues by international standards. Many other European countries look instead to employers' social security charges. There are a number of policy issues around this which we do not debate here. However it is clear that the corporation tax take is a very sensitive matter both from a business and Government viewpoint which accentuates the need for a consultative approach.
The 'foreign profits' exercise has involved a considerable amount of consultation but since 2000 it has suffered from a history of 'surprise' changes, often billed as 'anti-avoidance' measures, but seen as revenue-raising.