Wednesday, May 09, 2007

UK Looks To Scrap Tax On Foreign Profits

The United Kingdom government is reportedly working on proposals that would allow British-based multinationals to repatriate billions of pounds in profits earned overseas free of tax.

According to a report by the Financial Times, the Treasury is preparing to launch a consultation document this Spring which will discuss a number of options, including an European-style “participation exemption” for foreign dividends, as well as a different approach to the anti-avoidance rules that impose tax on profits generated in low-tax jurisdictions.

The move by the British government is being viewed as part of its effort to improve the corporate tax regime, after several warnings from business groups that recent additions to UK tax legislation are making the country increasingly uncompetitive compared with its economic rivals. Seemingly heeding these calls, Chancellor of the Exchequer Gordon Brown announced in his budget statement last month a 2% cut in corporate tax to 28%, bringing the UK below the OECD corporate tax average.

The expected revenue loss for the government from exempting foreign dividends from tax is thought to be relatively small - in the low hundreds of millions of pounds. However, according to the report, in its informal discussions with business, the Treasury expressed concern that the change could lead to more substantial tax leakage, as firms borrow in the UK to invest in low-tax jurisdictions. Consequently, the Treasury is likely to claw back any lost tax receipts with more anti-avoidance legislation, in a bid to ensure that any change in the law is revenue neutral. The measures are also not expected to bring about an overall tax cut for businesses operating in the UK.

Nonetheless, it is anticipated that the change would be welcomed by companies, as they would no longer have to apply complex tax strategies to minimise taxes on repatriated profits.

In 2005, a similar measure enacted by the United States Congress, whereby repatriated profits qualified for a special 5.25% tax rate for one year as opposed to the standard rate of corporate tax of almost 35%, led to many billions of dollars being repatriated by some of the country's largest firms. However, many observers believe that the law largely failed in its objective of encouraging US firms to invest and create jobs at home.

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