How the Government have sold their soul to the devil
We like rants. Furious rants, resigned rants, over-excited rants we aren’t bothered, but this particular rant caught our eye in a big way.
It’s not that we trusted politicians beforehand, but this latest idea really does seem to be Dave making sure he sorts out his mates at the expense of the rest of us. Good job we’re all in it together eh Dave?
The specific measures causing consternation are the new rules in respect of international corporation tax issues mooted for inclusion in the 2011 Budget, due on 23 March. There are two new proposals, those amending the rules for the Controlled Foreign Companies (CFCs) and those covering the taxation of foreign branches.
In simple terms, the new rules will mean that 150 companies, mainly banks and insurance companies, will now be able to avoid UK corporation tax, and potentially any tax at all, on profits from foreign branches, at a cost to the Treasury of £100 million a year.
At the moment, profits of an overseas subsidiary company are taxed in the country of origin, rather than in the UK, so the idea of setting up a foreign company in an overseas jurisdiction with, say 0% corporation tax might therefore have been an attractive measure for some UK companies who could then ‘divert’ profits from the UK charge into the cheaper overseas one. As a result, the CFC regime was introduced .
The principle behind the CFC rules was simple but in practice there were multiple problems, the biggest pain in the bum being those pesky Europeans. You see, the CFC regime meant that companies were not free to establish a subsidiary in other European countries without suffering penalty taxation, which is clearly contrary to the EC prime directive. The UK has been taken to the European Court and had its knuckles rapped on more than one occasion.
So the rules have needed amending for some time- they were so tightly drafted that legitimate companies were being caught in the CFC net. What is scheduled for inclusion in the 2011 Budget, however, looks less like a careful consideration of the issues and more like a broad relaxation of the rules.
Still, if it wasn’t for the changes to Foreign branches, they might just have slipped it under the radar.
Now, foreign branches were the other side of the coin. Here, much as a UK resident individual is normally taxed on his worldwide income, a UK company earning profits from foreign branches was charged UK corporation tax, with double tax relief on any foreign tax suffered. Sounds simple.
However, the 2011 Budget proposes to offer an opt-in exemption to any company who so chooses to take it. This exemption means that these companies will no longer pay UK tax on foreign branch profits. Sounds dodgy.
The rationale for this measure is that assessing profits and then allowing double tax relief is a waste of time, and where the tax rate in the overseas jurisdiction is equal to or more than the UK rate, thereby wiping out the UK liability, there is some sense in this argument. But what about where the overseas country levies no tax or very low rates? Like say the Cayman Islands or any other banking haven? Under the new rules, these foreign branch profits will escape tax altogether.
You might think you are missing something. You aren’t. Our “big society” leader is making big noise about a miniscule bank levy, while admitting that “The primary benefit of this proposal will arise in two sectors: banking, which currently makes greatest use of foreign branches and general insurance.”
The new measure, by the Government’s own predictions, is expected to cost £100million a year in lost tax revenue. And the benefit? Well the 150 companies the Government expects to be affected will benefit to the tune of £667,000 each. Every year. And I’m sure Dave will get a few pats on the back too.
Not so sure about the rest of us.