Foreign Profits Reforms - Proposals Deferred Beyond 2009

On 21 July 2008, 13 months after launching a consultation on

reforming the United Kingdom's regime for the taxation of

companies' foreign profits, HM Treasury released an

update.

Since HM Treasury launched a consultation on reforming the

United Kingdom's regime for the taxation of companies'

foreign profits 13 months ago, the subject of taxation

generally has become a political hot potato, with the

Government forced rather hurriedly to revise a number of

proposed reforms to the tax system amid a shower of hostile

headlines. The proposed foreign profits reforms provoked a

similar reaction, with several major UK companies deciding to

"migrate" their head offices out of the United

Kingdom by incorporating new ultimate holding companies

resident elsewhere, and others announcing that they were

actively considering taking such steps. The Treasury therefore

issued a technical note on 12 July 2008, partly to provide an

update on the consultation process but also to provide

reassurance to businesses unsettled by the breadth of the

proposals and the uncertainty surrounding the UK tax system

more generally.

The centrepiece of the original discussion document, the

introduction of a tax exemption for foreign dividends, was

widely welcomed by UK corporates. Whilst the current

credit-based system for taxing foreign dividends generates

relatively little revenue for the Treasury, it causes

considerable costs and complexity for UK-parented groups in

structuring their affairs to achieve this result by maximising

credit on foreign dividends. The quid pro quo for the

exemption, however, was a strengthened "controlled

company" (CC) regime to replace the existing controlled

foreign company (CFC) rules. The existing entity-based CFC

regime would be replaced by an income-based regime, which would

subject to tax in the United Kingdom almost all a group's

"passive" income (such as interest, royalties and

rents).

It was this change in approach which caused particular

concerns for UK corporates, particularly for those whose

business and profits in large part involved the exploitation of

intellectual property (IP) overseas, as it had the potential to

tax profits deriving from the exploitation of IP which has very

little UK nexus, that is outside the scope of the existing CFC

rules (including embedded royalties). The proposed reforms

undoubtedly played a large part in the decision of Shire

Pharmaceuticals and United Business Media to establish new

holding companies that...