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Taxation of foreign profits

Taxation of foreign profits. Malcolm Gammie (IFS TLRC) Rachel Griffith (IFS/UCL) Helen Miller (IFS). European considerations. Any measure that taxes cross-border activity or investment less favourably than the equivalent domestic activity or investment liable to breach Community Law

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Taxation of foreign profits

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  1. Taxation of foreign profits Malcolm Gammie (IFS TLRC) Rachel Griffith (IFS/UCL) Helen Miller (IFS)

  2. European considerations • Any measure that taxes cross-border activity or investment less favourably than the equivalent domestic activity or investment liable to breach Community Law • Case C-446/04 FII Group Litigation • Exemption of UK dividends and taxation of foreign dividends with credit not necessarily a breach • Provided they produce the same effective result • Does not for portfolio dividends but may do for direct investment (≥10%) • Case C-196/04 Cadbury Schweppes • UK CFC rules breach Community Law but may be justified

  3. Foreign profits proposals – June 2007 Exemption of foreign ‘participation’ (10%) dividends (replacing taxation with credit for foreign tax) Current taxation of certain controlled company income (replacing entity-based CFC rules with income-based CC approach) No interest attribution rules but limited, targeted changes to prevent abuse Abolition of HMT consent for certain foreign share and security transactions Parity of treatment of UK and foreign portfolio dividends

  4. Controlled company proposals • The most controversial element of the package • Income not entity approach • Capturing foreign passive and mobile income and gains • Extended to domestic groups • Small company ‘exemption’ (coupled with retention of credit system for foreign dividends) • Government concern that foreign dividend exemption should not impact UK CT revenues and that package should be revenue neutral

  5. Current state of play • HMT/HMRC reviewing package following 2007 discussions • ‘Revised’ proposals possibly to be presented with Budget 2008? General support for: • Exemption of foreign dividends (portfolio and participation) • More limited/targeted CC rules and not extended to UK (provided can be EC compatible) • Some modification/clarification of proposed new interest restrictions

  6. Tax simplification The demand is longstanding but responses are generally short lived 1995 “The Path to Tax Simplification” produced the tax law rewrite (plain English drafting, greater length but no simplification) Chancellor’s more targeted current initiatives may produce some, if limited, benefits The proposal for “principles-based” anti-avoidance provisions requires particular care The key is always to consider what, who and how we tax, recognising what is complex and why

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