18 march 2010 john connors director of tax strategy and policy vodafone l.
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18 March 2010 John Connors Director of Tax Strategy and Policy - Vodafone. IFA Presentation – Business perspective on CFC Reform. Overview. A step in the right direction – a cautious welcome by business as far as it goes Consultation process has been good

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18 march 2010 john connors director of tax strategy and policy vodafone
18 March 2010

John Connors

Director of Tax Strategy and Policy - Vodafone

IFA Presentation – Business perspective on CFC Reform

overview
Overview
  • A step in the right direction – a cautious welcome by business as far as it goes
  • Consultation process has been good
  • Key points are broadly sensible but the detail will determine the relative competitiveness of UK tax regime
    • “A more territorial system”
    • Definition by reference to examples of “artificial diversion”
    • “Reflect modern business practice”
    • “Minimise compliance”
    • “EU compliant”
  • All good aspirations but how will these be put into practice?
business perspective on framework
Business perspective on framework
  • Territorial system reflects sensible basis for UK tax
    • Recognition of global business choice to locate and invest around the world
    • Recognition that UK is not centre of the business universe
    • Removal of UK only default presumption
    • But contradicted by “CFC regime UK ownership and control”
    • And ‘more territorial’ lacks clarity and principle.
  • So document suggests that it will be a compromise to some extent
    • Hybrid system that taxes some foreign base?
    • Overseas monetary assets taxed by reference to a “fat cap” test
    • Overseas IP income taxed by activity test
key business concerns
Key Business Concerns

Failure to embrace Cadbury test

‘Ownership’ as starting point is detrimental to UK based Groups

Onus on business to determine ‘similar’ tax rates and bases is onerous and unclear

Widespread use of ‘artificial’ without definition suggests something wider than ‘front’ or ‘brass plate’ type operations.

Contradictions / mixed messages in some of the details.

monetary assets key business concerns
Monetary Assets – key business concerns

Potential ‘recharacterisation’ of equity is inappropriate and inconsistent with conclusions from previous consultations

Debt cap rules already address concerns about UK interest deductibility

Need to focus on UK tax avoidance and identify base erosion through UK tax deductions or recycling UK operating profits.

Shouldn’t seek to be the world’s policeman

monetary assets examples key assumptions
Monetary assets examples – key assumptions

It does not matter whether the Plc / UK tax group has net debt or net cash

In most cases it will have net debt and any interest restriction will be dealt with by debt cap rules etc

Assume all loans are on arm’s length terms

No distinction is made for the source of funds and Finco is financed wholly by equity plus retained profits

The equity can have come from the UK or an intermediate holding company

Examples are simplified but in a future competitive system life would be simpler as a lot of current complexity is to satisfy the CFC exempt activities rules

slide7

Example 1

What’s the difference?

What’s the concern?

PLC

Equity

Equity

Finco

(low tax)

Trader

(non-UK)

Loan

slide8

Example 2

Differentiation UK vs nonUK?

PLC

Equity

Equity

Equity

Finco

(low tax)

Trader

(UK)

Loan

Loan

Trader

(non-UK)

ip assets key business concerns
IP Assets – Key Business Concerns
  • How will active management be determined?
    • Integrated MNC business model share responsibility for decisions and operations across national and legal entity boundaries
    • “UK involvement” difficult to partition in MNC’s
    • Test may force UK activity offshore like current CFC rules!
  • Do challenges of valuation require a look back provision?
    • IP is valued at all stages of development in the real world
    • Earn outs are established through milestone payments and royalties so some should apply for tax
    • Look back leaves things uncertain and should be rejected
  • Interaction with patent box rules
ip tax base
IP Tax Base

Should UK tax royalties in

IP Hold Co?

UK Parent

IP Hold Co

Royalties

IP licence

Related foreign

companies

Third Party

ip tax base11
IP Tax Base

Should UK tax royalties in

IP Hold Co?

UK Parent

IP Hold Co

Royalties

IP licence

Related foreign

company

Related foreign

companies

ip tax base12
IP Tax Base

Should UK tax UK source

royalties in IP Hold Co?

UK Parent

IP Hold Co

Royalties

IP licence

Related foreign

company

Related foreign

companies

ip tax base13
IP Tax Base

Should UK tax all royalties in

IP Hold Co on a look back basis?

UK Parent

IP licence

IP Hold Co

Royalties

Related foreign

companies

ip tax base14
IP Tax Base

Should UK tax UK or all royalties in IP Hold Co on a look back basis?

UK Parent

IP licence

IP Hold Co

Royalties

Related foreign

companies

conclusion
Conclusion
  • A step in the right direction
  • Potentially onerous and judgmental
  • Bigger focus on competitiveness and commerciality required
  • Still a long way to go