20 corporate taxation Now’s the time to act


The government’s corporate tax reform proposals are intended to improve the UK’s international competitiveness. Here Stephanie Udall and Samir Wagadia of PwC’s international tax structuring network consider the resulting opportunities for international business


Corporate tax reform: a landscape of opportunity for international business


As many countries lower their barriers to international trade, the UK needs to keep pace and remain competitive. The UK government’s corporate tax reform proposals clearly show its commitment to improving the attractiveness of the UK tax regime for business.


These changes, widely regarded as the most fundamental change to the UK’s taxation of international business in years, include a reduction in the headline tax rate and a more territorial approach to taxation. The proposals have significantly improved the UK’s standing as a place for foreign multinationals to do business and offer an opportunity for groups to review and adapt tax strategies and to achieve commercial objectives without tax being a barrier.


Headline corporation tax rate reductions


Following the welcome surprise announcement in the Budget, the UK corporation tax rate has reduced to 26% from April 1, 2011, and will further reduce by 1% each year to 23% by April 1, 2014.


Exemption of foreign branches


UK companies can elect for their foreign branches to be exempt from UK tax for accounting periods commencing after Royal Assent of Finance Bill 2011. Such elections will be on a company-by-company basis (not a branch-by-branch basis) and will be irrevocable. Although the proposals intend to make branches and subsidiaries ’more aligned’ for tax purposes, it’s likely that the transfer pricing rules governing profit allocation to a permanent establishment will make it more challenging to achieve neutrality between subsidiaries and branches.


Controlled foreign companies (CFC) interim improvements


The interim improvements in Finance Bill 2011 including the


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tax burden in a way which is efficient from a UK tax perspective, for example using the favourable offshore financing regime. While April 1, 2012 may still seem some time off, action now could lead to significant benefits.


The foreign branch exemption provides an opportunity for international groups to use the UK as a single entity for Europe (or further afield) with a single board of directors and consequently a concentration of governance requirements. The risk of incremental UK tax on foreign profits should no longer be a barrier against such a structure. Moving to a single entity structure in Europe could also be beneficial from a regulation perspective.


Stephanie Udall


foreign-to-foreign intra-group trading exemption and the exemption for IP (where there is minimal or no connection with the UK) are designed to allow UK multinationals to manage overseas operations more tax efficiently than is possible under the current CFC rules.


In addition there is a blanket exemption for up to three years on the majority of companies brought under UK control for the first time.


UK as a holding company location


The Solent has a long and distinguished history as a first port of call in Europe for many of the world’s leading companies. With the improvements to the CFC regime, the UK will have all the necessary ingredients required from a tax perspective to be a great regional or even global holding company location, including: • the absence of dividend withholding tax; • a strong network of double tax treaties; • the broadened CFC exemptions (which are intended to exempt all genuine foreign business profits from UK tax); • the new branch exemption; • the existing exemptions for dividends and capital gains; and • the government’s confirmation that there will be no additional restrictions imposed on interest deductibility.


Samir Wagadia Offshore financing


Previously, groups with UK holding companies engaging in offshore financing from a low tax jurisdiction would have been subject to CFC apportionment of the profit from the finance company to the UK and as a result, such planning was generally ineffective. The new CFC regime allows for a tax rate on financing income equal to one- quarter of the headline UK rate. This means that offshore financing activities will be taxable at 6.25% from April 1, 2012, falling to 5.75% from 2014. This regime will allow groups to reduce their effective tax rates using planning which is effectively pre-approved by HMRC.


Intellectual property


The Patent Box regime which applies to income generated from 2013 onwards from patents commercialised on or after November 29, 2011, provides that a reduced 10% rate of corporation tax will apply to income generated from patents. The proposed CFC exemption for IP companies will also allow groups to achieve a CFC exemption where there is a ’low risk’ of ’artificial diversion’ of UK profits.


What are the opportunities?


For UK outbound investors the key opportunities involve managing the group’s effective tax rate, generally by reducing the foreign


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The reduced corporation tax rate means that the UK is a more attractive location for centralising business functions. As the UK is often a territory with significant existing substance within a group this could achieve tax benefits to groups with relatively limited disruption to the business.


For inbound investors the confirmation that there will be no additional restrictions on interest deductibility and the presence of the key ingredients for a great holding company location, should provide a mechanism to shelter any increased profits arising from centralising functions and activities in the UK. This should allow the UK to compete even more effectively with European territories, such as Ireland and Switzerland, as a regional headquarters location.


Overall the corporate tax reform proposals are extremely positive in terms of improving UK competitiveness. These changes should generally be welcomed by business and there are opportunities to act now to benefit from the changes.


Details:


Stephanie Udall 023-8020-2210 stephanie.p.udall@uk.pwc.com


Samir Wagadia 023-8020-2378 samir.wagadia@uk.pwc.com


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