Wide-ranging business tax reforms on the cards

Treasury to change tax on interest relief, inter-company dividends and controlled-companies

Written by Nicholas Neveling

Accountancy Age, 21 Jun 2007

Companies are facing substantial shifts in the way they are taxed under Treasury proposals released in a consultation today.

In its long-awaited consultation document on the taxation of interest, foreign dividends and controlled-foreign companies, the Treasury proposed easing the rules on dividends, but tighten the regulations for CFCs and interest relief.

In the consultation, a response to European Court of Justice challenges to the UK tax system, the Treasury proposed that all multi-national business should be exempt from paying tax on foreign dividends.

Small and medium-sized business, however, will still have to comply with the old credit system for taxing foreign dividends.

But SMEs will benefit from a light regulatory regime for controlled foreign companies, whereas multi-nationals will face a much heavier CFC compliance burden.

With regards to interest relief, it is proposed that authorities will compare a company's global debt-to-equity ratio with its UK ratio. If the UK company has higher debt levels then it will only receive interest relief up to a level that matches its global debt ratio.

'Overall the consultation is to be welcomed, but as always the devil will be in the detail,' said PricewaterhouseCoopers international tax partner Peter Cussons.