Foreign profit rules left in limbo

The wait was nearly over for those involved in advising on corporate tax and overseas dividends. The key decisions were to be enacted at the beginning of next month, but Treasury minister Stephen Timms now seems to have dashed those hopes.

Accountancy Age has learned 1 April is no longer the effective date for the foreign profits reform package to be introduced. At a recent business-government forum meeting on tax and globalisation, Timms said the date has been ruled out as too early to implement the new rules.

The reform package for taxing dividends made on foreign profits was announced by Alistair Darling in the pre-Budget report last year.

The chancellor said dividends on profits made on overseas interests would be exempt from tax. The issue has been highly controversial and had contributed to some companies, including Shire Pharmaceuticals and advertising giant WPP, choosing to relocate their headquarters overseas.

But despite announcing reforms it had remained unclear just when the government would put them into force.

The latest comments from Timms will no doubt cause heads of corporate tax everywhere to despair over when they can start using the new rules and put the uncertainty to rest.

There are those who believe that without the rules being enforced, the UK remains an acutely unattractive base for multi-nationals.

Richard Mannion, national tax director at firm Smith & Williamson, said despite extensive consultation, little clarity remains on the direction of foreign profits. ‘This uncertainty could have been managed a lot better. It’s been going on for years and it needs to be sorted out,’ he says.

There is further uncertainty over issues relation to the ‘worldwide debt caps’. This limits the interest paid on debt that is deductible against UK tax, and the deductions cannot be more that the total interest borne by a worldwide group.

‘There’s a fair amount of concern around this for companies. A lot of companies may not have foreign profits but they could still get caught by the worldwide debt cap,’ says Andrew Green of RSM Bentley Jennison. He says firms should be nervous about the adoption of the debt cap as clients unable to benefit from foreign profits will be affected, making current trading conditions all the more dire.