Experts puzzled over tax forecasts on UK companies' foreign profits

Treasury forecasts for tax receipts on companies’ foreign profits repatriated to the UK have puzzled tax experts, following the pre-Budget report earlier this week.

The Treasury estimates taxes on foreign profits will generate £75m for the Exchequer in 2008/09, but will cost about £275m by 2012. The reforms to foreign profits were first proposed in 2007, alongside ‘controlled company’ legislation, aimed at stopping companies shifting taxable profit outside the UK. A number of companies, including WPP, the advertising giant, and Shire, Britain’s third biggest drugmaker, are moving their headquarters overseas.

Deloitte tax partner Bill Dodwell said that he was puzzled by the forecast for tax receipts and tax loss resulting from the change to the controversial tax rules, but said the government was right to change them.

‘They think all of a sudden they’ve given away this gigantic amount of money. It is very implausible. There’s nothing I can see in any of the documents that support their reasoning,’ he said.

‘It’s a pretty good announcement,’ he added. ‘I’m not sure it’s going to stop someone emigrating who was keen to do so, but those who were undecided might now stay and stake a case for what they would like to see,’ he said.

Jonathan Hornby, the senior director of corporate tax at Alvarez and Marsal Taxand ­ a tax advisory firm ­ was also surprised by the Treasury forecast. Before the PBR, he estimated the cost to the Exchequer of introducing an exemption for foreign dividends would be £600m per annum.

‘Most commentators didn’t understand where those calculations came from in the first place. The Treasury never made the underlying information available,’ he said.