Can the government avoid a U-turn on its rules for taxing foreign profits? The alternatives do not look likely.

The government is facing an exodus of companies over plans to tax controlled foreign companies. But the government needs another climbdown like a hole in the head.

‘It’s perfectly viable for the Treasury to [drop the proposals],’ says Ernst & Young head of tax policy Chris Sanger.

He thinks a consultation that concluded the status quo was better would be an example of good consultation.

While any such result would be described as a U-turn, advisers seem to be urging exactly that.
‘If we end up with a different policy that will be a victory rather than a climbdown,’ says Deloitte head of tax policy Bill Dodwell.

The government has set up a committee with a line-up of CFOs to discuss the issue. Previously, tax directors had been consulted. Now it is the likes of Hanif Lalani from BT and Andrew Shilston from Rolls-Royce, both finance rather than tax heads.

But some are asking questions about the com-mittee. Why is a representative from a French multi-
national, Axa, there? If the fear is that companies will flee, why ask the advice of a company not based in the UK?

And WPP, despite being a vocal critic, is not on the committee, which may mean it continues to pour scorn on the government’s efforts.

The issue of what to do is the thorniest. The proposal to ex-empt inbound dividends from tax was in part prompted by the ECJ cases, at least one of which directly addressed whether tax-ing dividends restricted the freedom of movement of capital.

But fears about the cost of that proposal have baffled some. Companies tend to plan around that tax, and not move money around in that way. So why is some balancing revenue raising measure being proposed?

Sanger says the one goes with the other. ‘The Treasury is worried that if you create an exemption regime [drop dividend taxation] people will divert profits.’

The moves to prevent ‘passive’ income being situated abroad are an attempt to forestall the opportunities created by the dividend exemption.

Is there a radical solution that will satisfy business? At the moment, no new ideas have emerged from the Treasury. And with the complexity of multi-national tax, the status quo is starting to look more and more attractive.