A global debt cap could be introduced for multi-nationals to limit the possibility of abusing interest relief, it emerged yesterday.

As part of the government's moves to overhaul the taxation of multi-nationals, the Treasury raised the issue of returning to the idea of restricting interest relief, whereby interest on UK debts can be offset against profits.

The government said it was postponing its plans to drop the taxation of inbound dividends, saying that the move, without corresponding anti-avoidance measures, could cost the UK up to £1.1bn by 2012/13.

Businesses only pay £300m in taxes on inbound dividends, but the fear is the move could also leave the government open to abuse.

'The nature of some of the risks, especially from aggressive avoidance schemes, means it is not possible to set an upper limit on them,' the Treasury added.

The government plans to work on the plans again, with one plan being to introduce a debt cap.

It said: 'The aim of the worldwide debt cap is to target situations where a UK group bears more debt than is required to finance the worldwide group. In addition this measure could provide an effective means of targeting many ‘upstream’ loans to the UK, which are used to repatriate overseas cash. However, in order to protect those groups that are temporarily cash-rich the Government would intend to allow the worldwide debt cap measure to be set aside where a group is in a short-term cash rich position (e.g. following a sale).'

It is dropping plans to target 'passive' income, where multi-nationals' foreign subsidiaries generate income from assets that are arguably UK assets artificially located offshore for tax reasons.

'The Government sees attraction in exploring improvements to the entity-based model as an alternative to focusing on developing an income-based model,' it said.

Further Reading:

Read the Treasury's update on foreign profits moves