Treasury all at sea on foreign profits

The Treasury will provoke further controversy around its plans to overhaul the taxation of multinationals’ foreign profits, issuing an update in the next few weeks that will fail to clarify the direction of travel for big company tax.

The moves may also spark fears that the government is to press ahead with its most controversial proposals on controlled foreign companies rules, as the timetable for the reforms slips further into the future.

A Treasury spokesman said it would give an update on ‘ongoing discussions’ and the ‘development of policy’ in the next week, more than a year after the consultation was first announced, but confirmed it would not reveal detailed policy proposals until the autumn.

Chancellor Alistair Darling was expected to release a consultation paper containing proposals for the taxation of multinational companies by the end of this month. The government first began to review the issue three years ago.

The proposed tax changes have worried UK multinationals with operations abroad and encouraged companies, including United Business Media and Shire Pharmaceuticals, to relocate their headquarters from the UK.

Tax experts familiar with the foreign profits consultation said the government is prepared to bow to pressure and exempt overseas dividend payments from tax.

But they said the government appears determined to press ahead with its most controversial part of the foreign tax package ­ a clampdown on companies transferring billions of pounds of profits from the UK to shell companies in low tax offshore centres.

Business and tax experts fear the controlled company tax system would be too heavy handed. ‘The main sticking point is the controlled company tax system,’ said Ian Young, technical manager in the ICAEW’s tax faculty.

In a joint letter to the Treasury, the ICAEW and Chartered Institute of Taxation have called on the government to broaden its review of foreign profits to consider the UK tax base.

‘It is important to ensure that any tax reforms take account of the interests of all UK businesses and not just those carrying on international activities,’ the institutes wrote.

Tax experts said government indecision was partly due to a fear of further angering business after high-profile climbdowns on capital gains tax and the 10p starting rate of income tax.

‘The impression I get is that the government still hasn’t made up its mind on this issue,’ said one tax partner at a Big Four firm.

The newly-formed multinational forum on tax, which was set up by the government, is consulting with the government on the changes.

‘[The multinational forum on tax] has basically said the government needs to get this issue right
and not to rush it on to the statute book,’ said a source familiar with the tax group. ‘There’s also equal concern about the uncertainty caused by not knowing what the rule changes will be and when they will come.’