Little benefit from shifting HQs abroad

The announcement in last month’s pre-Budget report that the government will
not tax multinationals’ foreign profits has been broadly welcomed by business
and tax experts.

But the benefits to most companies are likely to be smaller than expected as
accountants face bigger challenges amid the economic gloom. In addition, a
little publicised announcement about business tax relief could also create
hassle for accountants.

A tax on foreign subsidiary dividends has been a controversial issue for UK
business since 2007, when the reforms were first proposed.

The reforms, announced alongside draft ‘controlled foreign company’
legislation, were part of a clampdown on companies transferring billions of
pounds of profits from the UK to subsidiary companies in offshore centres.

Several companies — including WPP, the advertising giant, and drug maker
Shire ­ have said that they will moved their headquarters to Ireland where taxes
are lower.

But despite becoming a high profile tax issue some experts believe the
foreign profits climbdown
will be of limited use to most companies given the sums of money thought to be
involved. The Treasury has estimated that taxes on foreign profits will generate
only £75m in 2008/09
An imminent recession means many companies are more worried about staying in
business or
maintaining growth than the modest advantages of moving their HQ overseas.

Andrew Green, tax partner at mid-tier accounting firm
Bentley Jennison
, says businesses that structure their company on the basis
of tax are making the wrong commercial decision.

‘People need a bit of education,’ he says. ‘Businesses need to be asking
themselves the right questions. You don’t necessarily need to move
[headquarters] offshore and you certainly don’t just do it for tax reasons. You
need to look at the options you have and whether you can restructure within the
group without moving operations offshore,’ he said.

For example, companies with loss making subsidiaries can minimise the impact
by offsetting the loss against future trading profits, he said.

Meanwhile, tax experts face another potential headache after the government
announced in the PBR that it plans to proceed with the so-called ‘worldwide debt

Under the new rules large UK companies will only be allowed a tax deduction
on interest costs
if these costs are matched by costs incurred by the worldwide consolidated

The cap is designed to prevent multinational companies from loading
subsidiaries with debt.

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