Is it a one-way street for foreign profits tax?

BT Hanif Lalani

Big name: BT’s Hanif Lalani is one of the FDs on Treasury tax forum

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

‘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.

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