Budget 98 – Foreign control and transfer pricing rules change

The Inland Revenue bowed to multinational companies and their advisers by introducing new transfer pricing and controlled foreign company (CFC) rules into corporate self-assessment legislation.

Roger Muray, international partner with Ernst & Young, said: ‘The existing rules work by direction and are incompatible with self-assessment. They could not have worked.’

For transfer pricing, the Revenue will revert to a narrow definition of the control relationship between tax-paying companies and allow existing joint venture arrangements to remain outside the new legislation for up to three years. Muray welcomed these concessions.

Eric Anstee, finance director for The Energy Group, currently the subject of takeover bids from US utility companies, said the obligation to report the control of foreign companies was ‘long overdue’ but added: ‘You can never really close the loophole.’

As with transfer pricing, changes to CFC rules were heavily influenced by consultation. The threshold at which tax becomes due on CFC profits is to be raised from 10% to 25% and the de minimis profits limit at which CFC tax becomes due goes up from #20,000 to #50,000 from 1 July.

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