Treasury all at sea on foreign profits

Alistair Darling

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
and Shire
, 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
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.’

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