Analysis – Double taxation relief is a let-down.

The review of double taxation relief for companies has been going on since March 1998 and the closing date for comments on the Revenue’s discussion paper was 30 September 1999. Six months later, we get a Budget bombshell which was not mentioned in the Chancellor’s speech and not hinted at during the previous two years of consultation. We now have four weeks to comment on the final proposals, not that it seems very likely that any further significant change will be accepted. Some aspects of this consultation exercise have been positive. Discussions have been open and wide-ranging, and senior Revenue officials have come out of their offices to attend seminars and workshops. The discussion paper which was issued a year ago was a reasonably balanced summary of the policy objectives and initial outcome of consultations. It looked as if we were heading for no significant change, and most multinationals broadly welcomed this. Until last Tuesday, my main criticism of the consultation exercise was that it had dragged on too long. Although this was partly a result of the breadth of the consultation, I still do not see why the summary paper produced yesterday could not have been issued in December – after all, since the chancellor made no reference to it, it was hardly one of his major vote-winning measures. The uncertainty has caused concern to businesses, and since the final outcome is much more fundamental than expected, their concern was justified. The main change proposed is subtle. The press release states: ‘The rate of underlying tax attributable to a dividend paid from one company to another will be capped at a rate equal to the United Kingdom corporation tax rate’. But since it has always been the case that the amount of double taxation relief cannot exceed the equivalent UK tax on the same income, this statement was somewhat opaque on first reading. The answer lies in the more detailed paper which was also published last week. This makes it clear that the effect of the change is to nullify the benefits of an ‘offshore mixer’ structure, previously used by many major UK multinationals as part of their routine tax planning. The UK’s DTR system works on a strict source-by-source basis. If a UK company receives one dividend which has suffered tax at 40% and another which has suffered tax at 20%, the excess credits on the first cannot be used to offset the residual UK tax on the second. However, using a ‘mixer’ company, typically in the Netherlands, enabled the rates to be blended into a single source with an average rate close to the UK rate of 30%. Yesterday’s changes prevent this technique being used in the future. Other, less significant, changes include a restriction on the ability of companies to specify the profits out of which dividends are paid, which will further reduce planning opportunities. The remaining changes are positive for taxpayers, although their net effect will not be great. Nevertheless, the removal of anomalies such as the potential loss of tax relief on an overseas merger is to be welcomed. The press release also mentioned a new relief to enable companies to carry excess credits back for one year, or forward indefinitely. This looked promising, but the detailed paper makes it clear the relief will be very restrictive – an opportunity to make the system more flexible, has been missed. What concerns me most about this package of changes is that it will make the UK a less attractive location for major multinationals. The discussion paper last year included an appendix which summarised the DTR systems of ten major trading partners of the UK: prior to these changes, the UK’s system was one of the most restrictive credit systems; it will now be at the bottom of the league table. The draft regulatory impact published yesterday indicates the net yield of these changes will be about #100m per annum; since the government estimates about 200 major groups currently use a mixer structure, that is a tax charge of an average of #500,000 for each of the UK’s largest companies. Please think again, Mr Brown. – Heather Self is the chairman of the Chartered Institute of Taxation’s Technical Committee and a partner with Ernst & Young.

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