Analysis - International pitfalls of double tax relief.
The government has rightly been given stick over its proposed changes to double taxation relief. The nine month deferral, to 1 April 2001, is nothing more than a gesture. The changes should be pulled out of this year’s Finance Bill, or they will immediately deter companies from coming to the UK. If the changes with the deferral are revenue-neutral, it is only because the UK will never get the new business which would have generated extra tax revenue: the government will take no more tax because there will be less to tax, and therefore fewer jobs and less private wealth. To be fair, there are some good measures on international tax in the Finance Bill. The leading one is the broadening of group relief. Until this change, one company could only surrender a loss to another company so long as both of them, and every other company in the chain linking them, were resident in the UK. The government was prodded by European law: there are strict limits to the extent to which UK companies can be treated differently from other European Economic Area companies. The government could have stopped at the boundaries of the EEA. All credit to it for going further and treating all companies, throughout the world, in the same way. The modern economy is global. It would have been silly to pretend that Europe is a special region, isolated from the world. But while the government was sensible at the strategic level, good old official paranoia about tax loss has taken over at the level of detail. A constant bugbear of the Revenue is groups that manage to deduct the same loss twice, once in the UK and once elsewhere. So if a non-UK company has a loss, none of it is deductible in the UK if any of it can be deducted abroad, by anyone, in any period (section 403D). Suppose there is a loss of #10,000. Foreign rules allow #1,000 to be deducted abroad. Then you cannot deduct the other #9,000 in the UK. Or perhaps the whole #10,000 is deductible abroad against future profits, which may not arise for 20 years. So because it might get deducted abroad, you will not get UK deduction. It’s a tough world! The obvious solution is a procedure under which countries co-operate, so you can deduct a loss once and only once. In a different area, double taxation relief, the government is clearly keen on co-operative solutions: there is new legislation on mutual agreement procedures. But the same enthusiasm does not extend to group relief. Instead, section 403D(6) adopts a ‘UK rules rule’ approach. If the overseas country says you can deduct a loss there so long as you cannot deduct it in the UK, you have to ignore that and refuse a deduction in the UK as the loss might be deducted abroad. The other country ends up giving the deduction in all cases. If other countries adopt an opposing ‘our rules rule’ approach, the unfortunate companies will get nowhere. This preoccupation with the UK Exchequer getting its own way is misguided patriotism. It has that much in common with double taxation relief changes. Those changes are also intended to make sure the Exchequer gets a certain share of the cake, but at the cost of deterring business, making the cake smaller. The government has also got a bit carried away with its worldwide clout in Schedule 28 of the Finance Bill. It imposes a draconian and largely ineffectual tax collection procedure on non-UK companies. Suppose that an overseas holding company has a subsidiary which has a UK branch. Under Schedule 28, a UK tax debt could be demanded from another subsidiary which has never had any connection with the UK, even after that subsidiary had been sold to a new owner who also has no connection with the UK. Revenue demands for the tax will be ignored by the companies concerned and by overseas courts. It is perfectly reasonable for the Revenue to pursue tax debts, but Schedule 28 lacks credibility. International agreements on tax recovery would be better. But here as elsewhere, the UK and overseas governments must give and take between themselves. They must not simply clobber business, the convenient piggy in the middle.