PBR 06: Brown delivers Cadbury 'insult' on CFCs

Chancellor Gordon Brown infuriated advisers this week by attempting to
restrict the impact of the Cadbury ruling at the European Court of Justice on
controlled
foreign companies.

The moves, which one adviser described as an ‘insult’, appeared to accept the
implications of the Cadbury judgment, but detailed documentation indicated Brown
hadn’t relaxed the rules as expected.

The Cadbury judgment had indicated that offshore vehicles could be exempted
from UK corporation tax where there was genuine economic activity.

But whilst accepting that ruling, the Treasury also gave its view that
economic activity only referred to profits resulting from ‘labour’ offshore, and
not from ‘capital’.

‘This is not good news for business; in fact it is an insult. It would have
been better for the chancellor to say nothing, rather than push the agenda in
this way,’ said Deloitte corporate tax partner Bill Dodwell.

Chris Morgan, head of international tax at KPMG, said the detail of the draft
legislation indicated that the government was determined to limit the impact of
the Cadbury Schweppes decision.

The full draught legislation says: ‘The distinction is in essence one between
the creation of profits in another member state and the diversion of profits to
another member state from elsewhere. And the distinction within a CFC is, in
essence, between profits, that arise from labour and those that arise from
capital.’

Morgan said:‘The draft legislation is over-complicated and will just cause
more litigation. What it does is allow profits on labour in a CFC to be
tax-exempt, but profits from capital will not be exempt. There is going to be
plenty of representation disagreeing with this point.’

PBR documents indicated that the Treasury in any case expected the judgment
to cost it £540m by 2010. A consultation on the issue will open in 2007, and it
is anticipated the rules in the draft legislation will be hotly contested.