We have come a long way since the original Budget Day announcements, but have we ended up with a system UK multinationals can live with?
For the smaller company just setting up an overseas structure, the new system of onshore pooling is definitely more favourable than the old.
Such companies will not have to weigh up the costs versus benefits of an offshore mixer, but will be able to offset foreign tax suffered in high tax countries against the UK tax on low taxed foreign profits.
True, the rules are complicated and there are some limits (the 45% cap and restrictions on CFC dividends), but overall such companies are likely to welcome the changes.
Inbound investors, such as US multinationals setting up in Europe, may also consider the UK’s system to be reasonable, particularly if the current consultation on rollover relief leads to a significant relaxation of our capital gains regime.
The position for established multinationals is more difficult to judge.
It has gradually become clear that the government does not merely want to remove the advantages of offshore mixers, but actively to penalise them in some circumstances.
This is difficult to understand from a policy perspective: true, it is time to acknowledge that offshore mixers were an anachronism, but they were developed as a pragmatic British solution to a tax system which was unreasonably restrictive. Now that the new rules are available, it is unlikely anyone would want to set up a new mixer: why is it necessary to impose penalties on those who had used them (probably with the blessing of a CGT clearance from the Revenue) in the past?
The penalties come in two areas. Firstly, if a mixer is left in place, it will cause extra tax to be paid in some circumstances. Calculating just how much extra tax is not easy, but let us take one example. Many groups will have made US acquisitions with existing structures underneath the US. Those structures will have had little or nothing to do with UK tax planning, but the way the ‘mixer cap’ works will impose a penalty if the tax rate in the US and below the US exceeds 30%. This penalty will apply whether the US is itself held below an offshore mixer or directly from the UK: a result which can only be described as capricious.
More subtle, and buried deep in the realms of new section 806C, is the fact that a dividend from a mixer which has been ‘capped’ at some point in the chain will not be a ‘qualifying foreign dividend’. In practice, this means that if a group holds all its overseas operations through a mixer, the brave new world of onshore pooling will be almost impossible to use.
This leads on to the second potential penalty. A UK multinational which carefully researches the new rules may decide its best strategy is to restructure so as to hold its investments directly from the UK, as the government is clearly encouraging it to do. But almost inevitably, such a reorganisation will incur significant foreign tax costs: so the company will have to pay a high transfer fee if it wishes to conform to the government’s ideal structure. Is there any point in penalising UK multinationals in this way? Does it do anything whatsoever to increase the UK tax take?
It is not going to be easy to persuade the Revenue, let alone the government, that further changes to DTR rules should be made next year. There is certainly little point in reactivating the broader policy arguments: like it or not, this is broadly the system we are going to have to live with. What we need to do now is to explore its true impact on existing UK groups, and seek to ensure that the costs are evaluated properly – without all the emotion that has been around for the last few months.
I believe that it may be possible to achieve some technical changes, which the government could accept as not disturbing its basic policy and which would at least save UK multinationals from wasting time and money on reorganisations – which after all, they would be carrying out wholly for tax purposes!
- Heather Self is a senior partner at Ernst & Young
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