Consultation begins on CFC reforms
Wednesday July 06 2011 | 11:13 AM

Following through on its commitment to streamline the Controlled Foreign Companies(CFC) regime to make the UK a more competitive base for international operations, the Treasury this week released a 118-page consultation document setting out proposals for inclusion in the 2012 Finance Bill.

The document sets out the second phase of a two-step approach to CFC reform that was started by interim reforms included in the 2011 Finance Bill.

While designed in the Treasury’s words to “to strike the right balance between improving the competitiveness of the UK corporate tax system and protecting the UK tax base against avoidance”, the impact assessment (Appendix H4) shows that the proposed reforms are likely to cost £840m a year in lost revenue by 2014-15.

The main focus for the reform proposals will be

• targeting and imposing a CFC charge on artificially diverted UK profits, so that UK activity and profits are fairly taxed
• exempting foreign profits where there is no artificial diversion of UK profits; and
• not taxing profits arising from genuine economic activities undertaken offshore.

The new rules will apply to individual entities and will adopt a proportionate approach. Where a CFC charge arises it will only apply to the proportion of profits that have been artificially diverted from the UK, the paper notes.

Other topics covered in the consultation paper and its appendices include:

• Treatment of intellectual property
• How new rules will apply to exempt foreign branches
• Interaction with EU Law

“Consistent with its commitment to improve tax policy making, the government has decided to publish as much detail as possible now to allow sufficient time to consult and ensure that these proposals will operate as intended ahead of publishing draft legislation in Autumn 2011,” the consultation document stated.

But the document did not impress international tax specialists. Heather Self, now a director at McGrigors after leaving HMRC, said the reforms would take domicile off the agenda and might make multinationals already based in the UK “think twice” about leaving, but would not do much to entice companies here.
 
“These rules are fiendishly complex. The amount of red tape companies will have to comply with in order to work out whether they will be hit by a tax charge may in itself act as a deterrent to foreign investment,” she added.
 
AccountingWEB contributor and IPtax blogger Anne Fairpo agreed, adding: “The rules could apply to almost all companies of any size with overseas connections, not just multinational groups, and the effort required to figure out whether the rules even apply  – let alone what the tax implications might be if they do – is substantial... There’s nothing exempting smaller companies. The CFC profits de minimis of £200,000 is expected to take most affected SMEs out of the rules, but there’s still a compliance issue in identifying whether the rules apply in the first place.”