Britain’s reputation as an attractive location for multinationals took another dent this week following Informa’s decision to move its tax base out of Britain. The decision by the world’s largest media provider re-ignited the debate over the taxation of profits earned overseas. Unfortunately for the Treasury, they are just one of many large companies who chose to leave the UK this year.
Informa’s shift of its domicile to Switzerland will not cut its British tax bill. However, it will make international tax planning less complex and avoid a tightening of Britain’s anti-avoidance rules that would have significantly increased its tax burden.
The main drawback of operating in Britain, particularly for international groups that conduct most of their operations outside, is that profits earned overseas may be still subject to UK tax. Thus, operating in low tax countries may offer no advantage.
Pharmaceutical businesses and other such companies who have a wealth of intellectual property could easily shift to low tax countries such as Switzerland and The Republic of Ireland who do not have any “controlled foreign company” (CFC) rules.
Clearly, this was pivotal for Informa. Peter Rigby, Informa’s chief executive said that Switzerland offered “a less complex taxation system which offers upfront certainty of treatment and does not seek to impose tax on the unremitted profits of subsidiary companies in other jurisdictions”.
As the controversy continued, The Treasury announced some changes to the existing CFC rules that will be introduced in July. These changes will be accompanied by a more fundamental reform of the tax system for international companies including a dividend exemption, allowing the tax-free repatriation of foreign profits.
This change indicates that the UK may move to a “territorial system”, under which only profits earned in the UK are taxed. This shift will make a significant difference to some large multinationals but those who benefit less are likely still to take their business elsewhere.
Advisors are recommending that companies wait until the full extent of the new rules is clear citing that the UK tax regime could become more favourable to intellectual property. However, many big companies fear that the Treasury will be more likely pursue back tax on profits earned offshore due to the current lack of reserves in the Treasury’s purse.
A report published in January by KPMG found that the percentage considering moving their tax residence had more than doubled since 2007 to 14 per cent. But, according to Chris Morgan of KPMG, the recession has made the decision less pressing for some businesses facing reduced profitability, .
