Darling in U-turn on foreign profits tax

Posted by admin on 20 July, 2008 under Business news | Read the First Comment

Alistair Darling will this week bow to pressure from business by scrapping contentious reforms to the taxation of foreign profits that threatened to provoke an exodus of companies from the UK.

The concessions mark the latest in a string of climbdowns by the chancellor, who has been forced to rewrite large sections of his Budget and pre-Budget report, including proposals on income tax, capital gains tax and fuel duty.

EDITOR’S CHOICE
Tax exemption nettle stings chancellor – Jul-20Alert over Revenue’s £2.7bn shake-up – Jul-18Audit spots possible £1.5bn tax credit error – Jul-15Small businesses on verge of tax rebellion – Jul-11Calls for big shift to green taxes under fire – Jul-10Business pushes for tax concession – Jul-10The latest retreat follows a furore over proposals set out by the Treasury last year to crack down on tax avoidance, as a quid pro quo for exempting foreign profits from UK tax.

Proposals in the discussion document to impose a worldwide tax on “passive” income, such as royalties from intellectual property, provoked a backlash from leading UK multinationals.

Shire, the UK’s third-biggest pharmaceuticals company, and United Business Media, the publisher, this year decided to relocate their headquarters to Ireland for tax purposes.

The head of Shire told the Financial Times that his company had made significant savings from its spring relocation. Angus Russell, the chief executive and former finance director who masterminded its move to Dublin, said he had been approached by other companies for advice on relocating.

The Treasury will this week announce that these anti-avoidance proposals have been axed. Ministers are expected to recommit to the principle of exempting foreign profits from tax, subject to protecting the UK’s tax base from erosion.

However, the means of achieving that protection – the catalyst for the outcry – will be the subject of talks with business, rather than a Treasury diktat. Any proposals will not be agreed before the autumn, at the earliest.

The Treasury decision will be set out in a reply to a letter from the CBI employers’ organisation, being sent on Monday or Tuesday.

The Tories are likely to attack the move as a sign of government incompetence, but one official said the decision showed that the consultative process was ­working.

“Some people will see this as a climbdown, but it’s a sensible, positive reaction to the feedback we’ve got, which we think will be welcomed by business,” he added.

Ministers accept the multinationals’ argument that the proposed regime would have had a disproportionate effect on certain sectors, hitting companies with relatively high levels of global intangible assets.

“Business felt the changes [to the anti-avoidance] rules were not acceptable or workable and we’re talking with them to resolve those concerns,” a Whitehall official said.

“The proposals in the discussion document are all being rethought – we’re not taking them forward.”

News reported by The FT