In this month’s corporate tax article, we have considered some of the proposed international tax measures introduced inthe Pre-Budget Report (PBR 2009). The headline-grabbing measures of the PBR 2009, such as the bank bonus tax or the increases in national insurance contributions, have already received considerable media attention and commentary, and therefore this article does not seek to review those measures. Instead, I will focus on some of the international tax measures introduced in the PBR 2009, and consider whether the proposed changes are an effective and proportionate response to the problems that the new rules are seeking to address.
Compared with recent years, the PBR 2009 was surprisingly quiet with respect to international tax matters. There was the expected ‘tidying up’ of the worldwide debt cap rules and the inevitable introduction of additional anti-avoidance rules. However, the government also announced that it will consult on the introduction of a new 10% corporation tax rate for income from patents and indicated that discussions are due to commence on the introduction of an exemption from foreign branch profits.
WORLDWIDE DEBT CAP
The Finance Act 2009 introduced new rules in relation to the deductibility of certain financing expenses paid by the UK members of a group of companies effective for accounting periods beginning on or after 1 January 2010. Broadly, the rules will apply to a group of companies if its ‘UK net debt’ (ie the sum of any net finance liabilities or receivables for each UK group company) exceeds 75% of the ‘gross debt’ of the worldwide group (ie the sum of the gross financing liabilities of each group company).
HM Revenue & Customs (HMRC) identified certain problems in the rules and released draft legislation with the PBR 2009, with a view to amending the worldwide debt cap rules in the Finance Bill 2010. Without going into the details of the proposed amendments, the changes are generally positive and remove some of the uncertainties and mismatches that can arise under the current legislation. On the negative side, the proposed changes are likely to result in additional complexity and compliance costs for groups of companies that may be subject to the rules.
The changes will be enacted with the Finance Act 2010 but will have effect for periods of account of the worldwide group beginning on or after 1 January 2010.
PATENT BOX: 10% TAX RATE
In the chancellor’s speech it was announced that a new 10% corporation tax rate on income for UK patents will be introduced. Unfortunately, very little detail on the proposal was published with the PBR 2009 and we will have to wait for a promised consultation document for the details.
Based on the information available, it would appear that the new rules will have a narrow focus, although the measures will apply to all UK corporation taxpayers. The regime is limited to holders of UK patents and will not apply to other forms of intellectual property, such as trade marks, designs or licences. HMRC have provided no guidance on how the new regime will interact with the existing IP rules or research and development tax credits.
This announcement is a positive development by the government and emphasises that the government are considering ways of improving the competitiveness of the UK tax system. Unfortunately, UK taxpayers will have to be patient before the rules are introduced. The consultation on the form of the proposed ‘patent box’ regime will only be ready in time for Finance Bill 2011 and the legislation will only apply to income from UK patents granted from April 2013.
It is unlikely that the proposed measures will be sufficient to compete with other jurisdictions with favourable IP regimes (such as The Netherlands and Switzerland). To compete with these country’s intangible tax regimes, it will be necessary to broaden the scope of the proposed measures so that the rules apply to all intangibles included within the regime introduced by Finance Act 2002.
BRANCH PROFIT EXEMPTION AND CONTROLLED FOREIGN COMPANIES (CFCS)
The government announced that discussions are due to commence onthe possibility of introducing an exemption for profits of foreign branches. No further detail was published with respect tothis proposal.
It is likely that the majority of UK companies will welcome such a development. However, as always there will be some companies disadvantaged by the proposals. Such companies would consist of those with start up loss-making operations that value the UK tax relief currently available. It was announced separately that the government would publish a document outlining the shape of the new CFC rules in 2010.
Despite the fact that the PBR 2009 contained several proposals to provide fiscal stimulus and to raise certain taxes from the domestic base, it was rather surprising that there were very few proposals relating to international tax.
The 10% rate of corporation tax applying to patent income and the exemption from UK taxation of foreign branch profits is welcome news, and may assist in improving the UK’s international tax competitiveness.However, it was unfortunate that no new information was published with respect to the ongoing review of the CFC rules.
The government confirmed that details of the proposed shape of the new regime will be published in 2010 and it is hoped that HMRC listens to the views of interested parties and introduces a regime that will seek to improve the UK’s internationaltax competitiveness.