Wednesday, December 01, 2010

UK corporation tax to fall to eight percent?

The UK has put out a document entitled Corporate Tax Reform: delivering a more competitive system. This is a long and complex document which has been summarised by the Guardian:

"Multinational companies will get an effective corporation tax rate of 8% for their offshore financing operations under new rules designed to stem the flow of companies leaving the UK for tax reasons. . . . The Treasury said that in future, rather than ignoring the structure and deeming the offshore income to be UK income, it would treat only a third of it as UK income. When the UK corporate tax rate hits 24%, that would mean an effective rate of just 8%."

The relevant section in the document, it seems, is this one, on the (offshore) finance subsidiaries of multinational corporations:

"Based on initial analysis the Government will consider the case for a minimum debt:equity ratio of 1:2. Assuming that the finance company is fully equity funded, this effectively excludes 66 per cent of overseas finance income from the scope of a CFC charge. In 2012, when the UK rate of corporation tax will be 26 per cent, that equates to an effective tax rate of less than nine per cent falling to eight per cent when the main rate reduces to 24 per cent. A final decision on the ratio will be announced in Budget 2011."

The last sentence makes clear that this is merely a trial balloon being floated, but make no mistake: a lot is at stake here. This will be one more foundation underpinning Tax Haven UK. The very headline of the document suggests that, as does its opening sentence:

This document shows how the Government will work with business to enhance UK tax competitiveness.

"Competitive" in this area is, as we have repeatedly noted, absolutely nothing to do with competition in markets: it is a weasel word which has been used to hide all manner of abuse of other nations' tax bases. And get this - the words "competitive" and "competitiveness" appear well over 50 times in the document.

Of course the tax advisers, true to form, are warning that even this slashing of corporation taxes
isn't enough:
"Some people will think that's excellent, a perfectly acceptable tax rate for finance income," said Bill Dodwell, a corporation tax expert at Deloitte. "Others will say, 'We are currently paying 1% tax on financial income – why would we think it's great to move to an 8% rate?'."
And there is worse. One of the great reforms crying out to be made is the unproductive facility whereby companies can deduct their interest payments against tax. This is routinely abused via tax havens, as the IMF and others have noted. (Again, as a reminder: you set up an offshore financing subsidiary, lend to your "onshore" subsidiary, charge very high interest rates - which are deducted against tax in the onshore jurisdiction, and simultaneously realised as lending profits in an offshore jurisdiction, where no tax is paid! Hey presto - a disappearing tax bill. And the UK government is resolutely sticking by its wealthy friends in the private equity industry and elsewhere:

"The Government remains committed to interest being relieved as a normal business expense irrespective of where the proceeds of the loans are put to use."

And everyone else has to pick up the bill. It just gets worse, and worse.

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