Call for foreign profits tax reform

Multinationals are increasingly frustrated by the tax obstacles put in the way of cross-border investment, according to a survey highlighting the pressure for reform of the taxation of foreign profits.

The Treasury is due to publish its proposals for taxing foreign profits in a consultation document this week. Businesses have been lobbying for taxes on foreign dividends to be scrapped in order to improve the competitiveness of the tax system.

More than six out of 10 companies view the existing tax regime for overseas dividends as a hindrance to outbound investment from Britain, according to the survey conducted for KPMG, the professional services group.

The idea of exempting foreign dividends from tax was backed by more than nine out of 10 respondents, with 62 per cent describing it as “very important”.

The survey was conducted by Lighthouse Global with 50 senior executives from large multinationals.

But it revealed strong opposition to new curbs on the ability to deduct interest costs against tax. Just over half of the companies surveyed said they would not want a tax exemption for overseas dividends if the cost was restrictions on interest deductibility.

The Treasury has mooted restricting interest deductibility to ensure that the tax reform was revenue neutral. The cost of abolishing tax on foreign profits is thought to be about £400m, although businesses argue that this cost would be offset by the impact of repatriating funds from overseas, which would generate extra tax revenues.

Chris Morgan of KPMG said the options under consideration by the Treasury would create winners and losers, making it difficult to reach a consensus about the much-needed reform. “I do have a big concern that, at the end of the day, the easiest thing for the Treasury would be to do nothing.”

Chris Sanger of Ernst & Young said the reforms should be aimed at reinforcing the UK’s position as an investment hub. “I think we will see some action. The question is whether it is enough to enhance competitiveness.”

The consultation document will also outline possible reforms to the anti-avoidance rules that impose tax on profits generated in low-tax jurisdictions.

Options for reform of the “controlled foreign company” regime are expected to include rules that would tax “passive” income generated in low-tax jurisdictions, but exempt income generated by genuine commercial activity.

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