The Government today published proposals for reforming the UK’s Controlled Foreign Company (CFC) rules, as part of its ambition to create the most competitive tax system in the G20.
This marks the next step towards introducing a modernised CFC regime in 2012 that better reflects the way that businesses operate in a globalised economy, and include the Government’s Budget 2011 commitment to introduce a partial exemption for finance companies that will normally result in a 5.75% tax charge on those overseas profits by 2014.
These proposals are designed to strike the right balance between improving the competitiveness of the UK corporate tax system and protecting the UK tax base against avoidance by:
- targeting and imposing a CFC charge on artificially diverted UK profits, so that UK activity and profits are fairly taxed;
- exempting foreign profits where there is no artificial diversion of UK profits; and
- not taxing profits arising from genuine economic activities undertaken offshore.
David Gauke, Exchequer Secretary to the Treasury, said:
The Government is clear that a key factor in achieving a sustainable recovery must be private sector growth. Multinational business plays an important role in this, but as the market-place has become increasingly globalised, the UK has lost tax competitiveness. These changes to the CFC regime, alongside our substantial programme of corporate tax reforms, will help us to rectify this and ensure that the corporate tax regime is once again an asset for the UK. Our proposals follow discussions with businesses and tax professionals and we welcome further input from them and other interested parties in response to the consultation.
Notes for Editors
The Government’s consultation on Controlled Foreign Company (CFC) reform runs from today until 22 September 2011.
Globalisation has meant that the world’s markets have become more open. As a result, companies increasingly operate across national borders and the ownership of UK businesses has become more internationally diverse.
The current CFC rules were introduced in 1984, and were intended for a corporate tax regime that operated on a worldwide basis; significant change is needed.
The Government recognises the majority of CFCs are held for genuine commercial reasons. The new regime will be targeted at situations that pose a high risk of being used to artificially divert UK profits, and will ensure that, if a CFC charge arises, it will be applied to the proportion of overseas profits that have been artificially diverted from the UK.
To account for the diversity and complexity of modern business operations, and given the inherent complexities of the risks that a CFC regime is designed to protect against, there are limitations on how simple the new regime can be. However, the Government’s aim is to make the rules as straightforward as possible to apply and to reduce compliance burdens where possible.
The Government wants to design a stable CFC regime and avoid, where possible, the need to change the rules on an ongoing basis to address new avoidance risks.
The reform of the UK’s CFC rules is part of the Government’s wider corporate tax reforms, including the reductions in the main rate of corporation tax. These proposals build on the CFC interim improvements that are being introduced in Finance Bill 2011.
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