Budget Comment 2009

Taxation of foreign profits - start dates announced

The Government has helped large corporates to achieve certainty by announcing the timetable for implementation of changes to the taxation of foreign profits.

The reforms are aimed at making the UK a more competitive international holding company location to stem the migration of UK companies overseas. However, in order to protect the UK's tax base, there are also a number of new anti-avoidance measures. As a package, this will have a significant impact on companies with foreign operations.

Following numerous announcements and a consultation, many of the measures announced were already known. The changes to be implemented include the following:

• An exemption on most foreign distributions and dividends received by companies. It was initially announced that this would not apply to small companies, however, this has now been extended to all companies
• A worldwide cap on debt interest where the total net debt of the UK companies is more than 75% of the worldwide net debt
• Changes to the controlled foreign companies (CFC) avoidance rules consistent with a further move towards a territorial approach

In response to comments from industry and the accounting profession, the changes to the taxation of distributions will apply to payments from 1 July 2009, along with the consequential abolition of the acceptable distribution policy exemption within the CFC regime. The implementation of the debt cap will not come into effect until accounting periods beginning on or after 1 January 2010, to allow more time for the detail to be finalised.

The current treasury consent procedure is also being abolished from 1 July 2009, and will be replaced with a post-transaction reporting procedure which will only be applicable to transactions greater than £100 million.

"The big change is that this exemption will now include small companies as well, which was not the case with the previous proposals introduced in the Pre-Budget Report in November 2008," says Paul Smith, Head of International Tax at Grant Thornton.

"The widely criticised new 'debt cap' rules, which will restrict tax deductions for interest expenses, will only apply for accounting periods commencing on or after 1 January 2010. The deferral of the start date for the debt cap rules is welcomed as it will enable companies to understand the impact of the rules before they need to report their results."

Following these changes, companies will be able to bring foreign profits from fellow group companies into the UK without suffering additional UK tax, providing a boost in investment to the economy of billions of pounds.

Revised draft legislation has not yet been published and there remain some significant uncertainties. The new legislation is likely to be complex but nonetheless, the proposals do represent a step in the right direction.

"However, the announcements still leave a good deal of uncertainty as to how the provisions will work for companies in practice but clarifying the start date has been a good step forward" adds Smith.