Bill Dodwell, head of tax policy at Deloitte, comments on the Chancellor’s announcement of momentous changes to the taxation of foreign profits of companies and, importantly, the setting of a new direction for further reform.  

With effect from 2009, companies will benefit from a new exemption from taxation in respect of overseas dividends.  At present, such dividends are taxable, with relief for overseas tax.  This will benefit not only the corporate sector, but also funds, especially those managed by life companies.  This will be financed by a new restriction on the amount of interest expense that may be deducted against UK profits. 

In future, UK tax deductions will be limited to the total, worldwide, third party interest expense.  In addition, current anti-avoidance rules on interest deductions will be strengthened.  Finally, the requirement to seek advance permission from the Treasury for certain issues of shares and debt will be abolished, although there will be a new information provision requirement.  

Most crucially, the Chancellor has announced that he will set up a new consultation on the reform of the UK's controlled foreign company legislation (laws which charge UK tax on the profits of overseas subsidiaries of UK groups).  The previous attempt at reform was not well received and led to some UK-headquartered companies moving to Ireland, Luxembourg and Bermuda. 

The Chancellor has now accepted that it is appropriate to move UK taxation onto a territorial system - that is, only taxing UK source profits.  It is thought that it may take up to two years before the new system is legislated. 

This is a good result for the consultative process, set in train in July 2008.  The plan to move UK taxation onto a territorial basis will help make our tax system attractive to UK-headquartered groups.   However, whilst we accept there is an economic case for restricting interest deductions, we are concerned that this proposal is complex and will prove unfair in some cases.  We hope that further debate will lead to some changes here.”

For further comment from Bill Dodwell, please call the Deloitte PBR Press Hotline on 020 7007 3333.

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The information contained in this press release is correct at the time of going to press.