By Ben Simmons
The Government is revising its anti-avoidance regime for multinationals, with new provisions to the controlled foreign company rules which govern how companies' offshore operations are taxed.
The new measures should make it easier for foreign subsidiaries to claim an exemption from the full UK tax burden if they have not been established primarily for tax purposes, say experts at PwC.
"The new measures mean the controlled foreign company rules are back on track to deliver as promised,” Stella Amiss, PwC’s tax partner commented. “They have the potential to make the UK more attractive to many businesses, which can only be a good thing.”
The controlled foreign company rules allow companies using offshore financing structures to pay a lower rate of tax (5.75%) rather the full UK corporation tax rate (26%), providing there is no avoidance motive. The long awaited draft legislation was published in December but subsequent feedback from business was that measures designed to reduce the compliance burden would not have the intended effect. A long and tortuous calculation exercise was needed to prove that the majority of activities undertaken by foreign subsidiaries should escape the tougher tax regime.
"The inclusion of a new ‘purpose based test’ allows tax payers to prove more easily if foreign subsidiaries have been established for commercial reasons, and not for tax advantages,” continued Amiss.
“There's still an element of subjectivity, and there's no guidance yet on how HMRC will apply the test or what evidence they expect to see from tax payers to defend their self assessments. There is likely to be much discussion on this in the coming weeks."