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Missing the Point on Tax

5 Oct 2011

It is time to challenge the view that multinationals wish to desert the UK's shores and hoard significant profits in brass plate operations overseas. Multinationals are just that - multinational.

Decisions around where businesses choose to headquarter their operations will be determined by key commercial criteria specific to their market. What is critical to any reorganisation of a group's supply chain is the fact that there is a clear transfer of resources, assets and risks that enable the business to be run effectively. Taxand UK looks at the issue of taxation within supply chain for multinationals.

Many companies have reviewed their geographic footprint to ensure that their supply chain is running as efficiently as possible. So to suggest that such businesses are trying to "pull a fast one" in relation to tax reflects a clear misunderstanding of businesses that operate on a global scale, as global corporate citizens.

But, despite this fiscal red herring, tax does lie at the heart of the debate about what the UK government must do to keep big businesses here and to attract more foreign investment. Significant changes to the UK tax system have to be at the top of the list. Crucially, there is a strong correlation between reductions in effective tax rates and increases in foreign direct investment.

The government has introduced a flagship competitiveness measure of cutting the rate of corporation tax to 23 per cent by 2014. If competitiveness could be measured on headline rate alone, this reform would give the UK a high ranking on the G20 leaderboard. Action is also needed on the damaging 50 per cent + NIC personal tax disincentive for senior personnel. We need a continuing shift towards a sensible tax regime which can help slow and reverse the investment drain from the LSE to competing stock exchanges.

We would argue that headway could be made by minimising compliance burdens through removing unnecessary complexity and eradicating uncertainty. Crucially, the UK is competing for the business of these companies.

There are positive steps, such as retaining the deduction of loan interest relief and proposed reforms to the Controlled Foreign Company provisions. Yet these are damaged by the complexity of "world wide debt cap" restrictions in the case of interest, and complications to third-party trading with the UK in respect of CFC exemptions.

Other negative factors include the UK's intermittent raids on industry sectors such as financial services and oil & gas. The spectre of a general anti-avoidance rule also looms large, which if implemented would have adverse implications for international investors who require certainty.

Taxand's Take

Global companies will always implement global solutions in making sure the business operates as efficiently as possible. A desire to reduce tax is not the overriding factor in this planning. But equally, it is true to say that the UK's convoluted tax regime has inflicted damage on the London Stock Exchange and, by extension, the City of London. Steps are being taken at last to make our tax system clearer, more certain and more competitive, but this rebalancing is not yet complete.

First published on Financial Director, 4 October 2011

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Andrew Gavan
T. +44 207 663 0406

Tom McFarlane
T. +44 207 072 3201

Taxand's Take Author