Darling tries to stem tax exodus

Just as the trickle of major companies deserting the UK for more tax-friendly foreign climes threatens to become a flood, the Chancellor reached out to the business community yesterday with proposals for a high-level forum to address the long-term competitiveness of the corporate tax regime.

Sir Martin Sorrell, the chief executive of the world's largest advertising group, yesterday added his voice to the chorus of business leaders concerned about the way that multinationals are taxed in the UK. WPP, which had revenues of £6.19bn last year and a tax bill of £204m, is considering a move to Ireland, Mr Sorrell said, because of "arcane proposals" on deductions for foreign-controlled companies. Both United Business Media (UBM) and Shire Pharmaceuticals have also announced plans to relocate to Ireland within the past month, specifically to avoid the UK's punitive regime.

With the public finances already strained by the worsening global economic climate, it is a bad time for the Treasury to be losing such significant contributors. Under the Chancellor's scheme to reverse the trend, a 10-strong forum of government and business leaders – to be chaired by Jane Kennedy, the Treasury's financial secretary – will be convened to discuss the future shape of the tax system and how it can ensure long-term stability. The membership is to be drawn from the upper echelons of major corporations and is expected to be finalised within the next two to three weeks, with the first meeting to take place as soon as is logistically possible thereafter.

"We need to anticipate a growing problem for all governments: how to protect revenues in an increasingly global marketplace for goods and services while promoting the competitiveness of our businesses so that they can take advantage of open markets," the Chancellor said in a Chatham House speech yesterday.

"I am determined that we do what is necessary to remain one of the world's best places to do business, and critically to ensure that we maintain our strong and resilient economy and our position as the world's leading financial centre," Mr Darling said.

The Chancellor also stressed that the UK corporation tax rate is one of the lowest in the G7. But at 28 per cent, it is still considerably higher than Ireland's 12.5 per cent. And the biggest beef from the business community is about the taxation of income from foreign subsidiaries rather than the basic rate itself.

The debate over so-called "controlled foreign companies" (CFC) rules has been rumbling for years and progress is slow – too slow for the likes of UBM and Shire. The ongoing official government review was instigated in 2006, after the European Court of Justice ruled that the UK rules breached the EU principle of freedom of establishment. And although a discussion document for feedback from the business com-munity was published last autumn, the subsequent consultation document will not be concluded until this summer at the earliest.

But the Chancellor's new working group is designed as a frame of reference for the UK's long-term strategy, rather than as a substitute for the existing CFC reform process, according to the Treasury. Richard Lambert, the director general of the Confederation of British Industry, has welcomed the proposals for a working group as an encouraging sign that the Government is looking for stability and consistency, although he notes that there is little room for manoeuvre in the public finances.

But scepticism remains about how the discussions of the group will translate into action. Sue Bonney, the head of tax at KPMG Europe, the accountancy group, said: "We welcome the initiative's intention and urge business to engage in a constructive way. But this must be more than a talking shop; action is required, quickly."

The defections to Dublin are just the latest tax issue to cause a headache for Gordon Brown. In the past six months, the abolition of taper relief on capital gains, the treatment of non-domiciled taxpayers and the end of the 10p rate have caused consternation.