Shire's exit may prompt others to follow
Shire's decision to move its tax base to Ireland represents a widely held fear of the unknown, tax advisers warned yesterday, amid continuing uncertainty about the taxation of multi-national companies.
The FTSE 100 pharmaceuticals giant has so far refused to give details of the tax benefits it will enjoy after the move – not least, advisers believe, because the decision was made in advance of firm proposals from HM Revenue & Customs on reforms of the way it taxes foreign profits.
A review of tax on foreign profits was launched at the end of 2006, after the Government was taken to the European Court of Justice by Cadbury Schweppes. The drinks and confectionery giant successfully argued that the UK tax laws on controlled foreign companies (CFCs) – the foreign subsidiaries of UK-based businesses – breached European Union law.
The CFC rules say that where a British company is deemed to control its foreign subsidiaries, these businesses are liable for tax on their profits even if the money is not brought into the UK.
The rules on what constitutes control are complicated, and there is a long list of exemptions, but the ECJ ruling said Britain was not entitled to tax foreign subsidiaries' profits until they were paid to head office back home, unless HMRC could show the subsidiary was a "wholly artificial arrangement" designed simply to avoid tax.
A discussion document published by HMRC last July rang alarm bells, with suggestions for a series of measures designed to bring the UK into line with European law and a long list of tax avoidance strategies the Government would seek to counter. Tim Steel, a corporate tax expert at Ernst & Young, said: "Many taxpayers believe the proposals are far from revenue-neutral and that the [new] rules will result in significantly increased revenues."
That's an anxiety shared by the CBI, which last month released the results of its business taskforce's investigation into the UK's corporate tax system. "It is deeply concerning that initial proposals are likely to make the UK significantly less attractive as a location for corporate headquarters," it said.
Shire may, however, have jumped the gun. Though the consultation process on the new CFCs rules ended last October, the Treasury has not yet published final proposals – regulations have been delayed until later in the spring. Heather Self, a corporate tax partner at Grant Thornton, said she believed the delays at least in part reflected a genuine desire on the part of the Treasury to get its proposals right.
Under the proposals issued last summer, each subsidiary would be required to account for every last penny of income, whether it qualified for exemption for UK tax and if so why.
"Such a compliance burden might persuade people to move to the Netherlands or Ireland just for the sake of simplicity and certainty," Ms Self said.
Shire, it seems, has already been persuaded.
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