The announcement on March 21st of the sweeping and fundamental changes to the double tax relief (DTR) system took the entire business community by surprise. Although the issue of offshore mixing companies was left open in the consultative document published by the Revenue last year, no indication was given that its elimination was a serious possibility. Indeed the consultation document correctly pointed out that the use of mixing provided capital export neutrality, which was not provided by the basic UK system of corporate taxation. The proposed changes are likely to cost British multinationals considerably more than the £100 - 300m mentioned in the Treasury press release.
The effect of introducing some of the changes from Budget day makes the changes retrospective for many companies. It is very unusual for the Treasury to make retrospective changes except where it is curbing a blatant abuse. Since offshore mixers have been used by UK industry for many years, with the apparent acquiescence of the Revenue, it is difficult to see their use as anything other than acceptable tax planning.
What is of vital importance is that the proposed changes will reduce the competitiveness of British industry abroad, because they will materially increase industry's costs. Any change that reduces British competitiveness should be fully and thoroughly considered with the Revenue's intent made clear, so that industry is able to present their concerns before the Treasury acts. Industry has had no such opportunity in this case. This change will affect British business far more adversely than a similar fundamental DTR change in France, Germany or the US would affect companies based in those countries, because British business is much more dependent on international operations.
In addition, these changes reduce the UK's competitiveness as a base for multinationals or regional headquarters companies. The UK will now have the least attractive DTR system of any nation in the G7. Most of our European counterparts have an exemption system and the US permits dividend mixing.
The suddenness of the change and its fundamental nature is extremely disconcerting to executives from countries such as the US, where tax changes of this magnitude are discussed in detail over a period of years with full opportunity for comment. The uncertainty engendered by these unexpected changes will undermine confidence in the British system and deter companies from using Britain as a base.
Industry has priced its investments and operations in countries around the world on the basis of the existing DTR system which includes mixing, gearing and credit specification rules. Loan margins were calculated, in part, based on these rules. The proposed DTR changes completely destroy the basis of these calculations, and it will take substantial time to adjust to them. In some extreme cases companies may have made investments that they would not now make under the system proposed.
Many of the companies affected by the changes have large and complex commercial arrangements that were put in place on the basis of existing law. It will take a substantial time to replace these arrangements to comply with the proposed changes. Industry needs at least 12 months to do so. The proposed legislation is effective from various dates from Budget Day until June 30th. This is a totally inadequate period of time for companies to reorder their affairs to take account of these changes.
What is needed is for these proposals to be removed from the Finance Bill to enable a proper period of consultation to take place, in order to achieve a double tax relief system properly suited to the UK's economic position in the world in the opening years of the 21st century.
David Creed, Director General of the ACT comments
Such a significant change in longstanding and well-accepted tax rules will require many companies to review fundamentally their corporate structure, their overseas investment policy, their dividend policy and in the last resort the location of their head office. The manner in which the changes have been imposed totally undermines the UK's position as a base from which companies can conduct business with any level of confidence in the future. The Association will be making representations to Government on these and other points during the next few days. David Creed, Director General of the ACT
For the full text of the commentary read:
Inland Revenue: Reform to Double Taxation Consultation - ACT Response.
For more information on the ACT or to commission an article, please visit the ACT Press Room.