KPMG's reaction to the Treasury's proposed new rules for controlled foreign companies that deal with the consequences of the Cadbury's ruling is typical of many. They say:
The key point that the European Court of Justice (ECJ) made in its recent judgement on Cadbury Schweppes was that the UK's controlled foreign company (CFC) rules should not apply where an entity is genuinely carrying out an economic activity. Today's announcement is clearly contrary to this ruling as it seeks to limit the circumstances in which it will apply. It suggests that the new relief will only protect the profits arising from 'labour' activities - ie directly from workers' actions - and not from profits arising from the investment of capital.
Well, I can't dispute the interpretation of the ECJ's ruling. That seems fair. I can dispute what KPMG then say about the Treasury's interpretation of this. The reason is simple, and it's precisely because as KPMG go on to say:
This is a very important distinction. It means for example, a shared services centre should fall outside the CFC rules. However, a finance company or an intellectual property management company would not be protected.
Yes, that's exactly what they meant KPMG. The reason is simple. You cannot pretend that locating a computer in Dublin and booking intra-group borrowing from that computer (operated remotely from London in all probability) does represent real economic activity. Nor is relocating the copyright of your logo, probably designed in London to a tax haven and then charging massive royalties for its use economic activity They're both profit shifting activity. Real economic activity requires management, people, decisions, services to be supplied. It does not mean artificial legal structures with no real third party economic impact designed solely to reduce the tax paid by a company at cost to the UK Exchequer. If you can't understand that KPMG, what do you understand?
But just in case evidence is needed, look at the work of Jim Stewart. As he shows the average number of employees of a company bin the Dublin financial services centre is precisely zero. That is not possible is the claim is being made that these companies undertake economic activity.
This puts KPMG's final comment into perspective. They say:
The Treasury had the opportunity to react to the ECJ's ruling in a way that would dramatically improve the business climate for multinationals based in the UK and they have not taken it.
Come on KPMG. They'd have been negligent if they had.
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Location of staff is just one determinant of where profits should be taxed in an international environment. Another factor is the location of intellectual property.
Surely in your example of the logo there would be a Uk exit charge. Provided this was declared and taxed why should a tax deductible royalty not be paid from the UK to the new owner of the IP?
David
Simly not true. We all know that such charges can be manipulated.
Much better to simply stop the artifical relocation of the asset, because that is what it is. And its indefensible.
Richard
Richard
I feel that is a very sweeping statement on manipulation and defensibility.
Under the EU treaties we have certain freedom of business location. If a business choses to locate assets with a genuine business presence to another EU country for an arms length price I can not see how this can be stopped.
Lets look at the underlying economics. the UK government has given tax deductions for the development of the IP. When the IP leaves the country it receives taxes based on the arms length price. Provided all maintenance etc is done outside the UK and the royalty is an arms length I can not see how this commercial arrangement can just be ignored.
David
You assume an arms length price is appropriately declared. I doubt it. Second you assume relocation within the EU. Most is not. Third you assume maintenance is done outside the UK. There’s usually no evidence of that either. Finally you assume an arms lenght priuce can be set for the return of a previosuly exported asset. Why is it different from the export price? It should not be. In which case the transaction should be ignored. It has no economic substance, as the government assumes.
Richard
Richard
If all the factors you set out take place e.g. non arms length price etc I agree there is an issue.
However I disagree this happens in all cases. Where the business is complies with the arms length principle and has a genuine business presence surely under international law the transaction has to be recognised?
The export price does not necessarily reflect the return price because the owner of the IP has taken a market risk in investing in the asset.
Nonsense David
The asset has remained under common control throughout. There is no market in that case. There is no transaction using substabce rather than form rules.
No gain can be justified in thta case.
The transaction is economic neutral and must be taxed as such
Richard
This debate with David is now closed
Richard
I realise this is your web site but I thought this was an area for debate. As it is not I will unsubscribe immediately.
David
An editor always has the right to close a corespondence
You have the right to leave
Richard