Foreign profits: time for a rethink

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The Treasury has indicated that the current round of consultation on the taxation treatment of foreign profits has come to an end. The reasons have been given in letters to the CBI and 100 Group of Finance Directors.

Many will see this a a back-tracking from the government. Well, I'm quite happy to criticise the Treasury, but this is not an occasion when criticism is due. Why? Simply because on this occasion it is abundantly clear that the consultation began because business said it wanted an exemption from tax for dividends received in UK companies from their foreign subsidiaries. And so the Treasury offered them that, but with a necessary package of anti-avoidance measures attached to ensure that the new arrangement was not abused.

And then those who asked for the consultation complained that it did not suit their goals. And they even persuaded a company or two, who pay almost no UK tax, to leave the UK as indication of the beginning of a rout (which has not happened, and will not happen). But they did get a review group on the future of corporation tax out of this ploy, and when at its first meeting tat review group did not accede to their demands they complained. This is what the CBI said:

Specifically, members have told us that they would welcome a decoupling of the dividend exemption proposals from the difficulties relating to other parts of the original package. This would avoid delaying the whole package and would mean that we could make real progress on this issue which is of the most pressing concern for business. Detailed proposals on the dividend exemption should be published for consultation before the summer recess in order to drive forward towards the hoped for target date of 2009 for legislation on this issue.

As the Treasury has correctly noted, what this means is that the CBI is asking that the dividend exemption go ahead with none of the related anti-avoidance provisions being enacted. It seems implausible that the CBI might have ever believed that this might happen, but perhaps they really did think they had the Treasury on the ropes.

If they did they were wrong. The Treasury has called their bluff and said, in effect, 'game over'. Quite right too. It is.

So should the review group it gave rise to also be disbanded as a result: it is meaningless now.

But what is needed is a serious, and broader based, review of how to really take corporation tax forward. I will be writing more on this in due course, you can be assured. But for now I take some comfort from what the Treasury has done, for a change.