In a move to make the U.K. more competitive for businesses and
to entice back British companies that have recently moved overseas,
the British government Wednesday said it would deepen and
accelerate a planned cut in corporate tax and would push ahead with
plans to change the taxation of profits earned overseas by British
businesses.
U.K. Chancellor of the Exchequer George Osborne told lawmakers
that U.K. corporate tax would be cut to 23% by 2014 from 28%
currently, a move he said would give Britain the lowest rate among
G7 countries. The reduction will involve a 2% cut from April 1, and
a 1% cut at the same time each year until 2014.
Previously, the government had planned to cut the rate to 24% by
2014, starting with a 1% cut this April.
"Let it be heard clearly around the world--from Shanghai to
Seattle, and from Stuttgart to Sao Paolo: Britain is open for
Business," Osborne shouted as he announced the changes in his
annual budget to lawmakers.
However, amid continued public anger over the role of banks in
causing the financial crisis and economic downturn, Osborne said he
would offset the impact of the cut in corporate tax for banks by
raising the U.K.'s Bank Levy to 0.078% from Jan. 1, 2012, instead
of the planned 0.07% rate. The levy on bank balance sheets was
introduced at the start of this year to help the government pay
down debts it built when it had to bail out some banks during the
crisis.
Analysts warned the move could prompt some banks to consider
moving abroad. "We can expect more rumbling from banks about
relocating now. Osborne is further unlevelling the playing field
for U.K. banks vis-a-vis global competitors whose tax and
regulation burdens so far appear less onerous," said one banking
analyst.
"If the right policy is to reduce tax rates to encourage growth
then logically that must apply in banking as well as manufacturing.
And judged by the government's own criteria--that the tax system
must be fair and encourage growth--why has it singled out this
particular sector for higher duties?" said Michael Wistow at law
firm Berwin Leighton Paisner.
Earlier this month HSBC Holdings PLC (HBC) said it wanted to
remain headquartered in the U.K. but increasingly was having to
justify the decision to shareholders in light of measures like the
bank levy, which applies to its global balance sheet even though
about 13% of its $19 billion 2010 pretax profit was earned in the
U.K. HSBC said the levy would have cost it around $600 million on
its 2010 balance sheet, making it among the largest contributors to
the tax that aims to raise about GBP2.5 billion annually.
HSBC wasn't immediately available to comment.
Osborne's move to cut corporation tax, along with measures to
change the taxation of foreign profits of U.K. businesses and a
reduction in the tax rate on overseas financing income, comes after
several high profile British companies moved overseas in recent
years, citing an unfavorable corporate tax regime in the U.K.
Advertising giant WPP PLC (WPP.LN) moved its base to Ireland,
which has a corporate tax rate of 12.5%, and it was joined by
pharmaceuticals company Shire PLC (SHP.LN) and United Business
Media PLC (UBM.LN). Others moved to Switzerland and the
Netherlands.
"I want Britain to be the place international businesses go to,
not the place they leave," Osborne said, adding that he was
considering allowing Northern Ireland to make extra cuts to
corporate tax.
"On the surface the budget looked good for us with corporation
tax coming down more than we had thought," said WPP spokesman
Richard Oldworth. "The government has fulfilled all their promises
and appears to be moving in the right direction."
WPP collects almost 90% of its revenues outside the U.K.
Oldworth declined to comment on a media report that the U.K.
government had been holding talks with WPP's tax department for
more than six months.
A spokesman for Henderson Group PLC (HGI.LN), the global
asset-management company that moved its tax exile to Ireland in
2008, said that it was too early to say whether the Chancellor's
cut in corporation tax would lure it back to the U.K.
"We continue to monitor the situation and what is most suitable
for us," the spokesman said.
A spokeswoman for Shire said: "We'll look at the detail of these
interesting proposals but at this stage our position remains
unchanged."
The U.K. Treasury said changes to rules on the taxation of
profits earned by British businesses on their foreign operations
would come into force in 2012, although there would be interim
measures put into law this year to help companies with the
transition. A consultation document on the changes will be
published in May this year.
Uncertainty over the foreign subsidiaries rules was cited by
those businesses that have left as one of the key reasons for
relocating.
In December, the government set out plans to exempt a
U.K.company's foreign subsidiary from U.K. tax if it can be proved
that the trading activities or intellectual property holdings of
the subsidiary have limited connection with the U.K. The plans
would also raise the exemption rate above which foreign profits are
taxed to GBP200,000 a year, from GBP50,000.
Under the current system, profits are taxed by the authorities
where a subsidiary is located, but if the rate is less than 28%,
then the firm has to pay a top-up to the U.K. government. There are
some clauses that allow companies to escape the top-up, chiefly if
they can prove that the subsidiary has a commercial rationale for
being in the jurisdiction.
For overseas branches--which are directly controlled by the
U.K.-based entity and fall under the U.K. tax regime--the
government said companies would be allowed irrevocably to exempt
those branches from U.K. corporation tax. However, no U.K. tax
relief will be available against any losses incurred by the foreign
branch, and the government said it would prevent companies from
diverting profits that would have been taxed in the U.K. to a
foreign subsidiary to try to avoid paying the U.K rate.
"We have long argued that CFC reform will boost U.K.
competitiveness. We now cannot afford delay as other countries, who
already have developed business friendly rules, are actively
seeking to attract U.K. business to their shores. We welcome
today's commitment to deliver this reform by 2012," the Association
of British Insurers said.
-By Steve McGrath, Dow Jones Newswires; 44-20-7842-9284;
steve.mcgrath@dowjones.com
(Marietta Cauchi, Ishaq Siddiqi, Margot Patrick, Adrian Kerr and
Tommy Stubbington contributed to this article.)
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