18 March 2010 John Connors Director of Tax Strategy and Policy - Vodafone IFA Presentation – Business perspective on CFC Reform
Overview • A step in the right direction – a cautious welcome by business as far as it goes • Consultation process has been good • Key points are broadly sensible but the detail will determine the relative competitiveness of UK tax regime • “A more territorial system” • Definition by reference to examples of “artificial diversion” • “Reflect modern business practice” • “Minimise compliance” • “EU compliant” • All good aspirations but how will these be put into practice?
Business perspective on framework • Territorial system reflects sensible basis for UK tax • Recognition of global business choice to locate and invest around the world • Recognition that UK is not centre of the business universe • Removal of UK only default presumption • But contradicted by “CFC regime UK ownership and control” • And ‘more territorial’ lacks clarity and principle. • So document suggests that it will be a compromise to some extent • Hybrid system that taxes some foreign base? • Overseas monetary assets taxed by reference to a “fat cap” test • Overseas IP income taxed by activity test
Key Business Concerns Failure to embrace Cadbury test ‘Ownership’ as starting point is detrimental to UK based Groups Onus on business to determine ‘similar’ tax rates and bases is onerous and unclear Widespread use of ‘artificial’ without definition suggests something wider than ‘front’ or ‘brass plate’ type operations. Contradictions / mixed messages in some of the details.
Monetary Assets – key business concerns Potential ‘recharacterisation’ of equity is inappropriate and inconsistent with conclusions from previous consultations Debt cap rules already address concerns about UK interest deductibility Need to focus on UK tax avoidance and identify base erosion through UK tax deductions or recycling UK operating profits. Shouldn’t seek to be the world’s policeman
Monetary assets examples – key assumptions It does not matter whether the Plc / UK tax group has net debt or net cash In most cases it will have net debt and any interest restriction will be dealt with by debt cap rules etc Assume all loans are on arm’s length terms No distinction is made for the source of funds and Finco is financed wholly by equity plus retained profits The equity can have come from the UK or an intermediate holding company Examples are simplified but in a future competitive system life would be simpler as a lot of current complexity is to satisfy the CFC exempt activities rules
Example 1 What’s the difference? What’s the concern? PLC Equity Equity Finco (low tax) Trader (non-UK) Loan
Example 2 Differentiation UK vs nonUK? PLC Equity Equity Equity Finco (low tax) Trader (UK) Loan Loan Trader (non-UK)
IP Assets – Key Business Concerns • How will active management be determined? • Integrated MNC business model share responsibility for decisions and operations across national and legal entity boundaries • “UK involvement” difficult to partition in MNC’s • Test may force UK activity offshore like current CFC rules! • Do challenges of valuation require a look back provision? • IP is valued at all stages of development in the real world • Earn outs are established through milestone payments and royalties so some should apply for tax • Look back leaves things uncertain and should be rejected • Interaction with patent box rules
IP Tax Base Should UK tax royalties in IP Hold Co? UK Parent IP Hold Co Royalties IP licence Related foreign companies Third Party
IP Tax Base Should UK tax royalties in IP Hold Co? UK Parent IP Hold Co Royalties IP licence Related foreign company Related foreign companies
IP Tax Base Should UK tax UK source royalties in IP Hold Co? UK Parent IP Hold Co Royalties IP licence Related foreign company Related foreign companies
IP Tax Base Should UK tax all royalties in IP Hold Co on a look back basis? UK Parent IP licence IP Hold Co Royalties Related foreign companies
IP Tax Base Should UK tax UK or all royalties in IP Hold Co on a look back basis? UK Parent IP licence IP Hold Co Royalties Related foreign companies
Conclusion • A step in the right direction • Potentially onerous and judgmental • Bigger focus on competitiveness and commerciality required • Still a long way to go