Grant Thornton: Tax Exiles - Paul Smith




Multinational companies are once again looking at their options to migrate out of the UK. Paul Smith of Grant Thornton UK LLP tells FDE why propose reforms mean there is still hope that they will not have to bite the bullet.

In 2008 it looked like there was a real risk that a large number of multinational companies would pull out their headquarters operations and residency from the UK as a result of unfavourable tax conditions. A sharpening up of government policy stemmed the tide and only a modest number of businesses – including Kraft and Procter & Gamble – moved their European headquarters to Switzerland.

But in July 2009 McDonald's also made a similar move and multinational companies continue to question whether they should remain in Britain. As recently as February this year, the chief executives of Diageo and Unilever announced that they were considering their options. The UK's controlled foreign company (CFC) provisions remain among the most punitive in Europe and new moves to tax intellectual property transfers could make the situation even less appealing.

Paul Smith, head of international tax at Grant Thornton UK LLP, sees this as a major problem for the British economy. "The biggest difficulty at the moment is the CFC rules we have in the UK," he says. "If you're located in a country such as Ireland or Switzerland, which don't have such provisions, you will pay low levels of tax in those jurisdictions and that will be the end of the matter."

"The reform of the controlled foreign company legislation is a step in the right direction and the change will probably be introduced in 2011, but there is still uncertainty as to what the final shape of the rules will be."

Britain's CFC laws mean that income earned abroad will be taxed at the nation's 28% rate of corporation tax. That is higher than the EU average of 25% but is especially damaging because other nations offer low rates on certain types of income, which British resident companies are unable to take advantage of. For example, the Netherlands and Luxembourg were the first countries to introduce 'innovation boxes' to tax royalties at approximately 5% tax rates, and other countries have followed.

These imbalances are putting pressure on certain businesses to move their holding companies to take advantage of more favourable regimes. "It is likely to apply where you've got streams of income, which are royalties or interest rather than from the sale of goods and services," Smith explains. "Those types of income can be taxed at low rates even if they are received in jurisdictions with generally high rates of taxation."

For companies looking to migrate, there are a range of potential destinations including Switzerland, the Benelux states and Ireland. "There are countries of choice but the precise location would depend on the particular characteristics of the group," he says. "They might already have some existing operations in a country that would make it sensible to expand there. There's not one solution that fits all circumstances."

While there are a range of options open to companies looking to move out of the UK, Smith argues that the British Government needs to take steps to address the problem before more decide to make the leap.

"I think positive moves have been made," he acknowledges. "The reform of the controlled foreign company legislation is a step in the right direction and the change will probably be introduced in 2011, but there is still uncertainty as to what the final shape of the rules will be."

Troublingly, a Treasury discussion document circulated in January this year suggested that there could be moves to impose a super-royalty on IP transferred out of the UK. Currently, a tax is levied at the point of exit, but as the value of early stage R&D assets can be low, the government is keen to raise additional revenue by charging UK tax on a deemed royalty based on future values for a number of years down the line.

Smith believes this policy could be counterproductive and drive innovation out of the country. "Because they've put that sort of a threat in the draft legislation, people are thinking: 'We don't know what the rules are going to be and if there's likely to be a problem if we transfer assets out of the UK tax net, perhaps we should do it now before there are any changes.'"

In an attempt to sweeten the deal, the government announced plans to introduce Dutch-style innovations boxes, but that will not be implemented until 2013.

Smith believes the position needs to be clarified to give businesses certainty about the future. "The government needs to do two things: make sense of those CFC reforms and accelerate bringing in some form of innovations box regime," he says. "If you get those in place there's no reason why anybody would want to move a company elsewhere."

While there are at least tentative signs that the necessary reforms will be made to boost Britain's attractiveness to multinationals, further steps are needed before the threat of migration finally evaporates.

Paul Smith, head of international tax at Grant Thornton UK