Monthly Tax Idea - November 2012
Next year sees a new opportunity for multinational businesses to substantially reduce the tax they pay on internal financing profits that they shift offshore. Curiously this opportunity is being introduced as part of a reform of the part of the UK’s tax code that aims to stop groups reducing their UK tax bill by shifting profits offshore ( the controlled foreign companies rules). These CFC rules were introduced in 1984 with a primary target of offshore “cash box” companies.
After many years plugging loopholes, a completely new CFC regime is coming into effect on 1 January 2013. Ironically, the new CFC regime will allow a group to set up very tax efficient offshore financing structures. The reason the Government has done this is to increase the competitiveness of the UK to multinationals, since a number of other countries have favourable tax regimes for finance companies.
Under this ‘finance company partial exemption’, only one quarter of the offshore company’s profits from its lending activity will be subject to UK tax under the CFC regime. At its best, based on announced tax rates, the tax charge on the offshore finance company’s profits will be less than 6%. Naturally a few conditions must be adhered to. The main one is that all the loans the group’s offshore finance company makes must be to non-UK resident members of the group. In its simplest form the UK parent can capitalise a non-resident company which then lends to the group’s non-UK subsidiaries. This non resident company will be a CFC but unlike the normal rules which impose a full UK tax charge on the CFC’s profits, only 25% of this special finance company’s profits will be caught under the new CFC regime.
To maximise the benefit groups will have to take a whole group approach. They will need to ensure that the tax liability in the country of residence of their offshore finance company is minimised, including the impact of any withholding tax imposed by the tax rules of the territories in which the borrowing members of the group are located. Securing effective tax relief for the interest expense in their offshore trading companies that will borrow is obviously essential to the tax efficiency of the proposal. And one vital aspect not to overlook is making sure the potential tax saving will not be wiped out by the costs of running the international finance company. With this in mind, in tailoring an offshore finance company for each group we start with the list of countries in which the group already has a presence.
Groups wanting to take advantage of this new tax saving opportunity can restructure now to take advantage as soon as the new regime takes effect at the beginning of 2013.