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Saturday, 20th April 2024 |
| UK pre budget report |
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| The UK pre budget report is of interest in Ireland primarily for the draft legislation published along with it , which is a reaction to the Cadbury Schweppes judgement of the ECJ that effectively ( but not formally ) held the UK’s controlled foreign legislation to be contrary to EU law. |
CFC legislation
The ECJ passed back to the UK courts the task of labelling the UK CFC legislation to be contrary to EU law. The courts have not yet ruled on this but the outcome is a foregone conclusion. The ECJ had held that the UK could not apply CFC legislation to tax in the UK the profits of a subsidiary of a UK group where the subsidiary was not only resident elsewhere in the EU but was established there and performing economic functions there, as evidenced by the possession there of premises, equipment and staff appropriate to the functions. The UK have now published draft legislation which will take effect from December 6, 2006 and attempts to respond to this judgement.
The draft legislation permits a UK group to apply to the Revenue for exemption of some or all of the profits of a foreign subsidiary established elsewhere within the EEA where it would otherwise be liable to UK tax on the profits by reason of CFC legislation. This application must be made in each successive accounting period. The exemption will apply only to such part of the profits of the foreign subsidiary as arise directly from the work of employees of the subsidiary located in an EEA state other than the UK. The value of work is determined by its value to the group as a whole – a crude and apparently unnecessary transfer pricing device.
The proposed legislation raises issues where the foreign subsidiary uses to any significant degree subcontractors, or agents in performing its economic activities. Prima facie, the value created by such non employees would remain potentially taxable in the UK. Whilst in keeping with the current exempt activities test in UK CFC legislation, it would not seem in keeping with the ECJ judgement which made reference to a company having employees in the country in which it was established only as evidence that it was indeed established there and not as a means of limiting the ban on CFC legislation. The emphasis on value created directly by employees also leaves doubt over value created from assets possessed by the foreign subsidiary – whether it be premises, plant, monies or most importantly, intangible assets such as IP and goodwill.
The draft legislation is commenced only from December 6 notwithstanding that the pre-existing CFC legislation is almost certainly illegal under EU law and always was so. The question of redress for those affected in the past is therefore not addressed and indeed might seem to be denied by this commencement date. However this may be due solely to the fact that it remains for the UK courts to formally declare the CFC legislation illegal, in the light of the guidelines given to them by the ECJ on this score.
The requirement to seek exemption each separate accounting period, backed up with detailed computations and information, would impose cost on a UK group operating elsewhere in the EEA. More importantly it creates a continuing state of uncertainty for the group as to the difficulties they may encounter in each successive year in defending their entitlement to the exemption. Since the application of CFC legislation to a company established in the EEA is illegal save in defined and unusual circumstances, this requirement for an annual application for exemption would seem to inhibit freedom of establishment within the EEA. By imposing a disproportionate burden of cost and uncertainty on those in the UK seeking to establish elsewhere in the EEA, it would seem a new breach of EEA law, in a measure alleged to be an attempt to make UK law EU compliant.
In fairness, it must be admitted that the inadequate judgement of the ECJ, which ducked an outright condemnation of UK rules, left the temptation there to resort to this sort of delaying tactic which now invites some other company, or the EU Commission, to take a new challenge to the new rules – leaving matters essentially unchanged for another few years so far as the UK is concerned.
It was also announced also that the quoted company exemption from CFC legislation was being repealed, as a reaction to alleged avoidance schemes.
Other measures
Many other measures announced betray the apparent UK obsession with anti avoidance measures, and with minutiae. More significant measures include:
• Further consultation on the proposal to tax the increase in land values consequent on the grant of planning permission. This is deferred until 2009 at least.
• Anti avoidance measures relating to the use of partnerships, leases and subsales in the context of stamp duty.
• Several detailed changes to the taxation of life assurance companies. |
Eric Wallace is a tax partner at KPMG.
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| Article appeared in the January 2007 issue.
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